Admitting it may come slowly for old-school players, but the
reality is computer betting will be a part of horse racing for as long as the sport
shall live. Whether that relationship proves toxically crippling or even lethal to the
game is a whole nuther matter, one that has fueled discussion, debate and
frustration in lockstep with its exploding influence.

Computer-assisted wagering even has spawned a polarizing
acronym. Pronounced letter by letter or barked as one syllable, CAW is on the
tip of a lot of potentially influential tongues.

“In 2003, CAWs were roughly 8 percent of total handle but, last year, probably about one-third of all betting on U.S. Thoroughbred racing,” research expert Pat Cummings, now of the National Thoroughbred Alliance,
told The Jockey Club’s annual roundtable last summer. “When you adjust these
figures for inflation, the concern becomes quite obvious. Handle from all non-CAW
customers is down by nearly two-thirds in just two decades.”

Hear what Daruty and Gramm said about computer betting.

The California Horse Racing Board dived in last month when
it hosted a 65-minute public discussion on CAW. It featured Scott Daruty. He is
the president of Elite Turf Club, a joint venture of The Stronach Group’s 1/ST
Racing and the New York Racing Association. Like Velocity, which is the
comparable operation owned by Churchill Downs Inc., it caters to a private
clientele of high-end computer players from around the world whose big-money
wagers are rewarded not only on their winning merit but with significant
rebates from the racetracks.

Marshall Gramm, an economics professor at Rhodes College in
Memphis, Tenn., is a successful horseplayer who won the 2020 Breeders’ Cup
Betting Challenge. He was part of Cummings’s panel last year at Saratoga
Springs, N.Y. In addition to being a breeder, Thoroughbred owner and even an investor
in Horse Racing Nation, he is not ashamed to admit he has become a
computer player.

Having grown into a bettor who pushes millions of dollars
through the tote system, Gramm has not forgotten the roots of his playing days
or the frustrations that persist for those who anachronistically are known as the $2
player.

Gramm knows firsthand the advantage of batch bettors who make
thousands of wagers in microseconds. He also knows that edge is perceived more
and more as a big foot that is squashing the potential profit not to mention
all the joy out of the game for the little guy.

Against that backdrop, Daruty and Gramm appeared together
last week on HRN’s Ron Flatter Racing Pod to compare and contrast notes.
Highlights of their conversation follow, including that very basic premise that
Cummings offered last summer.

In terms of computer-assisted wagers, what percentage of
the actual betting population do they make up? And what percentage of the
handle do they make up?

Marshall Gramm: For me, that would be just a guess.
Scott would actually probably have a more precise number. It also really
depends on how you define computer-assisted wagering. There’s the sort of
strict teams that have accounts with Elite or Velocity that are basically doing
computer-robotic wagering with complex models, but then you have other
individuals who are approaching it maybe more small time but are using
computer and automated uploading in their wagering. My guess is the big chains
are probably 15 to 20 percent of the handle, and there may be another 10 or 15
percent of people who are using sort of heavily involved computers in their
everyday wagering. That’s just a guess.

Understood. But Scott, this doesn’t sound too much
different from what you presented to the CHRB in terms of the numbers that you
have derived in your work with Elite.

Scott Daruty: You’re right, it’s very consistent. One
of the things I think Marshall points out, and it’s an important point, is when
we’re talking about these really complex issues, definitions matter. I’ve had
people approach me and say, “Well, CAW used to be X percent of the industry,
and now it’s Y percent, and that’s this huge growth.” Some of that has come
from growth, but some of it has also come from definitional differences. If you
go back in our industry 10 years, there were people who were playing who today
we identify as CAW players. Ten years ago when they were playing, they didn’t
fall in that category. If you look at that, and you say that’s growth in CAW, well,
no. That was a definitional change. That wasn’t a substantive change.
So it really does matter how you define it.

Do you want to go ahead and pursue some of the numbers
you gave to the CHRB so that we can frame this a little more with some of the
quantifying of this, Scott?

