Racing Does the name John L. Kelly Jr. resonate with you? How about Edward Thorp?

J.N. Campbell

True odds: How the algorithm made syndicated bettors

February 05, 2020

Does the name John L. Kelly Jr. resonate with you? How about Edward Thorp?

Next time you place a wager on a horse there is a possibility an individual or a group out there in the world is using one of their theories or algorithms against you. That shouldn’t deter you from betting; just know you can thank two of the founders who helped to unlock that elusive vein of what is known as “true odds.”

The first patriarch was born near the small town of Corsicana, Texas. John Kelly was one of those World War II veterans who made the most of the G.I. Bill. After graduating from UT-Austin, he made a name for himself in the early 1960s at Bell Telephone Labs by using an IBM 704 computer to synthesize speech. The project team famously recreated the song, Daisy Bell.

This in turn was immortalized in literature and film when the famed sci-fi fiction writer of 2001: A Space Odyssey, Arthur C. Clarke, got the idea for HAL, (the rogue computer whose name translates in computer language to IBM) to sing Daisy Bell, as he was being disabled by his human crew member.

Kelly didn’t stop there. He also worked on what was dubbed the Kelly Criterion, which centered on an algorithmic formula for bet sizing—in other words, it found the balance between a good tip and the right amount of cash to wager, in order to score big.

The second architect worked during the end of that same decade. Edward Thorp was a mathematician who also used an IBM 704, but he saw it as a vehicle to count cards at the Blackjack table. His influential book, called Beat the Dealer (1966), and later work on casino gaming, outlined how an analysis of pricing anomalies could yield results that would tip the scales in favor of the bettor.

The teams he sent into casinos wore disguises to throw off pit bosses, and he even developed a wearable computer (now declared illegal) that tabulated on the fly. Thorp always claimed his work was scholarly in nature, but it was one of those instances where the story outpaced the regular academic rigor that normally accompanies research and writing.

Both Kelly and Thorp’s intriguing studies became lore among the gambling community. Bettors in any market (including stocks) are always on the lookout for an edge, a tip, or divine intervention. But when they found out that with the proper equation you could even the odds and predict what is basically the unpredictable—for instance, how a horse would perform in a race—then you are talking about National Treasure, King Solomon’s mines, a mountain of cash stolen by the Joker…ok, ok, you get the idea.

For some time now, there is something going on internationally in thoroughbred racing that might be unnerving to the person who wants to win money betting on this sport.

It’s called a racing syndicate and their participation across the oceans of the world can have a major impact on the pari-mutuel system that at one time seemed very democratic.

You probably have noticed a syndicate in action but didn’t know it. Ever seen odds that were say 9-1, and you were so pleased to see that your handicapped pick was holding fast. To the gate you say! But tote watching is a fickle beast, and you had no idea that seconds later your odds plummet suddenly to 7-2 with less than a minute to go. So, instead of a $20.00 horse you get a $9.00 one.

Simply put: Is there anything that can be done to combat this phenomenon?

What needs to be understood is that there is nothing illegal about syndicates. They are not just rich and powerful folks sitting atop high-rises with English butlers and greyhounds laying about adorned in diamonds.

Rather, syndicates are connected to technology, math, and more specifically, they understand the power of quantification. Yes, they originated in Asia, but you might be surprised to learn that the original maestro was a guy from Pittsburgh named Bill Benter.

What he did was build under the radar one of the most successful programs for crunching huge amounts of data in a place that was ridiculously competitive and far from his home—Hong Kong. Tracks like Happy Valley and Sha Tin were like beacons of light for thousands of moths.

Before the British turned over the keys in 1997, Benter saw promise because it was a massive pari-mutuel pool (and continued to be under Chinese rule); and as long as the window, the betting shop, or the phone would take a wager(s), it was ripe for the picking.

In his computer-based system, there were others that assisted, but his network adapted at every turn because he held the formula. From the mid-80s until the time he “retired” in 2001, it is a distinct probability that he was a billionaire. If you don’t believe me, read this:

The model that Benter perfected was part Kelly, part Thorp, part Billy Beane’s Moneyball, and sheer trial and error.

