CONSULTATION ON THE STARTING PRICE: THE RESPONSE OF THE STARTING PRICE REGULATORY COMMISSION – 24th February, 2016.
In Summer 2015 the Starting Price Regulatory Commission (SPRC) launched a consultation on the future of the starting price (SP). The catalyst for the consultation was the high overround – a theoretical measure of bookmaker profit margins – at the 2015 Grand National. The consultation attracted only fifteen responses, seven from individuals and eight from organisations.
A few respondents suggested alternatives to the current SP, including: Industry SP; Exchange SP; individual bookmakers SPs; Tote prices; win – only and place – only SPs; hybrid; and abolition. The SPRC does not recommend replacing the present system. Instead, the SPRC endorses modifications involving: the sample; integrity; and automation. The SPRC rejects proposals to intervene to modify the overround; it does not have the power to do this and, even if it did, would not wish to use such power.
The Starting Price Regulatory Commission (SPRC) is the body set up by the suppliers of the starting price (SP) to oversee the integrity of the starting price mechanism. The SP is the price based on the prices offered by a sample of on-course bookmakers. It remains the price at which a majority of horseracing bets struck in betting shops are settled.
After the 2015 Grand National, some commentators suggested that the returned SPs were tilted towards bookmakers and against punters. This criticism came after a long period of major change in the betting industry, which led some to contend that the SP mechanism was no longer fit for purpose. The SPRC has had this question under review for a number of years, as it made clear in a series of Annual Reports (e.g. 2014: www.thesprc.org) But in June 2015 in view of the debate concerning the Grand National SP in the specialist racing media the SPRC decided to conduct an open consultation on the future of the SP. We wished to seek opinion on whether the SP as it is constituted now should remain in being or whether there are preferable and practical alternatives which might replace it. If the SP is to continue we also wished to know whether there were nevertheless any improvements that could be made to the operation of the SP mechanism.
That consultation closed on 30th September to which fifteen responses were received (some respondents requested that their submissions remain private). The SPRC would like to thank those who took the trouble to respond to the consultation. The Commission has since considered their submissions with great care; and this document represents our response.
The Grand National
As the catalyst for the SPRC’s consultation was the 2015 Grand National it seems appropriate to begin with that issue. But please note that the 2015 Grand National is not the focus of this response: its focus is possible alternatives to and/or modifications to the current SP.
It is estimated that some £150 million was bet – much at SP – on the 2015 Grand National. It has even been suggested to the SPRC that some two-thirds of adults may have bet on the race which took place in very favourable conditions for attendance and betting (excellent weather, Tony McCoy’s last ride). In spite of this significant public interest in the race our call for evidence enlisted only fifteen responses: seven from individuals (three of whom, it should be noted, were individuals who clearly had bookmaking experience) and eight from organisations involved with racing or major bookmakers. We recognise, of course, that there may be some other individuals, and organisations, with views on the 2015 Grand National betting but they have not taken the opportunity to let us know their views. The SPRC can only assess the situation based on what it has been told by those who did respond. Of the seven individual responses, two favoured abandoning the SP, two favoured making it subject to major modifications, one favoured the current system, and two did not comment on the system as a whole. The SPRC is grateful to the individual respondents to our consultation. But we would be remiss not to point out that just seven respondents – with varying views from fundamental change to no change – hardly suggests the punting public have major concerns about the current system. There were between five and eight million bets on the Grand National. Therefore, depending on how many bets each punter had, seven individual respondents could be equivalent to around one punter in one million. Moreover, the organisations that responded broadly supported continuation of the current SP mechanism, sometimes with modifications. Nevertheless the SPRC welcomes this consultation process. We have reviewed the proposed alternatives and modifications to the SP suggested by respondents and we give our response below.
The overround (a theoretical measure of bookmaker profits and the source of criticism by some in relation to the size of the overround on the 2015 Grand National) is not directly controlled by the SPRC. The SP needs to yield an overround, or overround per runner, that is fair to both bookmakers and punters or confidence in the SP would be undermined. We believe that, mostly, an overround that is fair to both sides is achieved: the average overround per runner has been very stable over the last three years at around 1.7%. Before the establishment of the SPRC in 2003 the overround was much higher, over 2% usually, although the SPRC acknowledges that the arrival of betting exchanges may have been one factor in the reduction of the average overround.
