Sports

The Value Of Sharp Money In The Sports Wagering Ecology

Sharp pencils

For years, the appeal of sports betting has always been the promise that anyone who tries hard enough could handicap events better than the sportsbook and win serious money. Winning more than 52.4% of the time seems like an easy endeavor.

However, in the end, many try, and few succeed. Those that do succeed often find their action is unwelcome by sportsbooks. In fact, it has become a widely accepted practice in the sports wagering industry to severely limit or prohibit players who might be classified as “sharp.”

There exists no Turing Test to confirm absolutely whether a bettor is to be considered sharp or not. Most sportsbooks take a fairly small sample size of how the bettor performs against the closing line and use that as a barometer. If they toss the baby out with the bathwater it’s just collateral damage. Their main goal is to cater to a bettor who makes poorly chosen wagers and loses beyond what the house edge dictates.

What this mentality fails to recognize is there is value in sharp money. Value that exceeds the minimal cost the book incurs by paying to see the sharp action.

How sharp money shapes markets

Sportsbooks rarely get it right on the opening line. Each day a dance is performed over the wires at leading offshore sportsbooks such as CRIS and Pinnacle. The initial opening line is posted for a future sporting event and immediately, someone has an opinion as to which side has value.

With the worldwide market initially limited to just a couple sportsbooks, liquidity is small. It doesn’t take much for an opinion to move the line. These select few offshore books that post true opening lines take fairly low limits on this action. After a short period of time, a line is solidified. From that point on, it’s a game of copycat. The line is largely replicated around the world in both illegal markets as well as regulated markets.

This is also true in newly regulated U.S. markets such as New Jersey. If they keep up with the latest line movements across the industry, operators should never be caught on the wrong side. However, some sportsbooks still choose to severely cut the limits for players they identify as sharp. This is a sign they’re not as concerned with where the sharp money is; they’d prefer to exist solely on recreational bettors. We’ll discuss shortly the merits of sharp money even at a sportsbook that targets recreational bettors.

Sharp money creates ‘steam’

Sportsbooks rely on the Don Best screen to see what the world’s major sportsbooks are posting on a game. The prevailing wisdom among sportsbooks is that the Don Best screen will show them where the sharp money is. Thus, they can let other sportsbooks do the heavy lifting.

The copycat nature of maintaining a market line often leads to a phenomenon known as steam. One move causes the entire screen to light up as they copy or overreact to that move. There are plenty of players who attempt to “chase steam.” They bet into the market inefficiency that exists between when a sharp line move begins and the time when it replicates to other books.

Books definitely dislike this behavior. Market inefficiencies aren’t the fault of the player though. The distinction between sharp action and steam action is important because having a better approach towards sharp action almost eliminates steam action entirely. Identifying sharp action puts the sportsbook ahead of the steam.

The case for sharp action

Fairness

The most obvious argument as to why sportsbooks should accept sharp action is that they advertise that they are beatable. Yet, when someone comes along and displays the knowledge to beat them, they suddenly can’t afford to fade that risk.

It seems downright un-American to flood our personal space with advertisements and promises of riches but in reality, only be willing to sell their product to a swath of the public of their choosing. It can seem almost predatory at times. A sportsbook can choose not to take a $500 wager from someone who has calculated the odds and is operating well within their managed bankroll. However, they’ll gladly take twice that from someone who is betting uninformed and potentially wagering far beyond their means.

“Severely restricting customers who act in good faith is obviously (and almost by definition of the word customer), not the optimal way to operate.” According to noted poker authority, and sports betting entrepreneur, Ed Miller. “There is a point where this behavior bleeds into bad faith behavior on their part, and that is the point where regulators should step in to make and enforce rules. There’s a squishy middle in there and it’s where operators can fairly compete with one another.”

In other countries, the concept of Minimum Bet Limits has surfaced as a way to help level the playing field. So far it applies to just horse racing but the concept is that there is a guaranteed minimum bet amount that must be available to all bettors. It’s a possible solution, but one that doesn’t even need to be broached if sharp action is handled correctly. As Miller indicates, there’s more to sharp action than just being sharp. There’s metadata involved. Sharp action is a clue towards more efficient future lines.

