BOOKIES: HOW THEY MAKE THEIR MONEY.

BOOKIES: HOW THEY MAKE THEIR MONEY.

A bookie is someone who facilitates gambling, commonly on sporting events, by setting odds, accepting and placing bets, and paying out winnings on behalf of other people. "Bookie" is a slang term for "bookmaker." Bookies do not usually make their money by placing bets themselves, but by charging a transaction fee on their customers' bets known as a "vigorish," or "the vig." Bookies may also lend money to bettors.

The types of gambling enabled by bookies are not always legal. Bookmaking and placing bets through a bookmaker can also be illegal. The legality of different types of gambling is determined by state governments. Some people have referred to their broker as their bookie due to large commissions and the broker's insistence on trading with regularity.

Traditionally, bookmaking is a lot like making a market in any other good or contract. The bookmaker tries to make money by matching buyers and sellers, charging a transaction fee, and taking on as little personal risk as possible.  Let's say Chun-Li and M. Bison from Streetfighter II are about to face off in a solo game of field hockey. In a world where there are no ties and each of them has an equal chance of winning, the outcomes look like this:

-Chun-Li wins          50%

-M. Bison wins         50%

If you were going to bet your money on one of these outcomes, in a fair world, you would get 1:1 odds. In other words, you would bet $100 on Chun-Li and if she lightening-kicks her way to victory, you get your original $100 back plus another $100. This gives your entire endeavor an expected value of $0 since half the time you lose $100 and half the time you win $100. In this scenario the bookie doesn't make money either. Let's say the bookie lets you and your friend bet against each other. You bet on Chun-Li and she wins. This happens:

1. You and your friend each put $100 into the pot. The pot is $200.
2. Your friend loses all his money. You get all $200 in the pot.

This scenario obviously doesn't make any sense for the bookie because the bookie gets no money. So in order to ensure a profit, the bookie adjusts the odds and payouts. For example, instead of offering 1:1 fair odds on this match, the bookie could offer 1:2 odds for each bet. This means if you bet $100 on either Chun-Li or M. Bison, you only get back $100+$50 = $150 if you win. In this example, if you bet on Chun-Li and won, this would happen:

1. You and your friend each put in $100. The pot is $200.
2. You win the bet. Your friend gets no money. You get $150.
3. The bookie gets the $50 that is leftover.

This is an extreme example, but conceptually, this is how a bookie can ensure profit on a bet. It's a bit strange to think about, but by offering 1:2 odds, the bookie is creating a universe where the bet would be fair only if each fighter had a 66% chance of winning. So the people making bets are getting a slightly lower pay-out than they would in a perfectly fair world. And that difference is the transaction fee that the bookie takes.

Bookies make this money in exchange for taking on risk. This is because not everyone bets their money at once. In the scenario above, the bookie is sitting pretty because she has balanced her book- someone is betting for Chun-Li and someone is betting for M. Bison. But this often isn't the case. By the middle of the afternoon, the bookie might find herself in a place where everyone is calling her to try and bet money on Chun-Li. If she takes on these bets, she is assuming risk and essentially taking on the other side of the bet (betting on Chun-Li to lose). So she has to find people to bet on M. Bison. One way to do this is to adjust the odds, and reduce the payout she promises to Chun-Li backers until more people back M. Bison. Or she could call other bookmakers who might have the opposite problem (too many people betting on M. Bison) and lay off her risk on those bookkeepers.
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Conceptually, this is the same way a market maker operates in a financial market like the stock market. Someone might want to sell a bunch of shares of M. Bison Corporation. The market maker would give them a slightly lower price than is "fair" in exchange for buying their shares and taking on the risk. The market maker would then look to offload those shares to buyers for more money later on. This is the bid-ask spread in the stock market.
There are other methods and nuances to bookmaking and I am definitely not an expert (or anything close). So it would be cool to hear from someone who really knows the world. But this is the general concept behind making a market in bets.