Daruty: We have a very broad industry. We have, I don’t
know, a couple hundred racetracks we’ll run over the course of the year at
different points in time, and so there isn’t a one-size-fits-all answer. There’s
a couple of ways to approach it. One is to look at a blend across all tracks in
North America. I think a more helpful way to look at it is a specific track-by-track
basis. With 1/ST Racing and our premier racetracks Gulfstream Park and Santa
Anita, we would like to see, as a reasonable target, CAW play constituting
about 20 percent of the pools. In certain pools on certain days, it can be
higher. Certain pools, certain days, it can be lower. I’ve heard one of the CAW
commentators out in the industry reference a day at Gulfstream where there was
a pool, and, “It was 40 percent by my calculations.” Well, yeah, maybe that’s
the case. I could point out one where it’s 5 percent. Really, what matters is
over the course of year at a given track, what is the management of that track
trying to accomplish? And are they properly utilizing the tools that they have
at hand to keep the CAW in the range they think is appropriate. So that’s for
the tracks that we own and control. Another track might decide that’s too high,
and they want the percentage lower. Another track might decide they’d like more
liquidity, and maybe 30 percent is OK for them. So I don’t profess to speak for
everybody in terms of what they’re trying to achieve, but as for Santa Anita
and Gulfstream, that’s kind of our target.

Targets also, in the case of players, they’re looking to
cash at a certain percentage rate. Marshall, what about for you in terms of
what you’re looking at either as a player yourself or in terms of the studies
you have made of computer-assisted wagers? What’s the target that they’re
looking at, and how much is dependent on what the tracks are giving for
rebates?

Gramm: In some ways, don’t we want everyone to have
access to computer technology? Then what ultimately do they have? They have the
ability to batch bet, right? And they have large rebates. I think it would be
great if more players had access to both of those things, whether it be lower
overall takeout. Either the takeout needs to come down overall, or we’ve got to
lower the margin between the casual player, the professional player and the teams.
I’d like to see that difference shrink. And then I’d like to see CAW-type tools
available to regular horseplayers. I know that 1/ST group, Stronach through Xpressbet,
have more tools available. There are other ADW (advanced-deposit wagering platforms)
that are creating tools as well. But the ability to create more efficient
tickets with quick upload processing, I think those are things that could help
the run-of-the-mill weekend warrior compete on a level footing. How big should Elite
and the teams be relative to the overall pools? I don’t have a good answer for
that, right? We don’t really know. But I believe what would benefit everybody
is if we could figure out how to encourage the pie to grow, encourage more
handle through lower takeout. I think that would benefit everybody. It would
benefit the teams, because there’d be more liquidity for them to bet in. And it
would benefit the weekend warrior, the casual player, to allow them to churn more.

Scott, there’s a counterintuitive factor here, though,
because it was pointed out at the CHRB meeting that higher takeout actually can
create more CAW traffic, because that then turns into bigger rebates. Do I have
that right?

Daruty: Well, I don’t think that’s exactly correct. I
think that it ends up being a wash. If there’s a 20 percent takeout, and let’s
say I’m getting an 11 percent rebate. If the takeout goes up to 22, and I’m
then getting a 13 percent rebate, mathematically, in the way the models work,
those things are essentially similar. The difference between the takeout and
the rebate is what the player has to overcome through handicapping and through
the selection of the correct horses. If the player can overcome that, then the
rebate’s going to make up for the increase in takeout and still get the player
overall 100 percent, recognizing that that’s the objective of not just CAW players,
I guess, but every player, right? You’re sort of betting, because you want to end
up with more than you started with. For the CAW players, they’re trying to end
up with more than they started with, but they all recognize they’re not going
to win outright against the takeout. They may, in my example that I gave to the
CHRB, and this is a number that’s backed up I think by pretty good math at
least at the tracks that that 1/ST owns and represents, a typical payback for a
CAW player on all their wagering activity over a period of time would be 90
percent. Meaning if they’re getting an 11 or 12 or 13 percent rebate or more
than that, they’re coming out ahead. If they’re getting a 10 percent or less
rebate, they’re not going to move money, and eventually they are going to go to
something else.

There’s a delicate balance here between the CAW players
and the so-called retail players, the everyday players. Is this like sharps vs.
squares that we’ve seen in Las Vegas and other gambling centers forever?