The SPRC has consistently noted in successive Annual Reports that the overround, or overround per runner, is only weakly correlated with bookmakers’ margins. This is because, on average we are told, 90% of bets are on the first, second and third favourites in a race and only 10% on the remainder. By contrast the overround (being a purely arithmetical calculation) is equally influenced by the price of each horse in the race.
The 2015 Grand National overround per runner at 1.67% was therefore not out of line with the three year average of 1.7% mentioned above. But we recognise that the 2014 overround for the Grand National was lower.
In examining its attitude to the operation of the SP mechanism the SPRC has taken the view that the Grand National is in effect unique. As already noted the stakes are large, with the total take on the race amounting to an estimated £150 million. All horses are backed to some extent; and a minor shortening of the prices of some horses without a countervailing lengthening in the price of others can therefore have a significant effect on bookmakers’ profits.
Some of our respondents tentatively suggested that in view of the particular characteristics of the Grand National the SP for it should be set differently. One canvassed the possibility of the return of an industry SP for the Grand National alone. The SPRC is not convinced that such a drastic departure is necessary. It would raise serious issues, for example of competition law. The SP as a system stands or falls as a whole. However, the SPRC will, of course, continue to monitor and consider the conduct and outcomes of betting in future Grand Nationals.
II: THE RESPONSE TO THE CONSULTATION
A few individual respondents took the view that the SP is now fundamentally flawed. They pointed out that betting markets had changed. Originally the SP was the mechanism used by which the prices set in a strong on-course market could be used to settle off-course bets. The on-course market has never operated in isolation from that off-course and off-course bookmakers have always sought to manage their liabilities by placing their own bets on-course. However, over the years, the on-course market has weakened considerably. At some courses, particularly at all-weather meetings, few bookmakers wish to stand.
At the same time, new forms of betting off-course – in particular “remote” betting via PCs, smart phones and tablets – have become more popular. Off-course bookmakers now offer their own competitive prices from the late afternoon of the previous day. Remote betting continues to grow and is the preferred method of many punters, especially those making substantial wagers. The on-course market has also been affected by the rise of betting exchanges, betting to slender margins. Exchanges allow on-course bookmakers to arbitrage between bets laid at one price on-course and where a longer price is available on the exchanges.
Such changes led four of the individual respondents to the consultation to say the SP should simply be abolished, or subject to major modification tantamount to abolition. In the view of one it would be for individual bookmakers to offer what prices they chose in betting shops, with competition determining the outcome. This respondent said that “the use of SPs should be scrapped and instead off-course punters should get a price at the time their bet is struck.” Two other individual respondents saw the current mechanism being replaced by one which is based on the flow of money on the exchanges. One leading bookmaker, while not necessarily going so far as proposing the abolition of the SP, advanced fundamental changes to its workings, which would in effect amount to a new system. Of the institutions which responded to the consultation, only one advocated radical change.
More generally, however, do the changes in the market identified by our witnesses imply that the SP has had its day?
In the consultation document we pointed out its advantages. “It is a tried and tested system. It is simple to understand, punctiliously administered and the number of complaints the SPRC receives about its operations is negligible. It does what it says on the tin. Sophisticated punters who prefer a different flavour have opportunities to place their money elsewhere”
The popularity of the SP is witnessed by the evidence that we received. We are told that around three quarters of the slips in betting shops are settled at SP though the proportion of bets by value is a little more than half. Of course, by doing so such punters may not be achieving the maximum return they could. But equally people use corner shops which are more expensive than supermarkets because of their convenience. Casual observation suggests that many SP bets are multiples promising a big return for small stakes. The percentage overround on such bets is high anyway, so any advantage of taking non-SP prices may not be so apparent to the customer. The SP is also a vital back-up in the case of “guaranteed prices” which are growing in popularity. That way of betting, apparently much favoured by punters, would not be available without the SP as a reference point. Though one respondent suggested to us that there is no evidence to suggest that SP is the only system which would support guaranteed prices, equally any replacement would have to be equally robust and equally transparent. We cannot immediately identify a promising candidate.
