Brought to the attention of the betting public first by Betfair and the now defunct Flutter.com back in the year 2000, betting exchanges changed the way we bet forever. Betfair has since become part of Paddy Power and the second largest exchange, BETDAQ, was bought by Ladbrokes back in 2013.
An exchange is essentially a betting marketplace for punters to bet between themselves, rather than betting with a traditional bookmaker. The exchanges offer the same markets on the same sports as high street bookies, however on this format customers can ‘buy’ or ‘sell’ the outcome of the event, trading in real time. From there, the exchange can generate its revenue by charging a small transaction fee.
Bookmakers versus Exchanges
Betting exchanges generate their revenue by charging commissions calculated as a percentage of each customer’s net winnings. The odds listed on betting exchanges are normally a good deal better than those offered by fixed odds bookmakers, even after commission, because there are much smaller overrounds – basically a bookmaker’s ‘locked-in’ profit. Punters whose betting activity has been stopped or restricted by bookmakers for winning too much are still able to place bets on exchanges, so long as opposing customers are willing to match their bets.
Backing, Laying and In-Play Betting
A normal bet is a transaction between a punter and a bookmaker, the gambler ‘backing’, or betting that their predicted outcome will occur, and the bookie ‘laying’, or betting that the outcome will not occur. The exchanges however offer the chance for punters to both back and lay. As every transaction needs both a backer and a layer, betting exchanges are not party to the bets made on their platform, simply taking a commission for bets placed between customers.
Should a punter think that a particular horse will win a race, they may wish to back that selection just as they would with an ordinary bookmaker. A fellow exchange customer thinking that the horse in question will not win can offer to lay that selection. The two parties can then agree the backer’s stake and the odds. If the horse does not win, the layer keeps the backer’s stake but if it wins, the layer will pay the backer out based on the odds agreed.
Exchanges tend to allow bets to be made ‘in-running’, i.e. while the event is in progress, though the feature is often restricted to only the most popular sports televised live.
Trading and Arbitrage
Arbitrageurs, known in the trade as ‘arbers’, are people who attempt to bet simultaneously on all possible outcomes of an event, such as a football match or horse race, in order to make a guaranteed profit regardless of the result. Traders operate in a similar way but are willing to take a risk and bet on events where no profit is absolutely guaranteed.
A trader can make profit by betting exclusively with betting exchanges or bookmakers, or in some cases by combining the two. Traders can lay a bet at a low amount on the exchanges before then backing it at a higher price with a bookmaker or even another betting exchange. Given the liquidity of betting markets, this must be done simultaneously in order to guarantee a profit or risk losing the opportunity altogether. Bookmakers consciously change their prices to avoid being arbitraged.
In order for a trader or arber to combine different exchanges or bookies for profit, they are required to find a marked l price differential if a profit is to be guaranteed, once the betting exchange commission is taken into account. Even between exchanges, large price differences are very rare, usually involve small stakes and more to the point are very short lived. Fortunately for traders, almost all betting exchanges charge their commissions based on net winnings and charge no commission in the event of a net loss. This suits the trader’s high turnover; low profit strategy providing they are betting with only a single betting exchange.
The usual way of things is for betting exchanges to post their book percentages, usually known in the bookmaking industry as the overround, prominently for each betting market. These percentages are taken to be the combined implied chances of the odds offered for each selection and for a single winner market will almost always add up to more than 100%. This ensures that, should backers bet on or lay all selections in a market simultaneously, it will not guarantee them a profit.
Every now and again however, especially in a fast-changing market, exceptions occur which can in theory make it possible for an rbitrageur to guarantee themselves a profit. Such situations are very rare and tend to correct themselves extremely quickly, exchanges generally trying to encourage customers not to take advantage of such a circumstance.
Betting Exchange Success
Traditionally, bookmakers in Britain had to pay a levy to the Levy Board, a non-departmental public body of the Department for Culture, Media and Sport. The largest share of the levy has been spent on race prize money, but it also provides funding for race day services on course, integrity services, industry training and education, loans to racecourses for capital projects and also veterinary science.
Because of their unique way of trading, betting exchanges were exempt from this and yet still essentially made large sums of money from the sport of horse racing. Punters who would usually bet with a traditional bookmaker and therefore indirectly contributed to the levy, were no longer doing so and traded against each other leaving the sport, in theory, short of cash.
Back in late 2015 however, the industry struck a three-year funding deal with Betfair under a controversial so-called partnership model. The betting exchange agreed to become the British Horseracing Authority’s (BHA) first “Authorised Betting Partner” (ABP). Beginning in April 2016, Betfair paid an undisclosed percentage of its racing revenues to the industry body in return for benefits such as access to race sponsorship rights. Other betting firms, such as 32Red and bet365, also committed to becoming ABPs in deals that once again changed the way betting influenced horse racing, driven by the exchanges.