Episode 13: How a Professor Won Gambling on an Obscure Sport

in the Spanish Basque country. It's kind of like racquetball, except the players play on this gigantic court. The ball goes nearly two miles the rackets of these gigantic crald things that the players wear over their hands. The ball is hard as a rock, and oh yeah, if it were to hit you in the head, the ball could kill you. This sounds like a made up sport. Um,

why are we talking about this? It's a good question because, in addition to how crazy and intense the game is, you know, as I said, two hundred mile an hour ball is hard as a golf ball, potentially deadly. People actually gamble on highlight, kind of like horse racing. Uh. The people a bunch of players play in a tournament of sorts and then people bet on whether the different players will win place or shows. So there's this big gambling element to it that's really interesting. Our guest today

that we'll be talking to is Steven Skina. He's a professor at stony Brook University and he wrote a book all about gambling on Highlight Online and how he cracked the system and he made a bunch of money. He cracked the system, so he beat the house. Yeah, it's basically impossible theoretically, you know, gambling, the house is always supposed to lose. But in these games we're sort of betting against other people and the crowd sets the odds.

It's actually possible. And not only did Steven beat the system and make a bunch of money, there's some interesting lessons in terms of eating the stock market and odds games in general. Okay, so I'm excited because not only am I about to learn about a sport which I've never heard of before, but I'm also interested in making money.

So this sounds too all right, I think you've seen it all well, think fast, experience the wall to wall action and NonStop excitement that is Miamie Highlive see world class athletes climbed the walls to catch a rock hard ball flying. It speeds over a hundreds of miles an hour. Think excitement, Think Miami, Higlan, I think fast Steven, thank you very much for joining us. Thank you, it's nice to be here. Tracy has never heard of highlight before.

What is highlight and how did you get interested in? So? Highlight is as as you said, a besque game. Originally, it's sort of like a variation on handball. Um. The reason people are exposed to it in the United States is typically because in Florida it's a betting venue. Um. There are these stadiums called front Times in Miami and Dania near Fort Lauderdale where you can watch mostly basque players play the sport. And that's actually exactly how I

discovered it. My family used to go down to Florida, my North Miami beach every winter for a couple of weeks, and we went occasionally to UH the Dania Highlight front Time. That was exactly the way that we got involved. You know, our family would every year take its vacation visiting the relatives in Florida. We would drive down and we would UH one night go to the Highlight front time. Is it fun to watch these games? It sounds intense from

Joe's description, it's I think it's incredibly exciting. I mean, first of all, it's fun to watch them make these plays because the ball is moving very fast, they have to make, you know, great catches and very difficult throws. But also the scoring system involved in Highlight has some infra sting mathematics instructor that makes it kind of fun

to watch. So depending up on how you bet and um, the chances of winning change extremely rapidly with every point, and so it's it's it's very exciting because the situation is always changing. Yeah, so I said it was kind of like horse race betting and that you could bet on wind, place their show. But in a way it's a little more complicated. Why don't you just sort of

describe how the similarities real quickly and the differences. So it is like horse race betting and that you can bet on win, place and show, and that's certainly what um, what we're gonna be doing. The difference is the scoring system. UM. Basically, in Highlight the winner is the first one to get the seven points, and they have eight teams that are playing in any given match, but because of the size of the court, only two teams can play at once.

The teams wait in a line. Their their uniform numbers are one through weight, corresponding to where they start in line. And originally the first two players play each other. Then the winner keeps playing, gets a point and keeps playing. The loser goes to the end of the line, and

they keep playing until you get to seven points. And if you think about that kind of a scoring system, it gives an advantage to the people who start early because um, obviously they get first cracks at getting points, and even if they lose, they are more likely to be they're gonna be the first player to come up for a second time. So they make the scorches them even more complicated. Whereafter every trip through the queue once meaning every player has played its first point, now every

subsequent point counts for two. And this makes for a very complicated scoring system. That means that even if you're very very close to winning, if you suddenly lose that point, you go to the end of the line and you might not get another chance to play again. And the betting system, it's a paramutual odds what exactly to that man. So paramutual means that you're betting against the other players,

and it's not me betting against the house. If I was betting against the house, the odds of me winning are very small. That's why the house is usually big. But in a para mutual system, what happens is the money, all the money that is bet in the accompetition is thrown into a pool. The house skims off a fee something and the rest is divided among the winners. So in order to you know, to have a successful betting system,

you have to be better than the other players. So the other betters like basically there are a bunch of dumb people like me and my family who used to go there from time to time and bet and we didn't know anything. And so theoretically, if you're really smart and studied, we're the fish that you could take advantag. That was the attraction. I mean again, it's it's a very exciting sport. It's probably a hard sport to know the players very well. You know, I don't think most fans.