Gramm: Yes. That’s what I would say. This is just
another evolution in horse playing. Whether it be the Sartin methodology or
speed figures or trip handicapping. This is just the modern innovation in
playing the horses using computer technology and modeling and handicapping. The
only thing I think that makes it different and unique from just an evolution in
horse playing is the fact that they can batch bet, and it can affect the pari-mutuel
system and the payout. The biggest problem that I have with CAW, that a lot of
people have with CAWs, is not so much that they win. There’s going to be
winners and losers. Everyone, if they play by the same rules, that’s just the
way the game is going to turn out. We can’t be bitter at them because they’re
winning. The problem is what they do to the final odds and their ability to batch
bet and their ability to change the odds. I know that the industry, NYRA, the
Stronach Group, has done things to prevent them from dramatically shifting the
odds, but we see it all the time. The pari-mutuel system was never really
built to where someone could make so many bets in the last minute. We think
about when Pierre Oller developed the system, he was a (19th century) perfumer in
Paris, to eliminate the risk that bookmakers faced when taking bets, no one
could imagine that someone could come in the last minute, put a lot of money and
basically establish the market prices. So that’s where we are today. I think
some of the stopgaps that have been used to help the win pool, especially what
NYRA has done (stopping batch wagers two minutes before post time) and to some
extent what 1/ST and Stronach has done have been helpful. I really wish
ultimately we could move away from the pari-mutuel win pool to an exchange-based
system for win betting. It would benefit everybody. The teams would love it,
because they would get to creating markets. Horseplayers that get their version
of fixed odds priced correctly could work out. If not that, really push the
teams into trifecta, superfectas and the pools where they’re definitely
winning, and they’re winning a lot. Those are pools that they’ve really
dominated. As a recreational player, I’d be very wary of betting Pick 4s or the
superfecta. But the teams are exceptionally good there. Give them an incentive
to play there, and then push them further away from the win pool and the exacta
pool, pools where the money movements really affect people’s play in the game. It’s
not only the odds drops that are problem. If I bet a 4-5 horse and it goes to 1-5,
I’m frustrated. But just as well, if I am looking at a horse and thinking I don’t
want to bet the horse 4-5, and it goes to 7-5, that’s money I wouldn’t bet
otherwise. I think that it’s the opposite movements in both directions are
problematic.

Pat Cummings believes what Marshall just said. But Scott,
I know you believe that the two-minute cutoff that NYRA has imposed on win bets,
that you can’t make a batch bet after the two-minute mark, hasn’t had the
influence that maybe the everyday player would hope it has.

Daruty: I don’t think it has. I applaud their efforts
to solve the problem, they being NYRA. We’ve made similar efforts at the 1/ST
tracks. There’s no perfect solution that I’ve figured out yet or been told
about yet. We acknowledged the problem of late shifts is a problem for
everybody. By the way, it’s a problem for the CAW players as well, because they
spend a lot of their time and energy trying to guess and predict where the
final odds will end up. They can’t see it in the pools any better than the guy
sitting at the racetrack can see it in the pools two minutes out, because there’s
not enough money there. So it is a problem fundamental to the pari-mutuel
nature of our game. We would love a solution. We’ve not been able to figure one
out. If anybody has any great ideas, tell me, and we’ll implement it. Different
ideas have been kicked around. What if you close the pool when the first horse
loads? That way the money will be in by the time the race starts. OK, but have
you really solved the problem? If you have to bet when the first horse is in, then
you’re just backing up the problem. You’re still going to have all the flow of
money in the last minute or two. It’s just that minute or two will expire when
the first horse loads instead of when the gate opens. Now it may solve the
perception problem of the odds boards moving during the race, but it doesn’t
really help the player understand the odds better when he or she is betting. That’s
just one example of one solution that’s been proposed. You can go through and
propose all kinds of different solutions, and we’ve taken external ideas. We’ve
had internal discussions. Every idea here has its own set of problems with it. For
example, if you were to say CAW has to stop at two minutes to post or two
minutes to off time or however you want to measure it, it has to stop before
the pool closes. The win bet is the bet in which this is this problem is most
visible. It also happens to be the bet in which it is least necessary to have
quick betting capabilities. Even the most sophisticated computer player may
only be betting, I don’t know, two or three bets on a winning pool. They may be
big bets, but you don’t need to put in 1,000 different combinations like you do
on a Pick 6. It’s a win pool. You just need to pick a horse or a couple of
horses and put your bet down. By closing the pool at two minutes to post, have
we prevented that player? We’ve prevented him from betting through the CAW channel
where every CAW player is identified by their own unique tote code, so we can
track their play and study their play, and if there ever were a problem, have
complete transparency. We’ve taken them out of that environment, and we’ve sent
them to the racetrack either personally or with a bet runner to go up to a
window and place it at the last minute or to do so through a TVG or Twin Spires
or Xpressbet retail account. Again, I applaud NYRA’s efforts. I just don’t know
that that solution has been all that successful.

