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How Arbitrage Opportunities Occur?

In order to understand why arbitrage opportunities occur you have to understand how bookmakers run their business. In general, bookmakers are only interested in profit they make when they have balanced book (bookmakers book is a record of accepted bets). This means that bookies aim to collect equivalent bet amounts (bet=stakes*odds) on all outcomes of a sports event they cover, so that they can make profit no matter of the outcome. Although maintaining balanced book for every single event would be perfect for bookmaker, that is not possible. By applying margin on every bet they accept, bookmakers are able to make safe profit on the overall betting volume. However, when bookmakers have unbalanced book they must offer odds that will attract people to bet more on one outcome than on the other. This is done by lowering the odds on the outcome that has received more bets and raising the odds on the outcome that has received less bets. By doing this they make a mismatch in the odds on the market and create opportunity for arbitrage trading (the market means all bookmakers that cover this particular event). So the change in odds actually creates an opportunity for an arbitrage trade.

Example how arbitrage opportunity occurs

For example, the market on tennis match between Wozniacki and Sharapova opens at 1.5 for Wozniacki versus 2.6 for Sharapova to win the match. This odds leave 5% margin for bookmakers. As time passes, one of the bookmakers receives $100,000 in stakes. Bettors staked $75,000 on Wozniacki and only $25,000 on Sharapova to win the match. This means, if Wozniacki wins, the bookmaker would loose around $12,500 ($100,000 - $75,000*1.5 = $-12,500). But if Sharapova wins the match, the bookmaker would won $35,000 because $100,000 - $25,000*2.6 = $35,000. Since the bookmaker's goal is to ensure a risk-free profit, he has to stop accumulating bets on Wozniacki and become more attractive for bettors to wager on Sharapova. So the bookmaker decides to lower the odds on Wozniacki to 1.3 and raise the odds on Sharapova to 3.5 to keep balanced book. As the rest of the market kept initial odds, 1.5 for Wozniacki and 2.6 for Sharapova to win, the bookmaker just created arbitrage opportunity with potential profit of 5%.

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