Most fans are not that intense, but they go once a year, twice a year. And before we get to your sort of rigorous approach. A story in your book. You won the first ever bet you placed on Highlights, right, So, so the reason we got really hooked on this was that when and our parents drove down the floor and let us go to highlight one night, they also let

us make one bet. They gave us two dollars and they said, you make one bet, and we followed the bet that was listed in the local tow sheet, knowing nothing, and astonishingly, it was a trifecta combination of first place and show that astonishingly one. And so we won, you know, a hundred four dollars. And this was an amazing amount of money to a bunch of kids back in the seventies. And uh, that's what I was, probably about twelve or

so at the time. Turning two hundred dollars into a hundreds exciting any time, but but when you're a kid in the seventies, it must be absolutely Uh. I could see how you would then get hooked for life on the game. Um, all right, let's fast forward a little bit, and so you're a professor at a Stony Brook. Talk us about how you started on your path to systematizing

a gambling system. For highlight and what you did. So when you look at the scoring system again, a highlight game is played in discreete points player one place player two. One of them wins, the other goes to the end of the line. You could imagine simulating the result of a highlight match by flipping a coin for every particular point player one. If player one is maybe better than player two, maybe you'd say it as a six chance

of winning the first point. And if you could figure out the odds that one player is going that every player has against every other player in that they might encounter in a match, you can build a simulation to use random numbers to play through and simulate each match. So is it like it sounds like a series of tree charts almost right? You assigned probabilities for each outcome and then you have them sort of branching across all the possible outcomes. Right, so you you could view this

as a tree process. It's a it is a branching process. It's a tree process where at every point in the tree is every note in the tree is basically two players playing each other with a certain score and a certain status of players in the queue to come. Then depending upon who wins it, you go to a different state in the process, and this process ends when you have identified who comes in for a second and third.

So this part sounds is where it seems to really diverge from say horse racing, where you just have one event, there's one, two, and three, not really all these different permutations and sequences. So horse racing is not at the scret event kind of a game. This is maybe a little bit more akin to I would say, um baseball than football. Baseball is a bunch of the scret events. There's pitches and things happen. In basketball, things are very continuous.

In horse racing, things seem continue with So when you started developing the system, when are we talking about how long ago is this? This is something we started in the I would say early nineties. If you have to get back there, it's probably the story about in the early nineties. Okay, so you broke highlight down into this series of discrete events, then what's next in terms of

the creation of your gambling system. So again, once you have the ability to view this as this tree process or as this um you can simulate one game, you can now simulate a million games or or or more and see what this probability distribution is of outcomes, and you can start to look at for every combination of first, second, and third, how often did it come in? And from this that gives you some insight into what things you

should bet on. But things get a little bit more complicated. First, you have to accurately model how good the players are, so you have a good guess as to how often player one is gonna be player two. And more that you have to get a build a model of how the public is going to bet um. Again, it's a paramutual system. I'm betting against the public. If everyone else in the public was someone who programmed the computer and did the analysis the way I did, I would have

no advantage. Are you looking for almost pricing descrepants? Ease between where you think the outcome of the game is going to come and where people are actually betting exactly so that that that again there is a a based on our simulation, basically an underlying real probability distribution which would in some sense and for a price as to what would be a fair return for a two dollar bet on that outcome. And then you know we look

for pricing disreferences, so let's talk about them. Are there some persistent biases that you learned about in how the public bets? Like you know, I'm the public is silly enough to mostly bet on by powerball tickets. People are irrational, So what kind of irrationality is did you see that you can take advantage of? What one interesting property is that since it's very very hard for all the players

with high uniform numbers to do very well. If you could imagine players six, seven, and eight, in order for six, seven, and eight to do well well, six has to beat seven in order to do well, but that puts seven at the end of the line, and seven has to eat eight, but that puts eight at the end of the line. It's very very hard for there to be combinations where all the big numbers come in and essentially

almost impossible. And yet you would always see people betting on this because they didn't know that that way, they were betting on essentially an outcome that essentially couldn't happen, and the odds must look pretty juicy for those characters. For those players, I mean, and it's up to the payoff would be good if they want. Because there's only one person betting on that during the course of any match, but it's never gonna happen. So so so here's our

system would look for these disrepencies. The other thing that we would look for that's sort of related to the kind of models people build for trading, is we'd have to look at what our impact on the betting pool is. So, um, if we bet on something and we win, it doesn't pay for us to bet a lot of money on that outcome because we're just dividing the pool among all the winning tickets, and so every subsequent ticket we would buy would would have a lower and lower expected value.