Let me run another idea by you at the risk of throwing
clay pigeons in the air here. What if you change the percentage of the rebate
the closer a bet is made to the start time of the race? You reduce it if you
wait until the last second.

Daruty: I think that’s a great idea. I think it’s a
much better, more sophisticated plan, a version of the plan that the 1/ST
tracks adopted. What the 1/ST tracks adopted was rather than telling the
players you have to bet before two minutes to post, and once that time period
occurs you can no longer bet, we didn’t take that. We took an approach that
said if you bet prior to two minutes, your price that you have to pay the
racetrack goes down, which means your rebate goes up, and we try to incentivize
through that higher rebate people betting early. Conversely, if you don’t want to
bet early, and you’re a CAW player, and you want to wait until the end and bet,
your price that you have to pay the racetrack goes up materially, and thereby your
rebate goes down. You’re effectively paying for right to wait and bet later. Why
I say yours is a more complex and probably a better variation than what we did,
we just had sort of one break point. Before it you get a higher rebate. After
it you get a lower rebate. I hear what you’re saying almost to be like a
sliding scale three minutes out, two
minutes out, one minute out. That becomes very complicated. You’ve got to
recognize we have people coming through different totes into the pool at
different times. If somebody were betting in through a United Tote platform,
for example, it would be complicated, because you wouldn’t actually see exactly
when they’re placing your bet. You’d see when United Tote is passing that bet
from United Tote, so it gets very complicated to try to set exact times. Yours
is better in theory. I just think it would be very hard to implement. However,
what we did find out, and I mentioned this at the CHRB, I said we adopted this
policy, and I said it hasn’t been wildly successful. What we found is
originally some of the players were betting early and taking advantage of the
bigger rebate. But as time went on, virtually all the players abandoned the
early wagering and started waiting later. Why is that? We think it’s two
factors. The primary one is that these players are also trying to bet against
the competition. They need to know what the pool is, and the earlier they bet,
the less definition they have, the less knowledge they have about where the
pools actually going to close. By having them bet early, they’re betting blind
just like the public. I think ultimately, one of the challenges we have is as
more and more players move away from brick-and-mortar environment, whether that’s
at a retail OTB (off-track betting) facility or whether it’s at a racetrack, more
and more players are moving to online wagering. By the way, even players who are
sitting at a racetrack are now on their phone and are betting through an account-wagering
platform. The more the industry goes that direction, the more money comes in
late. Whether that’s retail money or whether it’s CAW money, more and more is
coming in late. I think eventually we’re going to get to the point where your
pools might be zero at two minutes to post, and all the money comes in at the
end. Will some of that problem be a CAW problem? Yes. But a lot of it will be a
reflection of late retail money as well.

Which brings me back to you, Marshall. Technology. The
establishment of horse racing is still catching up in a lot of ways. Computer
players, I think there’s a certain edge that they always will have. How much is
technology a challenge on both ends of this?

Again, computer analytics, however we want to call it. Modeling.
It’s everywhere. It’s definitely dominating sports betting, too. It’s
definitely involved in in everyday business. … It’s definitely in the future.
I want to see a world where more of us use CAW technology. Where the pricing is
more equitably distributed. Scott even mentioned at the CHRB meeting that the
increase in effective takeout, as a result of the CAW teams, is just a couple
of percentage points. How do we easily solve that? We drop the takeout by a
couple of percentage points. That solves part of the problem for our
recreational players. It can be done. The takeout in California on multi-horse
wagers is 23.68 percent. That can be done fairly easily. That’s onerous
relative to sports betting and all the competition that exists for our wagering
dollar now. I know that our sport is tied up in regulation, and it’s hard to
change these numbers, but I just would like it to price more effectively. I
think that would help us solve part of the problem. Hopefully, the price
discovery part of the problem, which is big, which is the late money movements
making it difficult for people knowing what prices they’re going to get, that’s
a bigger challenge. I’d really like to see us move to exchange wagering. It’s
something that might solve this. That’s one that, again, if we can get the
price down that we pay, if we can get the takeout down, get the difference
between the teams and the recreational players down, I think that’s at least a
step in the right direction that can be done.