His product was copied and re-copied many times over. The secret is to have enough cash in play to minimize losses, which in America is called “bridge jumping.” When different pools are flooded with late cash someone knows something, and if they don’t hit it you might find them at your local high dive.

Yet, there is more to it than just making a massive show bet. What you want to do is find that line by analyzing the odds. The problem with the betting public is that they can be easily swayed by talking heads. So, if you can find a horse whose odds are lower than they should be, you can exploit that situation and add to value with a well-timed wager.

American tracks and their tote boards are notoriously inadequate when it comes to updating the live odds. They monkey around with them, and you will even see them fluctuating as the horses round the first turn on a route race.

So, what can be done?

In general, racing syndicates must be monitored as they are in Hong Kong. If you let them into the pools, they will invariably impact the live odds. If tracks consider it a glaring problem and are worried that it will drive away bettors, then they should draw up efforts to not take overseas wagers.

Could fixed odds be the solution? You mean a flat odds system similar to former failed Presidential candidate Steve Forbes’ flat tax—a world where everyone gets the same?

I am not so sure; doesn’t sound very Adam Smith, and doesn’t that give more power to the house?

Also, wouldn’t that take the sport out of watching the tote and participating in an open market? Seems rather draconian and Soviet-esque to me.

Britain uses ante-post wagering for major races on sites like Oddschecker, but payouts are limited because the pools are not nearly as large. Networks, including Twin Spires and TVG, have allowed you to lock in a “reasonable” rate for a celebrated favorite, but what is the catch? Hmm…

Still, one could argue, that whatever supposed solution, syndicates will find a way in. After all, Benter did. When he was banned from phone-in bets and cutoff from a hardline, he moved to using runners and bags of cash stationed in batches across the city. Where there is a will…well, you know.

Something that is more realistic to suggest is getting tracks to develop more sophisticated ways to let bettors know large syndicates are in play. For instance, the odds boards at the Hong Kong tracks are color-coded to reflect big swings in the volume of wagers. This in turn reveals a syndicate’s plans while still protecting their identities. Granted some tracks in North America try to report large wagers that come in, Gulfstream Park comes to mind, but you rarely see the type of sophistication that one might use as a punter at Sha Tin or Happy Valley.

We need to face facts, in an age when handle is everything and take outs on most wagers are still around 17 percent, it is unrealistic to think that banning syndicates is a sensible position. You think Mountaineer in West Virginia would turn down the chance to rake in syndicate cash?

Recall, in general, hitting a major Pick 6 ticket is extremely difficult, even with a specialized program. But it can be done.

For most members of the betting public, a modest return is good enough. Gimmicks like the 20 cent multi-race wagers, the Grand Slam bet at NYRA tracks or the Stronach 5 are not going to fit the bill, despite their creativity. Some wagers are rather silly. Last year, Santa Anita Park introduced what would become a failed attempt to install a “roulette-style” wager that is now long gone.

Another perspective to embrace is that racing syndicates developed the software and raised the cash based on the work of Kelly and Thorp. Doesn’t ingenuity and cleverness count for something when it comes to just how difficult it is to come out on top betting on this sport?

So why admonish them?

That last statement may be too apathetic for you—tut, tut, you say. Trust me, it’s practiced.

Maybe all that can be said to members of the pools are what gamblers have uttered for generations, “if you are looking around the table wondering who the mark is, it’s probably you.”

Don’t be a mark, pari-mutuel punters! Keep searching for value! Oh, and good luck syndicates, I say this with much reluctance, drop us a byte every now and then.

Editor’s Note: Kristi Anglen published an article on betting syndicates in August 2019. That article, “Computer syndicates, man vs machine,” can be read here: https://thorocap.com/2019/08/01/computer-syndicates-man-vs-machine/

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J.N. Campbell is a turf writer based in Houston, Texas. His work has appeared in a number of publications; including the International Journal of the History of Sport, Thoroughbred Daily News, The Sports Haven, and Gallop Magazine. You can head all of his prior work for ThoroCap here.

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