All right, So you have the mathematics, all the trees, you have the nature of how people bet, so the payoffs. You also have this calculation about how your own bets might affect the results. Now let's talk about putting it into practice. What did you do then? So the question now is how do we actually go bet on this thing? We we couldn't have somebody stationed at the HIGHLFE front on every day making our bets the front and we were interested in betting in was in Connecticut, I was

in New York. This was not you know, I'm not that crazy, but it turned out that Connecticut did have an O TB and off track betting operation where they had a phone system where you could dial it in

and dial in your bets. And so we programmed the computer computers back then had these things called modems for the kids listening, which I remember that I remember the A O L dial up modem, these dial up modems, and so you could in some sense, therefore, you had a device that you could program that could make phone calls and could likewise push buttons in some sense push

buttons on phones. And so we built a system that would um take our bets and convert that into the dial tone instructions that would be necessary to place this bet at the Connecticut oft TACH betting operation. And so we built essentially a complete, you know, programmed trading system in highlight. Every day, it would identify go over the web, identify what we're the game matches, and who was playing.

It would simulate each one a million times. It would determine the most profitable betting outcomes, and then it would phone it into O T B attempt to implement our trade. This is amazing. This sounds like algorithmically driven high frequency

highlight trading essentially. What I love about that is that you're exactly right, except there's this very old school part because there's high frequency algorithmic highlight trading except for the very last part, and it involves dial tones going through a phone tree, and so it's this incredibly modern seeming idea and then this very old school actually process of

placing the trades at the very end. I can't say that the you know, the the We wrote a book about this book called Calculated Bets and market for it ended up being not high live fans because it's not actually a big universe, but but if they're out to be, yet a lot of play in people who were doing trading and building these program trading operations, because it is essentially the same idea that people are using in the same technologies, and it kind of explains basically how these

things work. I want to just step back and ask the dumb question, how would you do? What's an algorithm? We hear it all the time, algorithmic trading, and people have some idea that it means computers in math, But what does this actually mean for someone in plain English? As it as it is said in in the world of algorithmic trading. It is typically a it's really I guess, a programmed procedure from making decisions so that uh, you know,

there is a decision in a program trading system. There has to be somebody making a decision to buy or sell this particular stock at this particular time. So a set of rules basically, so it can be sort of a set of rules as usually some level of input. I would say, it could be a simulation, it could be sets of rules. It's some kind of a procedure that that the sides that this bet or this series of bets are profitable, and goes and executes them without

human involvement. And now you set up the trading system, they're dialed in. How much money did you make? Well, we may we made okay by percentage wise. Again, recognize that the betting pool and highlight is very small. So that I told you that a you know, making too many bets on any particular match would would rapidly saturate the pool and none of the bets would be profitable. But but over the course of our trade, we made

over return on our investment. It was sizeable enough that it got to be a little scary to UM run it on university research machines, and so we eventually ended. It wasn't so much that I have deep regrets about turning the system off. What time frame we we had

it running for about a six month period. Six months, Yes, would you would you have gotten to the point if you had continued with it where you would just be the entire your market UM if we kept um again, if if we made our bets bigger and bigger than we could have easily become the entire market you know.

In fact, one of the one of the things that was key to our systems again we our system bet on Trifecta's combinations of wind, Place and show, which are rare events and but but really didn't make it payoff was they had a special type of bet called to Trifecta box where we could buy a particular set of all combinations of three numbers UM cheaper than we could the corresponding tickets. And our goal was really to have as little impact on the pool as possible, and that

was really what was necessary. It really wasn't a big margin here. If someone wants to do this, I mean, I know that it's harder, but what are the key areas of mathematics to study. So again I am a computer scientist, and so in this case there was um, you know, to understand things about Monte Carlo simulations. Again

we were talking about this tree process. Um, you could view this as building a tree that you exhaustively analyze where you could simul late at using something called Monte Carlo simulation, where you really did use random numbers to describe the path down the trade. So knowing computer science is a good thing. Um, you know, knowing something about statistics. You know, data science is a new field called data science, which is the kind of area where my my lab works.

And uh then this kind of field that this is the kind of stuff that I think is good learning how to build models, this kind of thing. So you mentioned you came out of this book Calculated Beds, and it wasn't a huge hit among high life fans because there aren't that many high life fans, but it got a lot of followers among people who play the market, people in banks. What are some of the key lessons in terms of what you did and how else they apply to someone wanting to play the markets and setting

up a trading system. So the first thing that I would say is that that markets are in general relatively efficient, even in high Lie where we had you know, these crazy you know, the people who were watching embedding workers only, these people who went once a year and didn't know anything, the pools of dumb money. I was surprised how hard it was for us to build a system that actually did um, did have a positive return. I thought it was gonna be a lot easier than that than it

turned out to be. And that's that's probably a lesson that most markets are are more efficient than you would think. You know, even in horse ray. They've been done studies in horse racing, and the markets there are relatively efficient. You know, the fact is that there's a large um transaction cost essentially of the house keeps, and that's a large transaction cost, and that's white people lose. So certain things are models are harder to build than than you

