Exchange Wagering Among Opening HBPA Topics

Whether a horse shortage will inevitably lead to a drastic reduction in number of races nationally and the pros and cons of exchange wagering highlighted the Jan. 24 sessions of the Horsemen's Benevolent and Protective Association winter convention in Pasadena, Calif.

The choice of venue might at first appear incongruous, as California does not have an HBPA division. However, the horsemen's roundtable that finished the day demonstrated that the Thoroughbred Owners of California and California Thoroughbred Trainers are dealing with the same issues as those of their HBPA counterparts in other states.

During the morning session on exchange wagering, the panel discussed the pros and cons of a system of betting that thus far in the U.S. has only been statutorily authorized in California and New Jersey, though not yet started in either. John Hindman of TVG, a subsidiary of Betfair, said that New Jersey is moving through the regulatory process, with Monmouth Park officials "enthusiastic" about the implementation of exchange wagering.

Exchange wagering, according to California-based trainer and attorney Darrell Vienna, "is basically stalled in California unless and until there is a business model that satisfies the needs of the horsemen, that they are properly renumerated."

Issues raised included the various business models available, the potential for cannibalization of existing wagering, and whether exchange wagering would compromise racing integrity.

Hindman and Brian O'Sullivan of Global Betting Exchange Ltd. cited the advantages of exchange wagering, including the ability to bring in new and younger customers.

Addressing the issue of integrity, Hindman said that because exchange wagering bets are monitored with a "complete audit trail" and are not anonymous, unlike many cash wagers at the track, there is even more transparency than with traditional betting.

Vienna disagreed with several points of his fellow panelists.

"It's easier to manipulate a race to lose than to win," Vienna said. "The potential for illicit or nefarious behavior—cheating—is exponentially greater once you allow a consumer to bet on a horse to lose."

Hindman and O'Sullivan brought up legitimate reasons for an exchange wagering customer to essentially wager on a horse to lose, or what exchange-wagering providers call a "lay" bet.

"He may lay that horse at 6-1 because he backed that horse at 10-1 an hour ago," said O'Sullivan. "He might have studied the form and says he can't pick a winner in this race, but he doesn't think the favorite is going to win."

Vienna felt the industry should closely examine the possibility of cannibalization.

"You have the issue of cannibalization, which is the migration of current bettors, and oftentimes big-value bettors, from wagers that return up to 6% to purses to wagers that produce slightly over half a percent to purses," Vienna said.

Hindman disagreed, noting that betting exchanges don't support exotic wagering, which makes up 70% of today's wagering in the U.S. He said that 75% of current wagering is not done on computer, whereas all of exchange wagering is on computer.

"You're talking about a very, very small percentage, 3-4% of the overall market, where there is a risk of substitution," said Hindman.

Hindman and O'Sullivan's companies offer two different business models to the industry. Betfair would provide the entire package, whereas Global Gaming would partner with the industry, which essentially would own the betting franchise.

During the horsemen's roundtable, exchange wagering was cited as perhaps a potential new way to promote and grow the industry. Much of the roundtable discussion centered on growth after the audience heard a somewhat dire presentation on the coming horse shortage by Alex Waldrop, president and CEO of the NTRA.

Waldrop cited national statistics that showed the 2012 foal crop to be 23,500, the 2013 at 23,000, and the 2014 crop estimated at 22,000.

"Even though we've seen a 40% decline in the foal crop, the number of races has declined only 17% since 2006," Waldrop said. "Therein lies the problem. That equates to a 23% reduction in field size."

Waldrop said that racing must improve its core product by such things as increasing the number of starts per runner, reducing the number of races, reducing the takeout, and implementing regulatory uniformity. Waldrop quoted an Equibase official who said that the number of races would have to decline by 25% in order to maintain field size, a prediction that did not sit well with the audience. Several people voiced frustration with the idea that racing opportunities might continue to decline.

The roundtable panelists--Alan Balch of the CTT, Joe Morris of TOC, and Robin Richards, president and chair of the HBPA--discussed ways in which such predictions could be forestalled.

"We're in the racing business," said Morris. "We don't want to see any fewer days."

Balch and Morris noted that California has put programs in place that have grown field size and that the California-bred foal crop has stopped its decline.

"There are differences regionally," said Balch. "I personally think that we have to look at some huge structural issues in racing and apply some intellectual capital to addressing these things."

Balch noted that with the customary purse distribution, 80% of purses are won by 20% of the competitors.

"How are we going to develop field size when we are not providing any incentive at the lower end?" Balch asked.

Balch also proposed flexible takeout that could vary based on everything from type of wager to where the bet is placed to even field size. He suggested that racing needs more and improved marketing.

Richards' experiences in Virginia demonstrated the vast regional differences between California, which is relatively isolated, and the Mid-Atlantic region, where she races.

"I don't think it's as simple as just saying cut days," Richards said. "Our racetrack in Virginia just applied for 12 days for the next season. But at Charles Town, their races are full every single night. I think that there is a regional component that you just have to look at."

Morris said that the industry rests on a three-legged stool consisting of the racetracks, the horsemen, and the bettors.

"We've got to create the balance among the three legs on the stool," Morris said. "If we do that, I think we can grow our industry again. The bottom will be 2014 into 2015. With the sales coming back, with New York with a strong program, with California still in a strong program, I think you're going to start to see the foal crop grow again. We need to stay positive and keep working together."