Asia’s horse racing industry struggles against online challengers

Online betting exchanges CITIbet and AA-Star have come to the attention of racing authorities across the region, which see them as a threat to racing integrity and a drain on betting turnover.

The secretary general of the Asian Racing Federation (ARF), Andrew Harding, hasn’t given up on reaping a financial return to horse racing from the so-called “Asian betting exchanges,” but admits it will require a long-term and systematic approach.

The exchanges are licensed in the Philippines’ special economic zone known as the First Cagayan, which critics have labeled a "Wild West" of offshore wagering. But defenders of the operations within the special economic zone say that racing jurisdictions are to blame for having take out rates that are uncompetitive with the online operations.

Citibet and AA-Star are similar in nature to legalized betting exchange Betfair in that they allow customers to match bets and therefore bet on individual horses to lose. The primary concern for authorities, other than a drain on turnover, is that, unlike Betfair, the exchanges do not work with authorities and provide account information for use in inquiries, making them a clear threat to racing's integrity.

A lack of transparency means the total amount wagered on the exchanges - which also hold bets on financial markets - is difficult to calculate, but judging from the numbers displayed on websites and expert opinion, the turnover on racing far exceeds that of Betfair and is equal to, or more than, the legal totalisator pools in Hong Kong and Singapore. The Hong Kong Jockey Club last season boasted a record betting handle of more than HK$100 billion and is on target to exceed that again this season.

The exchanges use starting odds, race field information and television pictures without permission from race clubs and, unlike Betfair and other more regulated exchanges, the low margin operations do not pay licensing fees to racing bodies.

The ARF is the over-arching association chartered with protecting the interests of racing in the Asia region, including Australia and South Africa. Harding says wagering operators should pay to field on racing, wherever they are based.

“It's about gaining recognition of the fact that racing's business model is built upon a reasonable rate of return from wagering to the sport. If that is broken and you are left with what we call the “Free rider phenomenon” - that is, wagering operators using racing without contributing to its costs. When this happens it is a case of market failure and if there is nothing done to address that then you end up with under-supply in economic terms and the industry cannot be viable in the long term. The sport will be limited in its growth or go into decline.”

Harding says recent legislation dealing with online betting in Australia and Singapore has provided an example on how to gain a return from the exchanges.

The head of a leading Asian bookmaker presented a slightly different take on the issue. While agreeing in principle that "betting on a horse to lose is an unacceptable and damaging proposition", he said that totalisator operators, especially a monopoly operation like the Hong Kong Jockey Club, only have themselves to blame for the pirated use of its product.

"The HKJC tote model doesn’t represent ‘Value’ to the Asian Punter – the take out rates are too high and this in itself helps to create an alternative market," he said.

"The HKJC is a premium product – but they should allow international operators to contract with them, integrate into their pools such that HKJC increase their global reach. The bets taken would add value to their pools, improve liquidity and therefore reduce volatility."

Chris Eaton a sports betting expert from the International Centre for Sport Security is outspoken in his criticism of what he says is the low level of scrutiny placed on the First Cagayan-based operations, and called for governments around the world to unite in holding them to account.

Eaton also pointed to the fact the exchanges are now operating on financial markets and have "all the hallmarks of criminal organizations: a lack of transparency, and structures clearly designed to maintain anonymity and secrecy."

"It's the wild west and out of control," Eaton said "These operations are turning over billions weekly and governments are not pursuing them, and no one even knows who owns them - this is outlandish. Pressure should be applied to the Philippines government to do something about it. They need to be made open up and be made transparent. Clearly a joint government effort is required, perhaps even with United Nations supervision. The agent-based structures of these operations are ready made for abuse by criminals and money launderers."

Harding, in his role as the former head of the Australian Racing Board, was also at the forefront of the court battle to force Australian bookmakers to pay fees to field on racing. Harding said the High Court ruling there, which determined that operators like Betfair would have to deliver a return based on turnover to racing for use of information, created a precedent that could be adopted elsewhere.

Harding also pointed to Singapore's recently passed Remote Gambling Act as a hope for the future, saying if similar legislation was adopted elsewhere it could provide further leverage to the sport.

Matt Pollins is a sports gaming law expert and associate at Olswang Lawyers in Singapore and says the Remote Gambling Act is less "grey" than the anti-offshore gambling laws in other Asian jurisdictions.

"Even though the law hasn't come into effect the a lot of the sites have shut down Singapore-based  accounts," Pollins said. "It now stands out as a jurisdiction where it is clear that you can't take bets from when a lot of countries it is quite grey. In terms of its international reach, the law is deliberately territorial - which means if I am based in the UK and operating a site that takes bets from Singapore, I am committing an offence in Singapore, which means I could be extradited to face charges there."

Harding suggested the best chance of eventually bringing the exchanges into line in the short term was the Philippines authorities seeing other jurisdictions receiving a bigger financial return, and asking for the same.

The biggest holds on CITIbet and AA-Star are on Hong Kong racing, and the movements on the exchanges are thought to be the main catalyst for late tote fluctuations, or “price stomping” as it is known.

Although there is some conjecture over how much the exchanges affect the Hong Kong Jockey Club’s escalating year-on-year turnover, the late price movements have become a headache for the club.

Price movements in other Asian racing jurisdictions are also a major issue, making overseas betting operators cautious of fielding on racing with the smaller betting pools of Macau and Malaysia particularly prone to late “bet backs”, with bookmakers managing liability by “laying off” large bets or manipulating tote prices.

Racing officials across Asia have taken to closely monitoring the sites for suspicious activity. The exchanges are also extending their reach into America, although there the main problems are major price manipulation in harness racing and greyhound racing, which the exchanges also offer bets on.

J. Curtis Linnell is the Vice President of operations and wagering analysis at the Thoroughbred Racing Protection Bureau, and says his organization has been aware of what is termed "price steaming" for the past two years.

"We had heard about the Filipino-based exchanges, and have a followed their infamous exploits," Linnell said. "We have seen some effect, starting about two years ago, with some steam betting on some lightly handled tracks. Tracing that steam betting back through accounts, it seemed to trace back to South East Asia, and in particular Malaysia. The first instance  there was some very large wagering. The individuals probably over bet what they needed to - but since then we have seen about 50 or 70 races in total affected.
"I am trying to get to the actual licence holders - CItibet, AA-Star - that would be the practical way to do it, because we want to be in touch where there is liquidity on our events. We haven't been able to, which leads one to suspect that there is a lack of transparency - and that's not a good thing."