The incidence of insider trading in betting markets and the Gabriel and Marsden anomaly

Estimates of insider trading in the betting on individual races, conditiona l on the Shin model (Economic Journal, Vol. 103 (1993), pp. 1141-1153), are employed in an analysis of the market anomaly observed by Gabriel and Mars den (Journal of Political Economy, Vol. 98 (1990), pp. 874-885) that Tote p ayments on winning bets consistently exceed those paid by bookmakers. Use o f more appropriate statistical methods suggests that the original anomaly d isappears, but that another remains: bookmakers pay more generously than th e Tote on winning bets on favourites, but less generously on winning longsh ot bets. This discrepancy is shown to be associated with the incidence of i nsider trading in the betting on each race, and it is argued that it cannot be arbitraged away because of the bookmakers' dominant market position.