Scott, you could address what Marshall just said on
takeout. But let me double down on this and also ask about the rebates. How
often do you review what you’re giving back to the batch bettor?

Daruty: That’s reviewed
almost on a continual basis. It’s reviewed and adjusted. The CAW players are
getting this rebate, because it is so directly related to how much liquidity
they bring. It’s not uncommon for retail players to get some rebate as well, but
it’s typically much smaller. If you were going to go in, and you were going to say
let’s close the gap, as Marshall said. You want to close the gap in a way that’s
fair to the consumer and creates more turnover, but you want to do that in a
way that ultimately brings more revenue to the industry, not less revenue. That
becomes a complicated mathematical analysis in its own right. If you were to go
to a regular consumer, and you were to give him a 2 percent rebate or a 4
percent rebate or a 6 percent, where are the break points? How much more do
they pass at each of those levels? I don’t know for the regular retail consumer
that it’ll be as directly correlated as it is for the professional player. We
can almost predict, I don’t want to say perfectly but to a very, very high
degree of accuracy, what a professional player’s handle will do based on if we
give him a 2 percent more rebate or a 2 percent less rebate. We can very
accurately predict what that’s going to do to his turnover. Which then means it’s
very accurate to say, OK, at that new turnover number, how much revenue comes
from that vs. a retail player. You might give one guy a 4 percent rebate, and
his handle goes up 50 percent. You might give another guy a 4 percent rebate,
and he bets the exact same amount. They don’t have the same motivation as the
professional players do. The idea is a good one. We’re certainly open to that.
We’re 100 percent supportive of the notion of giving more technology and better
tools to the retail player both in terms of helping them analyze the field and
select their horses as well as formulating their wagers and getting those
wagers in promptly. That’s something that we do focus on, are 100 percent
supportive of, and if anybody has any ideas in that regard, we’re totally open
to how can we provide better tools to the retail player?

Gramm: All those things sound great. I’m thinking
more in terms of the takeout relative to other betting opportunities. If we
think about pricing, the landscape has changed. Horse racing was a monopoly 30
years ago and in some ways was priced better 30 years ago to what it is now for
recreational player. We have such a tiered system. I actually get substantial
rebates, because I’m lucky enough to live in the great state of Tennessee. I
don’t have a track, so I don’t pay any source-market fees. If you’re probably
the same level of bettor as me but in California or Minnesota or Virginia, with
source-market fees your rebates are much lower. In fact in certain states, you
can’t even bet in the pools, because it’s doesn’t make sense for the ADW to
take you, because they lose money on your bets. I just wish there were more
equitability across pools for players where they don’t have to be like me and
be in the correct state. The rebates do level the playing field. I don’t think
that you can be a winning player without rebates, and we need more people with
at least the illusion of winning or at least the confidence to think they can
win, to invest time in the game, that more learn more. I went from being a mid-five-figure
player, got access to rebates, and I’m an eight-figure player. That’s all
because of the ability to start winning or at least being able to compete
competitively at a lower price. I think there are a lot of people like me out
there that don’t get the chance.

Scott, I don’t want to let you get away without
addressing the questions that will arise about a conflict of interest with
racetracks owning betting platforms and even now, as was pointed out by the
California board, 1/ST has gotten into bed with MyRacehorse, so it’s even
owning racehorses. I know you’ve said that this has been the way racing has
operated for a long time. Do you want to go ahead and advance that?

