Betting Exchanges

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So what exactly is a Betting Exchange?

The long and short of it for those who only intend on reading the first sentence on this page is that a betting exchange allows punters to bet against each other instead of up against a bookmaker. The punters on both sides of an outcome will balance one each other out. Now, for those who are still reading, we’ll go into more detail. The name “betting exchange” is used in conjunction with those systems that allow the operator to counteract the risks on both sides, by using technology. Betting exchanges are therefore, a child of the internet. It’s term comes from some of the similarities that the system has with the stock exchange: one way to describe the system is as a stock exchange for bets, that works off of “peer-to-peer,” or rather, “many-to-many” betting on a website. Whereas in a normal situation, the bookmaker makes all the rules, and sets all the odds, in a betting exchange, the operator is more of a middle man, arranging bets between people on opposite sides of the table. Legally, though, the arrangements are still being made my a third party who is licensed for sports betting, NOT between customers. Most of the betting you’ll find in a betting exchange will be with fixed odds, though you may come across spread gambling on occasion.

Betting Exchange at Betfair

Betting exchanges didn’t just pop out of nowhere, though. The original idea was peer-to-peer betting, introduced to the public by Flutter in 2000. Right afterwards, Betfair began with their “open-market betting,” which translated to “betting exchange” very quickly. Betfair’s version became the standard, a standard that Flutter accepted, and even improved upon. Since their new technology didn’t come out til a year later, Betfair kept their advantage by being the first. Eventually, the companies merged, an Betfair did upgrade their system to include some of Flutter’s old tricks. Betfair remains a force to be reckoned with, having absorbed yet another company as recently as 2004 (Sporting Options).

Betting Exchanges prosper with flexibility

Punters will nearly always gravitate towards those exchanges where they can find opposite punters for the bet- they look for the counterbet. Betfair, in particular, is unusual in their use of decimal odds that than the traditional odds found in fraction form. Decimal odds tend to be more global- though some of Betfair’s competition allow the members to choose which format they prefer. Betting exchanges make their money in a different way, as well. Whereas normal bookmakers adjust their odds in order to ensure that their profit will go untouched, betting exchanges charge a commission as a percentage of the winnings from each client, for events or markets. This opens the exchanges to those punters who have been restricted from more traditional sites, usually for winning too much. The only limitations these players have on the betting exchange, is that all bets placed must be matched by one or more punters on the opposite side. Simply, as long as someone’s willing to take the bet, regardless of the amount, then it will fly. You’ll notice as you explore that the odds tend to be better at betting exchanges than with regular bookies, too, because the middle man is eliminated; they get their money through the commissions, and there’s no concern for guaranteeing a personal profit.

But that’s not to say it’s a free for all. There are certainly some restrictions when betting on an exchange. For example, Betfair will offer accumulators BUT they are severely limited in type and in number; punters do not have access to the results in the accumulators themselves. Another example is that exchanges do not support unrestricted multiple parlay betting. The odds are usually limited to within 1.01 and 1000, as well. But, all in all, 
Betfair’s success has resulted in some competition, including Betdaq and Betsson.

New Type of Bettor

Betting exchanges also offer up the opportunity for someone to “lay.” Whereas to “punt” simply means to bet that something will happen, to lay is to bet that something will not happen. It is the role that usually bookmakers will take. With regular online sports betting, a bettor will bet on an outcome- whether team A will win, or team B will win. In betting exchanges, you can bet that team A will NOT win. In the end, it’s really all the same, because the only way team A will not win is if team B does, but it makes a difference in terms of the roles being played. Even laying a particular horse is equivalent to backing all the other horses. The importance lies only in the distinction. Never before could consumers be the “layer;” it was a role solely fulfilled by the bookmaker, regardless of his opinion.

Betting exchanges have given rise to a new type of bettor - someone referred to as an arbitrageur, or a trader. Basically, a trader is one who plays on both sides of the fence- he both will be a layer and a backer or the same event. The goal of the trader lies in the odds- if he can back an event with longer odds than he can lay the same event, he will have room for a profit with very little risk. It’s called a “positive trade” when this works, and he gets longer odds to back than to lay; it’s called a “negative trade” when the outcome is in favor of the laid event.

How it works?

Ok, that got a little convoluted. Let’s go back to an example. A trader will bet that Team A will win AND that Team A will lose (be that Team B winning, or a draw.) As long as he has placed his bets (with other bettors, mind you, so odds don’t necessarily add up) with longer odds that Team A will win, he finds himself in an advantageous position. If Team A does indeed win, he’ll win more than he loses, and come out with a profit. If Team does lose, then he will have covered his bases for much of the funds at risk, and remains in a strong position, having only lost a portion of the losing bet.

With fixed priced betting, too, it is possible to arbitrage both by using an exchange for one low bet on the lay side, and simultaneously placing a much higher bet with a bookie, or another exchange. Whereas with regular bookmakers, input is constantly being updated, with odds adjusting accordingly, betting exchanges do not share trading status and therefore open inter-market trading opportunities to the very careful, and very quick, arbitrageur. The betting exchange’s commission program only supports the trading possibility, as the fee will only be charged for winning bets.

A good trader can usually ensure no more than a 10% loss of the total risked money for both backed and laid stakes. Because of the nature of the system, a trader therefore needs to bet on both sides a significant amount of income – the whole amount of which would be at risk if he were unable to close the other side of the trade in time for the event.

As great as the betting exchanges may seem, they have not been without criticism and objection. Three of our biggest names here in the UK- William Hill, Gala Coral Group, and Ladbrokes – have been vocal about their concerns. One of the strongest, or at least most popular objections is the concern that betting exchanges may corrupt sports like horse racing by allowing bettors to take up the lay position; they say it is easy to bet on a horse NOT winning, and may even lead to criminal offenses to ensure such lay bets. Exchanges have argued back that gambling of all forms can be corrupted, and allege that the bookies’ concerns are not sincerely in relation to the purity of the sports, but rather originate from their own pockets. They assure doubters that identification means are in place for all of their customers, and that they (the exchanges) in some cases, have even signed agreements with the governing bodies of the sports themselves. Said agreements, like those with Jockey Club, require that the exchanges co-operate in full with any concerns regarding corruption.