The sharp books more or less operated the way you're describing. They would try to set the line as close to the true odds as possible. They knew who the sharp bettors were, and they may have limited their bets to some degree, but they would take them and adjust the lines accordingly. You have to be a very good bookmaker for this strategy to work, because every line that's a little bit off is going to get pounced on for the max bet.
The square books' strategy was to keep the sharp bettors out by limiting their bets severely or kicking them out entirely. This also lets them set the lines in a way that makes them more money, because there are a number of biases recreational bettors tend to be subject to. In particular, they tend to overbet on favorites, and they tend to underappreciate the home team advantage. There's also an effect where people will tend to bet on their favorite team, and so teams from large markets get more bets than teams from small markets. By moving the line a few percent one way, they can make significantly more money on average.
BetFair calls it the Expert Fee :))
If you make more than $100k profit, you pay 40% extra Expert Tax on it :)
https://support.betfair.com/app/answers/detail/expert-fee-fa...
You're right: TIL, so thank you. I've done no more than dip my toe in the water on betting exchanges.
That level of expert tax seems... rude. Really rude.
But I wonder if some goes to the government in lieu of taxes that would not otherwise be payable on winnings from gambling (at least not here, in the UK, since winnings from gambling aren't taxable).
And modern KYC checks mean, I'd imagine, you can't simply subvert this by running multiple accounts or by periodically shutting down your accounts and setting up new ones.
The problem in the US is that it is a highly competitive market so you have to acquire your customer base every weekend, and these customers don't actually care so much about prices. So having weaker prices is a more effective way to deliver the product. In addition, US gamblers like parlays, parlays are more profitable, have lower volume per bet, and (so far) the economics of the Asian book don't work for this market (i.e. get syndicates to bet your lines early).
But if some whale comes in and wants to drop a large bet, I suppose the house doesn't want to sit around and wait for the same amount of action on the other side before they take the bet or the game starts. And now they're exposed if the whale wins.
[0] I'm using small numbers because the total value of matched bets on many horse races can be small. If you go in and drop £100k or £10k, or even £1k, especially if you did it all in one go (and assuming the exchange would allow it), there are plenty of races where only a tiny portion of that would be matched. In fact most races have only thousands of pounds or low five figures matched.