Punters who want a simple way of placing bets but do not care for the SP have the option of betting at Tote prices (at least at those betting shops which have a Tote Direct facility, or online. This includes the “big four” shop bookmakers). They can also place bets at the “board” prices displayed in the shops. More sophisticated punters can use the exchanges. The punters’ choice of bets has never been so great. When the SP was introduced, that and “board” prices (generally only available in the 10 minutes before the “off”) were the only options available in the betting shop. There is now vastly increased competition among bookmakers and we have seen the advent of exchanges, odds comparison sites, and best odds guaranteed.
III: ALTERNATIVES TO THE SP – THE PROPOSALS AND OUR RESPONSE TO THEM
It is right that the SPRC should consider carefully whether respondents to the consultation had made a convincing case for alternatives to the SP mechanism, and we have. The following sections outline the arguments put to the SPRC as to whether there were alternatives to replace completely the present SP mechanism, or to adjust it radically by supplementing the current SP mechanism. As noted above, punters are under no obligation to accept SP prices. It follows that if the SP were to be abolished and replaced by something else the choices available to punters would actually be reduced.
There could also be a problem presented to the media by some of the alternatives. For example, if Individual bookmaker SPs were to replace the current SP, would the media actually quote the different SPs returned by different bookmakers? How many such prices would they quote and would their less savvy readers understand what the different prices quoted meant?
It is true that Industry SPs already exist, for example for overseas meetings from countries where there is no on-course betting market such as Dubai and France. If there were to be an Industry SP for British racing it would be set by the off-course bookmaking industry. Punters may not easily be persuaded that such prices are fair and equitable. A transparent mechanism for setting them, comparable to that for the SP, will be hard to devise. Does it make sense to jettison the accepted fairness of the existing SP for a new and unproven system of this sort. In the handy cliché, if it ain’t broke, why fix it?
The off-course industry has possessed the technology for many years to provide an Industry SP for all horseracing. There is nothing to stop off-course bookmakers from introducing such a system for British racing, although the industry would want to be satisfied that this did not raise competition law concerns. The fact that the industry has chosen to stick with the current SP mechanism probably reflects the fact that for most UK punters an industry substitute would be an unfamiliar system, which would no longer have the years of acceptance that is attracted by the current SP.
An Industry SP might well be perceived as lacking in transparency in the eyes of the general betting public and in the media it might be regarded with suspicion. Indeed, one off-course bookmaking firm suggested in its response that if an Industry SP was introduced a code would have to be agreed to ensure integrity. Such a code would in effect replicate the functions of the SPRC . Another off-course firm commented on its experience with the Industry SP for overseas racing. It questioned the willingness of bookmakers to keep prices fresh and reflective of what is actually happening in the market. Finally, the introduction of an Industry SP could have an adverse impact on the on-course market as it would no longer be necessary for off-course firms to try to manage their liabilities with on-course bookmakers (although it is acknowledged this practice is in decline). This would affect liquidity in the on-course market. In the worst case the problem of low attendance by on-course bookmakers could be exacerbated, which in turn could make race going less attractive to the ordinary punter.
Two individual respondents were supporters of an exchange-based SP. Alternatively two would favour at least the inclusion of exchange prices in the process which produces the SP. Other respondents, however, objected strongly to the use of exchange prices.
A key objection put forward to using exchange prices was the lack of transparency in the formulae used by exchanges to calculate their starting prices. This in contrast to the algorithm used to determine the SP which is in the public domain.
Exchanges are not bookmakers and make profits (through a percentage deduction from the winning bets of customers) by acting as a facilitator – they do not have a book to manage. Exchanges make a profit regardless of what their customers decide the win, place and each-way markets should be, and at whatever overround their customers, not the exchange itself, are prepared to trade.
Other objections included that exchanges have separate win and place markets, and that they do not lay each horse in a race to good money.
Two points need to be emphasised again. Off-course firms are not obliged to use the official SP so if exchange prices were to become a new “official” SP, off-course firms could simply stop using it as the means of settling off-course bets. Nor are punters forced to take the present official SP, they can already choose to bet with exchanges if that is their preference.
