One of the hazards of wagering on horse races is that the average bettor is not privy to non-public information that often bears on whether a horse has a chance to win a race.  Owners, trainers, grooms, and other insiders can see for themselves if a horse is doing well, or they may hear something pertinent, perhaps from a veterinarian.

A bettor can employ the most sophisticated handicapping software and crunch a plethora of public past-performance data to model a race, but the output will be worthless if a key variable available only to insiders is omitted, such as a horse is off its feed or is nursing a bad tendon.  The same holds for sports betting; an injury to a star athlete, unknown to the public, can compromise the chances of a bet on his team being a winning wager.

In horse racing and sports betting there is no equivalent of the Securities and Exchange Commission to protect a bettor.

Yet one wonders how much insider trading laws and the SEC really act as deterrents.  I am reading a riveting book (if you enjoy investing topics) called Black Edge, by Sheelah Kolhatkar, about the insider trading criminal scandal associated with the hedge fund SAC Capital that sent people to jail or ruined their reputations and careers.

One of the traders at SAC Capital classified information about companies into three categories:

  • White edge is public information such as an SEC filing or a research report.  This is the horse (or sport) bettor’s equivalent of past-performance data obtainable from, say, the Daily Racing Form.
  • Black edge is “obviously illegal”—for example, information about a publicly traded company’s earnings before they are released or knowledge that a pharmaceutical company’s potentially blockbuster drug is failing in FDA trials.
  • Gray edge is information that is not clearly white edge or black edge, perhaps an offhand remark that a corporate executive made at a private dinner with a stock analyst.

The SAC Capital trader who developed this color-code system to guide his associates said about buying or selling securities based on black-edge information: “If you do one thing wrong, you’re in jail and your life is ruined.  There is no trade that’s ever worth it.”  (Obviously, some at SAC Capital did not heed this advice and greed prevailed.)

In securities investing, an investor has the assurance that the SEC is policing the practice of trading on secret information, but as cases like SAC Capital show, the investor also can see that insider trading goes on all the time, particularly with respect to gray-edge information.  In horse racing, or sports betting, there is no government organization looking out for the bettor…and thus he or she knows that wagers made using insider information are rampant.  The horse-race bettor is under no illusions.

Copyright © 2017 Horse Racing Business