A betting exchange is a p2p gambling website acting as a broker between parties for the placement of bets. The concept is similar to that of a stock exchange or a futures exchange, where in this case the commodity being traded is a bet, rather than a stock or futures contract. Most betting on a betting exchange is a form of fixed odds gambling.

History

The concept was first brought to the public by the UK website Flutter.com in May 2000 in person-to-person betting form, followed closely by UK-based Betfair in June 2000. Betfair embraced a pure exchange model – one Flutter later adopted and even improved upon in places – but 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.

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 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.

Exchanges have their limitations. Exchanges are not suited to unrestricted multiple parlay betting. Betfair does offer accumulators of their own content management construction, but these are limited in number. Users cannot determine the outcomes contained in accumulators themselves. Exchanges also tend to restrict the odds that can be offered to between 1.01 (1/100) and 1000 (999/1).

Unsurprisingly, Betfair’s success has attracted a number of rivals.

“Laying” an outcome

Exchanges also offer the opportunity to lay outcomes, which is to bet that a particular participant in an event will lose. This is the position bookmakers take when offering a bet for somebody to back that the participant 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 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 the opposite outcome. 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.

Controversy

The fact gamblers can now lay outcomes on the exchanges has resulted in criticism from traditional bookmakers including the UK’s “Big Three” – Coral, 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 case remains before the courts.

Links

• Bloomberg article on betting exchanges
• Tactical Trader article about betting exchange trading

This guide is licensed under the GNU Free Documentation License. It uses material from the Wikipedia.