Informed Traders and Balanced Books

Abstract

We explore sports gambler and bookmaker behavior by examining the pregame price movements of sports contracts listed on the Tradesports betting exchange.  The vast majority of prior gambling studies that examine the price efficiency of bookmaker-style betting markets and the associated informational processing ability of bettors rely on the balanced book assumption.  But, on Tradesports, bet prices are directly observable and therefore we are not required to assume that the point spreads set by bookmakers are a reliable proxy for the market’s dollar-weighted vote on contest outcome.  We find that pregame NBA and NFL contract price movements are reliable predictors of future contract values.  The magnitude of these movements is sufficient to remove the possibility of profit-taking by tipoff/kickoff.  Results are consistent with the notion that in bookmaker-style NBA betting markets there exist informed traders and that lines are set at levels that balance wagers on either side of the bet.  However, NFL bookmakers may allow (or perhaps encourage) imbalanced wagering in order to exploit relatively unskilled NFL bettors.