would think. That's I guess one lesson here. The other is that if you're careful and you're you're thinking hard enough, and you beat on it and maybe there's something there. Does the lesson of not saturating the market apply to broader financial markets because obviously we hear a lot today about um high frequency trading, algorithmically driven trading, and it's impact on markets. What do you think, Yeah, so it's certainly the case that in any market, you if you

bet enough, you're eventually betting against yourself. And uh, the the advantage of the financial markets that they're generally large enough that you can put in a tremendous amount of capital and play before it, you know, you really start betting against yourself. But again, you know many in many hedge funds, in some sense there's they will occasionally occasionally a hedge funds will return capital if they can't think they can invest it efficiently enough. And that's basically because

of these saturation effects. But what about if you get a market that becomes dominated by algorithmic trading and they all kind of feed on each other. Does that end up having the same effect. It's an interesting question. Um, if everybody was doing the exact same thing in a market,

then there wouldn't be an interesting market going on. And so the question of whether whether algorithmic trading is going to eventually get into a world where you know, sometimes people are betting against them where nothing is happening, It depends upon the traders doing different things. I guess markets would only get into trouble if all the different traders

were doing the exact same things. That's I guess when you get into bubbles and when you get into into crashes, there any sort of final key lessons for markets from what you did. Has anyone has anyone written to you and said they've used your book and made a fortune?

And I feel I have heard from every person who has read the book the people the book is and I acted books that did reasonably well, but it's still the case that uh, a lot of people felt very very close to this book because it does tell a story that's that's a kiss akin to what a lot of traders basically do. And UM, you know, I hear from people. I occasionally hear from people who want to want me to get involved in their betting scheme. I heard from a Russian syndicate recently that wanted UH to

do trading in um soccer pools and uh. And I've I've hung around a gambling syndicate in Macau where they've been in horse racing and uh. And so you know, so there are these these and I've also spoken through a lot of traders, and uh again we met at a financial conference. So it's been an interesting leading into a world that's quite different from me as a computer scientist. Your system was ultimately based on pure mathematics. Does that take the emotion out of winning and making the bet?

It was true that that that there was sort of the fact that there was a real event happening, that they were really these besques tossing a ball around was really an abstraction. You know, every day I would get email from my machine about how we did, and every night the computer would play a million simulations of this game that was going to happen tomorrow. But and and somehow we were divorced from the real aspect of it. And that may be true in certain certain aspects of

the markets. I mean, people are busy trading stocks around in some ways, quite independent of whether or not these are You know that there are companies there, and that people are working and people are building things, and there's things happening. So there's a certain sense in which this was an abstraction of the world that that may may have felt a little bit funny when you think about it. And last question, are you doing any betting on anything?

Or these days or back to hip pure academic stuff. I am, I am up again. I am a professor. I I you know, I live a clean life. But but again, my my research area these days is related to data science data analysis. We do a lot of projects related to data modeling and uh things like this, and so every once in a while my work touches on some kind of a model related to that does have relations with financial markets and other things. Thank you

very much for joining. Its fascinating and just talking with Thank you, there's a lot of fun. So Tracy, are you Are you a high life fan? Though? I kind of want to go watch a game. I want to I want to bet on a game. I want to be the dumb money on the sidelines of the game. Um. I love that conversation. I thought that was like, I don't know, I just I thought it was fascinating. So

I learned a lot about the sport. And it also is really helpful in bringing to life some the concepts that we talk about all the time and markets like algorithms. Absolutely like all these things in terms of simulations, decision trees, algorithms, and particularly that part about how you know the end we were talking about about how if you get too big at a market, or if everybody's chasing the same

algorithmic strategy, how can all break down? Yeah, exactly, And my absolute favorite part was when he described the betting system and you have like all the math and then you have the algorithm. But how in the nineties and finally ended up where you had to like have your computer make dial tones to enter in the debates. There's a marriage of old style and modern trading techniques. I thought was hilarious to imagine. Yeah, that was great. All right,

that is all for Odd Lodge. Thank you for listening. I'm Joe Wisenthal, Managing Editor Bloomberg Markets, and you can follow me on Twitter at the stall War. And I'm Tracy Alloway, Executive editor of Bloomberg Markets and I'm on Twitter at Tracy Alloway. Thanks again. Joe and I are very proud of our new podcast, Odd Lots, but we are also very proud of Bloomberg's other growing suite of original podcast all designed to help you navigate the complexities

of business, financial markets, and the global economy. So in addition to our own podcast, please don't miss Benchmark with Dan Moss Tory Stillwell and Aki Edo and informative, jargon free look at the inner workings of the global economy. Then there's Deal of the Week with our M and A reporter Alec Sherman, which is a breakdown of the biggest M and A deals and gives you an inside

peak at corporate boardrooms. All three shows are available on iTunes, SoundCloud, pocket Cast for Android, Bloomberg dot Com, and of course, the Bloomberg Terminal.