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Saturday, February 28, 2009

Breakage

Not all horseplayers understand the concept of breakage. But a HANA member breaks it down for us in a piece for his blog.

"Breakage robs horseplayers of $150 Million per year. Release that money to the proper owners, the horseplayers, and you would see an immediate $600 Million annual increase in handle by virtue of that money being churned back through the mutuel pools. "
Rich Bauer


What Is Breakage?

By Cangamble

Breakage is what the track makes due to the rounding down of what a horse should actually pay versus what the track ends up paying to the winners.

Most jurisdictions allow tracks to "break" to the dime (Canada and New York state break to the nickel). In other words, after the track applies their track takeout to the total money bet, they round down what they pay to the bettor to the nearest 20 cent interval per $2 wager. In Canada and New York state, the payoff is rounded down to the nearest 10 cent interval per $2 wager.

Here is an example how it works:

There is a four horse race. $100,999 in the pool. Number 1 has exactly 21,000 bet on him, number 2 has 18,500, number 3 has 23,500 bet on him, while number 4 has 37,999 bet on him. Takeout is 16%, and number 1 wins.

$100,999 times .84 (1.00 minus 16% takeout)=$84,839.16 to be divided to the winning tickets. There are 10,500 winning $2 ticket. This means that each horse should pay $8.07992, but of course, it only pays $8.00 The track just made 839.16 in free money (breakage). In fact, they charged takeout on their own money (the $999 that wasn't going back to the customer if number 1 won the race).

Now lets look at the cumulative effect it had on the players with the winning tickets:

Simply take the 84000 and divide by 100,999 which equals .83169, subtract that total from 1 and the takeout in this case was 16.83% instead of the published 16%.

The higher the cashed ticket, the less significant is the effect on the real track takeout the player is up against. Show bettors will see a much higher real takeout than win player, and much much higher than exotics players.

Here is an extreme case:

Lets say you were betting some hick harness track that has very little money in its pools. You like a longshot, and you decided to take a shot and bet $200 to win. Your bet $200, but no one else bet the horse to show. The total pool is $299. Your horse wins, but it turns out you were the only person who bet the horse.
Track takeout is 20%, so your payoff should be $2.392 (299 times .8), but because the track breaks to the dime, your horse only pays $2.20 to win.
The track makes an extra $19.20 in breakage. And it cut your potential profit by 49%. Interestingly, the effect on track takeout isn't as high as you might think. Instead of 20% it works out to be 26.42% in this case (220 divided by 299). Goes to show how high takeouts cost us lots and lots of money in the long run.

Overall cost to bettors:

When breaking to the dime, breakage has an equal chance of being zero, one cent, two cents...10 cents...14 cents.....18 cents, 19 cents. So adding all the numbers up from zero to 19 and dividing by 20 yields a 9.5 cent average. This means that over enough time, you donated 9 and a half cents for every $2 ticket cashed. If you bet $20 tickets, on average you get back 95 cents less per bet cashed thanks to breakage.

In Canada and New York state, breakage only costs the player 4.5 cents per every $2 bet cashed on average.

I spoke to a former racing exec who told me that he factored in .5% of the total expected handle to come from breakage, when making his yearly budget. This means that Canadian tracks and New York tracks expect to make .25% from the total handle, thanks to breakage. Again, the effect on the player will vary widely depending on whether you play exotics or mainly you are a WPS bettor. The more bets you cash, the more it will cost you. If your average win mutuel at a certain track is around 9 bucks, and the published track takeout is 16% for that track, thanks to breakage, the real takeout is closer to 17%.

One has to ask, that in the computer age we live in, why don't bettors get back what we are supposed to get back from the tracks and ADWs? Anyone who has cashed a 20 cent superfecta at HPI knows that their accounts often have odd pennies in it thanks to a super that, for example, paid $1,546.35 for a buck (for 20 cents you wind up with $309.27 put into your account). So the technology is there to give us what we are entitled, we just don't get what is entitled to us.

For more on Breakage, please try Rich B's site for a good article.

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2 comments:

Hajck said...

Excellent illustration, but little else would be expected from Cangamble.

Anonymous said...

Canadian Pari-Mutuel Agency notes 2007 breakage at .23%. Uncashed tickets represent .27%!!

The CPMA in their 2008 review recommended that 'unchased ticket' revenue be returned to horseplayers. This recommendation was rejected by the Minister of Agriculture. However in a compromising manner, Woodbine offered to use a portion of uncashed ticket revenue to renovate the back stretch living quarters. Hummm.......
It is interesting to note that CPMA targeted uncashed tickets and not breakage?

I am not aware of any legal argument that would entitle racetrack operators to breakage.

The argument is that if operators are deprived of breakage/uncashed tix, they would simply raise takeout to compensate. As horrible as that would be, at least it would no longer be a 'sneaky' hidden tax, and would help address the on going questions of Ingegrity and Transparency haunting the industry.