The Gambling Commission, the government’s betting watchdog, is understood to have launched a review of the Tote’s betting activity.

The former state-owned betting operator is under scrutiny over whether it is fulfilling its obligation in its pools to make it “clear to customers in plain language” that they could in effect be betting against the Tote itself when they gamble on small-stake, high-win pools, such as the popular Placepot bet.

The Commission will now assess whether the operator is compliant with the regulator’s rules to ensure that gambling is “conducted in a fair and open way” and to make the extent of the Tote’s involvement in its pools “clear to customers in plain language”.

The Commission’s decision to assess the extent and nature of the Tote’s staking in its own betting markets comes a few weeks after the regulator received a detailed analysis, compiled over two years by a longstanding racing fan and punter, which suggested that the Tote’s own money now accounts for up to 60% of the cash invested in its key daily Placepot bet, which will have a guaranteed minimum pool of £750k on each of the four days of next week’s Cheltenham festival.

Pool betting, also known as a pari-mutuel, is designed to remove the bookie from the betting process by pooling the total stakes on a race and declaring a dividend to a £1 unit once the operator has taken a percentage of the gross pool in commission.

The Tote, meanwhile, has been a feature of the British betting landscape since 1928, when it was set up by an act of Parliament introduced to the house by Sir Winston Churchill to offer pool betting on racecourses. Nearly a century later, the majority of its customers still perceive it as essentially a bookie-free process in which punters bet among themselves.

During the Covid-19 pandemic in 2020, however, when racing continued for many months behind closed doors, the Tote launched what it described as a Pool Guarantee Service (PGS), in which it “seeded” its pools with automated bets up to four hours before the start of a race with the aim of ensuring “greater predictability for customers about what the pools will pay on any winning bet”.

The Gambling Commission accepts that some licensed operators participate in their own products, in order to “make products more attractive to the wider customer base by providing more gambling opportunities and/or making prizes larger”. This includes the practice of seeding markets, which is commonplace in many pool betting systems around the world, to encourage liquidity in pools.

At the same time, though, the regulator also requires operators to communicate the nature and extent of its involvement to customers “in plain language … as part of providing fair and open gambling”.

The Tote’s terms & conditions acknowledge that it is involved in seeding, and also that its PGS process “also seeds some multi-leg pools such as the Placepot”.

It does not detail the extent of its involvement, however, while the analysis sent to the Commission last month, which has been seen by the Guardian, suggests that the overwhelming majority of the Tote’s betting in Placepots takes places around three minutes before the start of the first race in the bet, rather than an hour or more in advance.

Rather than “seeding” the markets, last-minute injections of significant cash into the pool are more typically associated with syndicates employing high-frequency automated betting strategies to identify overpriced permutations in multi-leg bets.

The Placepot bet is available every day, at every UK and Irish meeting. Covering the first six races of the day, the bet requires punters to select a horse in each race to be placed.

In practical terms, if a significant percentage of the Placepot pool is actually the Tote’s own money there is likely to be an inevitable impact on the payouts that winning punters receive.

At next week’s ultra-competitive Cheltenham festival, for instance, if a backer found a winning Placepot line on a day when several short-priced favourites finished out of the frame, a monster payout might well be declared with only a handful of winning tickets. There will be no way for the winning customer to know, however, if one or more successful tickets were placed into the pool by the Tote itself, thereby denying them an even bigger slice of the pool.

As the analysis sent to the Gambling Commission also points out, the Tote enjoys a “significant information advantage” over its customers when betting into its pools, which could create “an inherent conflict of interest” in which the operator’s “profit or loss is dependent upon, and inversely correlated with, their customer’s loss.”

When contacted on Wednesday, the Gambling Commission declined to either confirm or deny that it is reviewing the Tote’s activity in its pools as it has a policy of refusing to comment on individual cases. The Tote has also been contacted for comment.