Balancing

In sports wagering, it is nearly impossible to maintain a win rate beyond 57%. Bookmakers understand this. Eventually, the market forces regression to the mean. While sportsbooks do sometimes find themselves with significant liability on an event, most realize they will grind out their house edge over time. Additionally, sharp action typically bets a number and not a narrative. The recent Super Bowl was a good example of that. There were plenty of sharps that liked New England on the moneyline, but immediately shoved any amount of money they could get on Los Angeles +3.

Sharp money is largely self-leveling. It will bet into a good number until that number is no longer good. It can be used by sportsbooks to limit liability and hedge positions. A sportsbook which finds itself with too much exposure on one side can position their lines relative to the market to attract sharp money. All the while, the sportsbook is booking with a vig that enables them to maintain a projected margin. High volume is the friend of low-margin industries. Sharp money has always been a predictable ally when market liquidity is needed. Sportsbooks who shy away from sharp action will often find themselves taking on more variance in their results.

This is especially true in newly regulated states such as New Jersey where there is intense scrutiny of monthly revenue numbers. Each month, industry pundits, as well as lawmakers in potential sports betting states, dissect the actions of the emerging market. The growth of the industry is largely measured in aggregate handle. Using sharp money to increase liquidity and smooth out variance seems like an ideal partnership. Unfortunately, the practice of many sportsbooks in emerging states has been to bring account limiting procedures across the Atlantic.

It finds a way in anyway

Perhaps the biggest fallacy related to limiting sharp action is the notion that limiting sharp action is even effective. You’re dealing with people who already have a mindset of “beating the system.” If they’ve figured out the science of betting, they’re probably already versed in the art of betting. Even in legalized markets like New Jersey, there are plenty of ways to disguise who is making a wager. As one NJ sportsbook CEO remarked “We realize that if we limit you, you’ll just get your wife or mother or friend to sign up and place the bets for you.”  You can shut the door on sharp action and it’s just going to come in through the window.

The amount of administrative effort spent trying to stay one step ahead of sharp action is probably wasted capital. Even the Don Best screen is an ineffective tool. Sharps have long realized they can fake out the screen by betting the wrong way at a sportsbook, which will move on their action. This creates a wave of other sportsbooks to bet into at an advantageous price. In fact, the Don Best screen has become so manipulated lately that many of the new regulated sportsbooks have chosen not to list themselves on it.

How to use sharp action

Back to Ed Miller for his opinion on sharp action, “one thing I’m sure of is that one operator’s ‘undesirable’ customer can be another operator’s golden goose. Sharpness lives on a spectrum and if you operate in a more optimal way, you’ll capture profitable customers that other operators can’t service.”

So who is valuing this sharp action, and how are they using it? The traditional approach for using sharp action has been to profile the bettor and quantify how sharp they are at a given sport. Widely known as the Pinnacle Method after pioneering sportsbook Pinnacle.com.

The school of thought is that no one person is able to adequately handicap every sport, but some players have definite strengths. If you can identify a sharp bettor’s strengths and encourage them to place their wagers with you first, you can identify which way the market will be moving. On the flip-side, quantifying not only a bettors strengths, but their weaknesses, is key. You gain their loyalty on wagers for which they don’t have an edge. Moreover, being able to take a position ahead of the potential steam makes the operator immune from the steam chasers.

There’s also value in identifying which sports are so efficient that even sharp action doesn’t really move the needle in terms of true liability. If you’re restricting a sharp bettor on game day of an NFL game, you either have too high an opinion of their prowess, or too low an opinion of your business model. As worldwide liquidity continues to increase, so does the efficiency of major league professional sports markets. Forward-thinking operators might be able to conjure up other ways to use sharp action. Whether it be for their own use or as a way to leverage their position in a global market.

Conclusion

There exists no perfect template good for all markets in dealing with sharp money. However, if sharp money exists on a spectrum, then so do the benefits of dealing with sharp money.

From the tangible; If sharp money is predictive of impending steam, then accepting sharp money is a small price to pay for knowing future movement. To the intangible; if you’re unwilling to take sharp action you risk gaining a reputation on social media of being a gambling company that doesn’t want to gamble.

There will always be sharp money in the market. Companies which choose to shut their eyes to it will probably be the companies most victimized by it.