Tabcorp looks to new technology for cutting-edge betting options

 Horse racing officials, looking to revitalize the pari-mutuel betting model, are turning to the financial world for technology to enable the development of new and complex bets.

Pari-mutuel wagering has long formed the financial backbone of horse racing, but as the sport comes under serious threat from sports betting and illegal bookmaking activities, the popularity of the "totalizator" has waned. Complex technology originally applied to solve liquidity problems in derivative markets may now be the thing that comes to the rescue.
In a case of Wall Street meeting the racetrack, New York-based company Longitude's patented single pool wagering technology, dubbed the "enhanced pari-mutuel system" has now been adopted by Australian wagering giant Tabcorp across its three-state operation. The technology has been in use at the Hong Kong Jockey Club for the past year,

“Pari-mutuel remains a significant part of the Tabcorp business – we handle around A$7 billion ($5 billion) per year – but it is a model that hasn't had a lot of innovation in recent years,” said Doug Freeman, Tabcorp's executive general manager, commercial development.

Liquidity isn't an issue for the Hong Kong Jockey Club; it boasts the biggest per-race betting handle in the world and last season topped HK$105 million ($13.5 billion) in turnover on racing alone. Still, the Jockey Club has looked to Longitude as a way to spark new interest with the technology's capabilities of providing new bets like “winning trainer” and “winning region” - eventually the bets could be as varied as imagination of the player allows.

Tabcorp plans to add similar bet types to the new Jockey Club products and even more in time, but first will look to solve the issue of liquidity on the hundreds of markets it fields bets on every day across three codes of racing; thoroughbred, harness and greyhounds.

How Longitude works is by aggregating otherwise separate betting pools, usually on one race, but possibly a meeting or even across different fixtures. The Jockey Club started by combining the similar First Four (first four in any order) and Quartet (first four in order) bets – allowing for a more robust pool and creating more customer confidence.

“We will be launching new products just like Hong Kong, but there will be some combining of pools – that’s an obvious thing to do,” Freeman said. “Deep liquidity is a key to any pari-mutuel business – you need deeper, larger pools – that enables customers to put larger bets on and not influence the dividends that ultimately come out of that pool. Liquidity is key and if you don't have it, people will bet less.”

The threats to racing's traditional cash-cow of pari-mutuel betting haven't just come from external sources, namely the rapid growth of sports betting over the last two decades, but changing customer preferences and a shift to fixed-odds bets - which are now offered by Tabcorp and provide an ever-increasing segment of revenue.

Freeman says meeting the needs of customers with new betting options is now possible on events where previously the small handle made it difficult to create attractive pay-outs.

“One of the challenges for us has been to launch new products – but to launch new products you need liquidity,” he said. “Creating instant liquidity in such a big market is not that simple, and the great thing about Longitude is that it can allow us to launch new products in a less risky way.”

Tabcorp needs approval from three separate state regulators before rolling out single pool wagering, but is aiming for it to be in use by the Melbourne Spring Carnival in late 2016.

While liquidity might be a problem at more minor meetings, during the spring carnival public interest, as well as turnover, in the sport is at a peak and that is when Tabcorp hopes to begin using the enhanced pari-mutuel system.

Last year the Melbourne Cup meeting at Flemington held A$141.8 million, up 2 percent on the previous year, and it seems Tabcorp is likely to try to leverage that interest with a lotteries-type bet on the “racing the stops the nation,” which features 24-runners and spirited betting.

“We haven't got a specific product in mind for that event at this stage, but if you wanted to launch a life-changing dividend-type product, an event like the Melbourne Cup provides the pool sizes, number of runners and level of interest that make that work,” said Freeman, who stressed that gaining customer confidence and explaining the complicated technology to regulators was more of a priority in the short-term. “We want to identify the potential products we could use Longitude for, take them to research – we want to make sure we launch products our customers actually want.”