Individual bookmaker SP
Like the Industry SP the technology has existed for decades for each off-course firm to provide its own individual SP. Under such a system, each off-course firm would determine its own SP taking account of the liabilities on its book for each race. There is again the question over the transparency of the mechanism used by each firm to determine its SP. Firms would be under no obligation to use the same methodology. As with an Industry SP, the introduction of individual bookmaker SPs could impact on the attendance of bookmakers on-course.
Tote pool prices operate in a radically different way from the SP. There are separate Tote win-only and place-only pools for each race, rather than each-way prices for the SP. The margin applied to the win- only pool is roughly three times what traditional bookmakers would expect to make. The place pool deduction is even higher. This would depress the SP, so it is hard to see how inclusion of Tote prices would meet the concerns of those critics of the SP that it yields an excessive overround.
Win only and each way only SPs
This alternative would maintain an SP mechanism but instead of the single SP ( which covers both the win and place parts of an each way bet) returned now there would instead be separate SPs for win-only and each-way bets. This would be a massive change to tradition and there might be a substantial cost due to the need to alter equipment and software. The change could result in confusion for customers in trying to understand separate SPs, which in all likelihood would have different over-rounds for the same horse depending on whether the bet struck was win or each-way. There could also be difficulties for on-course operators to identify who is quoting win prices and who is prepared to lay each way.
Although some respondents saw a continuing role for the SP mechanism this approach would involve prices other than those quoted by on-course bookmakers being part of the SP mechanism. The most developed version of this option was that put forward by a bookmaker who is a prominent critic of the present system. There would still be a contribution to the SP from the on-course market but this would constitute only one-fifth of the SP. Also, a series of conditions would be set regarding those on-course firms allowed to be part of this new SP mechanism. The remaining four-fifths of the mechanism would take prices from the nineteen largest operators to include not only off-course bookmaking firms but also exchange prices and racecourses’ own betting ( e.g. ChesterBet). These elements too would be subject to various conditions for inclusion in the new mechanism. It is clear that such a new mechanism would be complicated. Even if it was practicable at all it would still involve transitional costs from making the change as well as possible additional on-going running costs. Even though computerised, such a system could well involve delay in delivering an SP from these disparate elements.
The operators of the SP mechanism and the SPRC itself could simply call it a day and leave it to the market to decide how off-course bets should be settled in future (where a price had not been taken). It would be left to individual off-course firms and the media to explain to punters how their bets were being settled. Such a system would mean forgoing the advantages of the present SP system in terms of familiarity, simplicity and transparency noted above. Though the SPRC would not hesitate to abandon the SP if its fairness, integrity or continued viability was in serious doubt, having examined the arguments above with great attention, the directors of the SPRC Board are not convinced that abolition is a sensible option. It would be premature to abandon the SP now when it remains the preferred choice of most betting shop punters.
We intend however to keep the SP under review in the future as we have in the past.
IV: MODIFICATIONS TO THE SP MECHANISM
Although the SPRC Board is minded to retain the existing SP mechanism it has given serious consideration to a number of modifications to the mechanism put forward by respondents. A number of these modifications the SPRC supports in principle. The modifications fall , broadly, into six categories: sample; integrity; overround; “automation” (by which respondents mean a greater use of new technology); on-course standard betting terms; and legal status of the SPRC. However, although a number of the modifications are the responsibility of the SPRC there are others for which, while it may have an interest, the SPRC has no responsibility.
Abolition or widening of the sample
One organisation said that it is not clear why sampling is necessary at those meetings where there are a small number (fewer than twenty-five) of bookmakers present on-course and the whole population could feasibly be taken into account. Another organisation went further and suggested that the SPRC should do all in its power “to ensure that as great a number of bookmakers are used in the sample to deliver the SP as possible”.
There is no firm statistical evidence in the public domain that increasing the sample size has a material effect on the returned SP. Nevertheless the SPRC can see that an increase in the sample size would tackle the perceived vulnerability of the on-course market and make it less easy for it to be influenced by the off-course market. The scope for such influence, it should be noted, is less than it once was. Until April 2003, on-course bookmakers were obliged to hedge with other bookmakers on course. In consequence an on-course bookmaker who was the recipient of off-course money could only attempt to hedge this in the ring and this would have a direct effect on the returned SP. On-course bookmakers are no longer restricted in the way in which they hedge and many now use the exchanges for this purpose. So, an on-course firm which is the recipient of off-course money, if it does not simply reduce its “board” price, is now more likely to hedge this on the exchanges and in consequence there is much less direct effect on the returned SP.
