Betting exchange

The term betting exchange is used to describe a form of bookmaking in which the operator offsets its risk perfectly through technology, such that the effect to the customer is that customers are seen to bet between themselves. Coined because of its apparent similarities to a stock exchange - it is often defined as "a stock exchange for bets" - it is therefore commonly seen as a peer-to-peer gambling website, when in fact it is more closely described as "many-to-many" (i.e. very few bets are actually just one person on one side and one on the other). Equally, it is often suggested, or commonly believed, that the operator is merely acting as a broker between parties for the placement of bets, rather than a bookmaker, although the reality is that bets are being accepted and offered simultaneously through technology, and the legal contract for the bet is with the operator itself and not between customers. Most betting on a betting exchange has been a form of fixed odds gambling, although recently the phenomenon has also been established in the spread betting markets.

History

The concept of peer-to-peer betting - the precursor to a betting exchange - was first brought to the public by the UK website Flutter.com in May 2000. At the same time Irish-based betting exchange Betmart.com was launched into the UK. Soon after, UK-based Betfair launched what it originally called "open-market betting", in June 2000 - a name which was quickly changed, by the media and the associated industry, to "betting exchange". Betfair embraced a pure exchange model - one Flutter later adopted and, some say, even improved upon in places - but it took a year before Flutter launched their new technology, and first-mover advantage proved decisive for Betfair. Though Flutter managed to climb to a reported 30% market share, Flutter's backers were content to broker a merger which left Betfair the dominant partner by a reported ratio of 84:16. Post merger, Flutter's customers were transferred to Betfair's system, which was later upgraded to embrace some of Flutter's functionality. Betfair went from strength to strength and controls a reported 90% of global exchange activity today. In late 2004, Betfair announced a rescue package which resulted in it absorbing the customers of Sporting Options, which had gone into administration with debts in excess of £5 million.

As with other types of exchanges, betting exchanges thrive on liquidity and customers tend to focus on the exchange where they are confident their bet can be paired up with a matching counterbet. Breaking with British tradition, Betfair uses decimal odds instead of fractional (traditional) odds because they are more popular globally. Some of its competitors allow customers to use fractional odds if they prefer.

Most exchanges make their money by charging a commission which is calculated as a percentage of net winnings for each customer on each event, or "market." Gamblers whose betting activities have traditionally been restricted by bookmakers (normally for winning too much money) have found these sites a boon since they are now able to place bets of a size unrestricted by the exchange - the only restriction is that one or more opposing customers need to be willing to match their bets. Moreover, the odds available on a betting exchange are usually better than those offered by bookmakers, in spite of the commission charged, because the middle man is eliminated.

Exchanges currently have some limitations. Exchanges are not currently suited to unrestricted multiple parlay betting. Betfair does offer "accumulators" but these are limited in number and type: Users cannot determine the outcomes contained in accumulators themselves. Exchanges also tend to restrict the odds that can be offered to between 1.01 (100 to 1 on i.e. 1 to 100) and 1000 (999 to 1).

Unsurprisingly, Betfair's success has attracted a number of rivals, including Betsson and BETDAQ.

Laying

Contrary to bookmaker and totalisation systems, betting exchanges offer the opportunity to lay, which is to bet that a selection will not occur. This is the position bookmakers have traditionally taken when offering a bet to somebody to back that the outcome will win.

For example, if someone thinks Team A will win a competition, he may wish to back that selection. A bookmaker offering the punter that bet would be laying that selection. The two parties will agree the backer's stake and the odds. If the team loses, the layer/bookmaker keeps the backer's stake. If the team wins, the layer will pay the backer the winnings based on the odds agreed.

As every bet transacted requires a backer and a layer, and the betting exchange is not a party to the bets transacted on it, any betting exchange requires both backers and layers. Of course, the distinction is moot: A layer is always simply backing that the event will not occur. Laying the home team is the same as backing the visiting team to win or draw. Laying one horse in a race is just the same as backing all of the other horses to win.

Trading

The advent of the betting exchange has given rise to new type of gamblers - the "trader" and "arbitrageur". Arbitrageurs attempt to simultaneously bet on all possible outcomes to make a guaranteed profit. A trader operates similarly to an arbitrageur, but is willing to take on extra risk and bet on events where no immediate profit is possible. A trader hopes to make a profit by closing out the bet at a later stage at more favorable odds. Closing out a bet for profit involves collecting more money by laying than is paid out when the outcome is backed back. If the event does not occur then no money is lost.

Traders can make money by betting exclusively with betting exchanges or bookmakers, or by combining the two. The trader could lay at a low amount on a betting exchange and then back at a higher price with a bookie or another exchange. This must be done simultaneously to guarantee a profit or else the opportunity could quickly cease to exist with liquid markets quickly correcting prices and bookies trying to avoid being arbitraged.

Almost all betting exchanges charge commission on net winnings only, which suits the trader's high turnover, low profit strategy. The profit or loss for a trader will typically be no more than 10% of the total amount of his combined back and lay stakes - so to make meaningful amounts of money a trader needs to commit a relatively large amount of capital. The trader therefore runs the risk of having a large unwanted bet on an event if he is unable to close his position before the event starts (e.g. if there are technical problems with the exchange).

Controversy

The fact gamblers can now lay outcomes on the exchanges has resulted in criticism from traditional bookmakers including the UK's "Big Three" - Gala Coral Group, Ladbrokes and William Hill. These firms argue that granting "anonymous" punters the ability to bet that an outcome will not happen is causing corruption in sports such as horse racing since it is much easier to ensure a horse will lose a race.

Exchanges counter that, while corruption is possible on any gambling platform, the bookies' arguments are motivated not by concern for the integrity of sport but by commercial interests. Exchanges also assert they are well aware of who their customers are and some have signed agreements with governing bodies of sport including the Jockey Club, with whom they insist they will co-operate with fully if the latter suspects corruption to have taken place. In the summer of 2004, Betfair provided data to investigators, including the City of London Police which on September 1 lead to 16 arrests on charges related to race fixing. Among those arrested was champion jockey Kieren Fallon, whose name has now been cleared and all charges dropped.

ee also

*Betsson
* Sports betting
* Bookmaker
* Gambling
* Parimutuel gambling
* Spread betting
* Matched betting
*BETDAQ
*Betfair
*Matchbook Exchange
*TradeSports

External links

* [http://news.bbc.co.uk/1/hi/uk/7109494.stm BBC article on how betting exchanges work]
* [http://quote.bloomberg.com/apps/news?pid=nifea&&sid=a8Y11XQeIcyY Bloomberg article on betting exchanges]
* [http://www.tacticaltrader.com/article/read/22/An-introduction-to-betting-exchanges Tactical Trader article about betting exchange trading]
* [http://www.bettingmarket.com/refraichir010388.htm An analysis of the betting exchange industry]