Daruty: I’m going to leave the MyRacehorse part out
of it, because that’s not my area of expertise. Obviously, horse ownership is a
key part of what drives our industry, but I’m focused on the betting side in my
role. You go back to the start of horse racing, when the only place you could
legally place a bet was at the racetrack where the race was being run. It was
the track who conducted the wagering. Then you move into the OTB expansion and
simulcasting, and again, it was always the tracks who controlled the wagering.
When ADW launched, you got Twin Spires owned by Churchill, and you got NYRA
that’s with its own platform, and you got Xpressbet owned by the 1/ST company.
Even in the retail ADW space, it’s the racetracks that operate the wagering. I
feel like the ownership of Elite Turf Club being divided up between NYRA and 1/ST,
and then our competitor Velocity being owned by Churchill Downs, I think that
is a natural extension of the fact that the betting in horse racing has always
been owned by the racetracks, always operated by the racetracks. I don’t see it
as a conflict. I believe it’s beneficial for the industry, meaning the
racetrack owners and the horse owners. I think it’s beneficial to that group
that the CAW platforms are owned by the racetracks, because it gives us a visibility
and a transparency that might not otherwise exist if it were a third-party
platform. On balance I’d see it as a positive thing. I’m not blind, though, and
I understand why there would be an appearance of a conflict. I understand that
people raise that point. I just think that, on balance, it’s better that we own
the platforms.

Gramm: I’m not worried about it, but I do think that
it leads to conspiracy theory. There are people who sort of raised alarm bells
over CAW believing that the industry itself is profiting from them, or they own
the teams, which is not correct. … I don’t believe the conspiracy theory that
given the teams have access to higher-up officials at Stronach and NYRA that they
can help some of the decision making, that maybe that’s why we end up with a
blind maiden race in the middle of the force-out in a Pick 6 sequence. I don’t
think that’s true. I hope it’s not true. But you can see where the conspiracy
theories would come from.

Perception then is important, Scott. Perception can be
reality for a lot of the public. Is the pressure then inevitable to make
changes to, for instance, the rebate structure for CAW, especially with the
fact that the California Horse Racing Board did call you in to answer questions
about that?

Daruty: Perception is critical in in any business but
especially in the gambling business. Perception is critical. People need to
have confidence that the game is fair. Knowing what I know, and seeing it day
in and day out, I have every belief and every confidence that the game is fair.
Marshall mentions there are a lot of conspiracy theories out there. None of
them really have any validity to them. Still, it’s something we have to address
and try to instill confidence. I don’t know exactly how to do that other than
to have conversations like these. It’s why I appreciate the opportunity to talk
with you and Marshall, who I respect tremendously. It’s why I show up at CHRB
meetings and try to spread the truth. We’ve got a lot of challenges in this
game. It is a tough competitive market now that sports betting is legal in 35 states
or whatever the number is today (actually 38 plus D.C.). We’re in a competitive
environment, and we have to do things that instill confidence in our customers.
I just don’t know that there are any silver bullets, at least not that I’ve
seen. We’ll continue to work day in and day out to try to improve things, and
as I said, always open to suggestions and ideas, because we certainly think a
lot about these and haven’t come up with solutions for some of these problems
yet on our own.

Marshall, I’ll let you have the last word here. I think
we would all agree that racing in the 21st century under at least the economic
model that is extant cannot survive without computer-assisted wagering. What is
the next step? How do you see maybe the next five to 10 years and the
advancement of CAW vs. retail betting?

Gramm: I don’t believe rebates are the problem. I
think that rebates are very important. I think it’s important that we reward
our high-volume players. Whether they be computer teams, whether they be
individuals. I think it’s important. It’s one way that we can bring the price
down. I would hope we could bring the price down for everybody. I believe that
there is the issue of will there be a short-run gain. I don’t know. But I’m
confident in the long run that there’ll be benefits to it. Ultimately, the
pricing of rebates isn’t the problem. The problem is the price discovery and
what it does to late odds movements. What does the next 5-10 years bring us? I
hope it brings us lower pricing. I hope it brings us a rise in both computer
play and casual play. I hope that some of these things start to dissipate. If
we can, I believe, price our product competitively and bring back some of the
casual players and weekend warriors and compete with sports betting, I think we’ve
got one of the best gambling products out there. The gambling price is built
for people with short attention spans. A race is over in 72 seconds. You bet on
football, it’s like getting tortured. Or basketball, where we can have a lead,
and then your team starts fouling, and you lose your bet. I think that what we
have is a great gambling game for the 21st century. I just hope we can figure
out how to make it work. I am pleased that we have people like Scott working on
it. People like Pat Cummings out there who think about these things. Maybe
there’ll be some creative solutions where the game can really thrive.