The SPRC does support increasing the sample size where possible –not least for reasons of public perception and confidence – subject to two important caveats. First, increasing the sample could hit practical limits so long as human operators are on-course trying to monitor events. Therefore, second, any increase in sample size turns on more “automation” of the SP mechanism. The operators of the SP system (currently the Press Association, SIS and TurfTV) and the SPRC will wish to examine the costs and benefits of greater “automation”.
Two organisations argued for the inclusion of (some bookmakers from) satellite rings in the sample. One of these respondents claimed that some of the strongest bookmakers now operate from satellite rings rather than the main ring. Some of the larger firms now have two pitches at the more important race meetings and the principal representative of the firm is as likely to be found in a satellite ring as elsewhere.
The SPRC supports the principle that the SP mechanism should accommodate such bookmakers outside the main ring. Once again though there are issues of practicality and costs and inclusion of satellite rings is likely to be dependent on greater “automation” of the SP mechanism.
Low bookmaker attendance
One organisation suggested that meetings with fewer than nine bookmakers (Rails and Tattersalls) in attendance should be designated as “low attendance meetings”. It proposed that consideration be given to include all bookmakers in the sample who bet to standard terms.
The SPRC supports the proposal to include within the sample all bookmakers who bet to standard terms where there are fewer than nine bookmakers present at a meeting, subject to the automation point outlined above. But it should be noted that this will not necessarily solve the problem of low bookmaker attendance at mid-week, winter, all weather meetings – a repeatedly emphasised concern of the SPRC but a concern over which we have no control.
Anonymity of sample
One respondent sought assurances of the anonymity of the sample. If the sample is not anonymous it is more straightforward for off-course firms to attempt to influence the sample.
The SPRC fully supports the sentiment. If, as outlined above, the sample is abolished or widened anonymity is no longer an issue or becomes less so. If the sample is maintained as at present the SPRC will continue to use its best endeavours to ensure anonymity. But the SPRC recognise that, sometimes, it is reasonably straightforward to predict the composition of the sample even though the anonymity of the sample is protected by the operators. This will particularly be the case where there is very low bookmaker attendance.
RDT and Elite
Present data collection to return the SP is to a great extent via two different systems: RDT and Elite. RDT currently supply the majority of bookmakers. Although those bookmakers using the Elite system can be included in the SP this has to be done via manual entry of their prices into a PDA. One respondent had a concern about the lack of opportunity for bookmakers using Elite to be included in the sample.
The factual position is that all bookmakers are eligible to be included automatically in the sample if they meet the criteria for inclusion. The SPRC will be monitoring future developments in data collection (whether by SIS, TurfTV or others) to try and ensure not just the continued integrity of the data collection process but also that bookmakers have an equal chance of being included in the sample.
One major organisation said that it has significant concern at the lack of transparency in the current system. Specifically, it suggested that information should be made publicly available giving details of prices offered on each race by each (anonymous) bookmaker in the sample, and the movements in the prices, such that the SPRC can demonstrate that what is being returned is reflective of the market. The respondent did not indicate the platform on which the data would be made available, nor “the customer” who might use this data.
The SPRC’s whole raison d’être is to uphold the integrity of the SP and so in principle it sees no objection to the release of such data. It is not, however, the SPRC’s responsibility to insist on the release of the data and it seems to the SPRC that the wisdom of the proposal turns on a much deeper analysis of the costs and of potential users. Even under the present SP mechanism the number of data items would run into millions. If the sample were abolished or increased the number of data items would be multiplied further.
One organisation said the SPRC should work towards the compulsory display of overrounds to boost confidence in the on-course market. Another respondent also suggested that on-course firms should display on their boards total overround and overround per runner.
The SPRC cannot compel individual bookmakers to display their overround. However, the SPRC is supportive of on-course firms displaying on a voluntary basis their overrounds. If on-course bookmakers were to display their overrounds the SPRC does not see why similar disclosure should not apply to off-course bookmakers, the Tote, and exchanges.
