Knowledgebase
Rule 4
Posted by Bet Angel - Technical Support on 23 May 2013 10:41 AM

CONCEPT

In a horse race the whole field is able to be wagered on all the time. Each runner and the chances of it winning inter play with the other runners. If a horse is withdrawn from the race the chances of the other horses winning the race can change significantly. You would be significantly disadvantaged if you had either backed that horse or another whose chance of winning would change significantly if a horse is withdrawn from the race. Therefore all bets, odds and books are automatically adjusted for the removal of a horse from a race.

In traditional betting circles this is called a "Rule 4" and on exchanges the subsequent proposed change in odds allocated to a runner is called a "reduction factor". If you want to see the reduction factor allocated to a horse click on its name and you will see the reduction factor.

Rank outsiders generally do not cause an adjustment to the market as the impact is negligible, for example a horse trading at 550 will only impact the market by (1/550)=0.0018=0.18%. Most bookmakers and exchanges will not bother adjusting the market in this case. Betfair do not adjust under 2.5%.

What happens when a horse is withdrawn from a race?

This has important implications to the way you use exchanges. This is because you effectively always have some open ended liability or gain in the market at any point if you are doing anything other than just backing or laying.

Let us assume a horse is trading at 1.72 on the exchange and it is removed from the market / race. The whole market will be suspended and reopened after all the bets have been adjusted. The adjustment in the odds is related to the reduction factor allocated to that horse. The reduction factor on this horse was 50%. Because we were in the market at 1.72 and the reduction factor is at effective odds of 2.00 (1/.50) we will lose money on this horse because it has been taken out of the race. However if the horse had a reduction factor of 60% we would make money.

AWARENESS

You have traded an event - You are green on all horses, then one or more is withdrawn from the race.

In this situation all your bets on the race are adjusted by the current price and this could significantly impact your P&L. It all depends on the reduction factor on the horse and the price at which you laid and backed it.

You are making a book on an event

You have successfully laid a book at 102% and then a horse is withdrawn. Your new P&L could now show a loss because the remaining bets have been adjusted for the non runner. If the price of the non runner has come in from the reduction factor implied odds then you may make money. However the situation could be much worse if the price has drifted away from the implied odds based on the reduction factor.

You put an order into the market well before the race starts

We often see users sending us emails reporting problems with the software, similar to this: -

"I placed a back bet in the morning taking odds of 7.4 with the intention of laying off just before the race at 6.00. My p/l showed that the bet had been matched in the morning (I didn’t check the matched bets or log) assuming everything was fine. Started trading when racing started and then I came to the race where I had placed an early bet to my surprise the matched bet showed odds of 5.89 not 7.4 as originally taken. I checked the log which said the bet was placed after 2pm when the original bet was placed at 12.15. I ended up laying off at 6.00 taking a small loss. What happened to my original bet that the p/l confirmed at 12.15?"

This sort of thing happens because there was a rule four. The price of the market was adjusted and therefore the price at which the bet was struck was adjusted. Depending upon which horse was taken out of the market, the early price may radically alter depending upon who is left in the field and what happens before the off.

Lessons from fully automated trading software (No human intervention, which we consider dangerous)

You have £200 in your account. The software lays all runners to a 101% book. You now have £200 back in you account to lay the runners again. You can repeat this process as quickly as you wish. BUT the software does not take into account reduction factors. Recently it was witnessed, not for the first time, a race where one of the horses was a known non runner, doubtful runner, so Betfair set its reduction factor to 0%. So when the non runner was taken out, instead of making a lot of 1% profits the software, with a mere £200 in their account the user lost £40,000.

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