The key component of one respondent’s evidence was that the SPRC should determine the amount of an acceptable overround. Another respondent also suggested how a formulaic adjustment to any overround could be implemented.
The SPRC does not have the power to insist on limits to overround (either on the upside or downside) and, even if it did have the power, it would not wish to exercise it. Moreover, setting any limit to overrounds would be likely to attract the attention of the Competition and Markets Authority.
The SPRC thinks that those who suggested a correction mechanism have missed an important point. Off-course bookmakers could simply sidestep a correction mechanism because they are not compelled to use the SP, as currently returned, as the means by which they settle their customers’ bets.
Two organisations argued for greater “automation”, or the greater use of new technology, in the system to return the SP . The motivation of one organisation was to achieve greater transparency, whereas the others approach was directed at reduction in costs via off-course validation.
Developments in technology inevitably present challenges to the SPRC in its fundamental role of assessing how the SP is to reflect the market. The SPRC will continue to ensure that any changes in technology do not undermine it in its essential role of protecting the fairness and integrity of the SP.
The SPRC is in principle in favour of the greater use of new technology to support the return of the SP – and it thinks more automation will inevitably happen over time. The greater use of new technology – where appropriate and cost-effective – does, however, raise business issues for the operators of the SP mechanism and so it is for them to decide how, and how quickly, new technology should be deployed.
Calculation of odds
One organisation stated that there is currently an anomaly for 16-21 runner handicaps where on-course customers are offered one-fifth of the odds on the place part of an each-way bet. By contrast, standard each-way terms for these types of races with off-course bookmakers is one-quarter the odds. It was suggested that one-quarter the odds be the default on-course as well.
This matter is not within the responsibilities of the SPRC. Although the SPRC is sympathetic to the idea it notes that, if implemented, odds offered on each-way bets will be shorter and therefore the overround (on average) greater.
The legal status of the SPRC
One respondent commented on the legal standing of the SPRC, expressing a preference for a regulatory body backed by statute. The case for a statutory body would need to be made to the Government if, that is, Racing as a whole desires a statutory body. However, the Government has made clear it is in favour of de-regulation and so it seems to the SPRC that there is little prospect of legislation to introduce a statutory regime. Even if the Government was minded to introduce a statutory body it is the observation and experience of the SPRC that it could be a lengthy and costly process before any statutory regime is implemented.
Conclusions on the proposed modifications to the SP mechanism
It is clear from the descriptions and analysis above that of the eleven relevant areas of SP activities where respondents to the Consultation have suggested modifications to SPRC procedures, five are actually not within the remit and power of the SPRC to control and change. These are: bookmaker course attendances; display of overrounds; corrections and limits to overrounds; calculation of handicap odds; and the legal status of the SPRC. We have indicated above our reactions to these suggestions, including sympathy in some cases, but they are beyond our powers of determination.
The other categories of suggested modification do, however, come within the SPRC’s remit:
- Those relating to the sample: whether to increase it, to abolish it or to improve its anonymity?; whether to designate certain meetings as “low attendance”, with consequent changes to the sample?; and whether to incorporate satellite rings into the bookmaker potential sample? We are and have long been sympathetic to some of these proposals, as indicated above. However, these changes are all subject to issues of technology and practical costs which are not under direct SPRC control, though we can, and where appropriate will advise the SP operators.
- Those relating to data information, especially its transparency of access. The SPRC always supports the maximum availability of and access to its data, though this issue is again subject to the practicalities of automation and costs.
- Relating to the on-course supply of betting information, the SPRC will continue to offer close scrutiny of suppliers to ensure proper access.
The SPRC will continue to review the above issues, all familiar to us, together with others which arise concerning the SP, within the obvious constraints of costs and technical practicality mentioned above.
V: CONCLUSION ON THIS CONSULTATION
After carefully considering the evidence submitted, the SPRC has concluded that the case for the SP’s abolition has not been made. We have also considered a number of modifications designed to improve its operation and recommend those that seem most persuasive. We will continue to keep these matters under review and our conclusions will be openly published on our website and in our annual reports.