Betting exchange
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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. most bets are not strictly one person on one side betting against 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 the exchange's technological interface. Since it is only the exchange operator who holds a bookmaker's licence in most cases, the legal and licencing requirements invariably dictate that the legal contract for all bets be 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.
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[edit] 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.
Unsurprisingly, Betfair's success has attracted a number of rivals.
[edit] Exchanges and traditional bookmakers compared
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.
In spite of these advantages, exchanges currently have some limitations. Because exchanges seek to concentrate their liquidity in as few markets (i.e. propositions) as possible they 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. Some exchanges also offer multiples but the exchanges act in the same manner as traditional bookmakers in doing so (i.e. they themselves and not a customer act as the layer of such bets) 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).
A further advantage that traditional bookmakers retain over exchanges is that bookies are better willing and able to allow customers to bet on credit. There are two obvious reasons for this:
- Exchanges operatee on much tighter margins, which lessens their ability to absorb bad debts.
- Allowing customers to bet on credit would likely compromise customer confidence in the financial integrity of an exchange, especially when one considers the effects of the ongoing credit crisis and the close association between betting exchanges and Internet betting in general.
[edit] 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 any of the other horses to win.
[edit] In-play betting
A further advantage to the exchange model is the ability to allow bets to be made in-running or in-play (i.e. to make bets while a race or match is in progress) without undue risk to the operator. This feature is generally restricted to the most popular events for which widespread, live television coverage is available.
Whereas non-in-play bets are entered into the system immediately after being placed by the customer, when betting in-play a time delay might be instituted so as to make it somewhat more difficult for unscrupulous customers to accept offers for bets that for whatever reason have suddenly become highly favorable. Markets may also be actively managed by the operator. In this case, betting will be briefly halted after each occurrence likely to cause a substantial change in the odds (for example, in association football matches goals, penalty kicks and sendings off would warrant such suspensions), so that unmatched bets can be cancelled.
In-play betting is not currently available on exchanges licensed in Australia. This is due to local regulations.
[edit] Trading
The advent of the betting exchange has given rise to new types 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, alternatively if a trader is able to lay a higher stake at shorter odds than his back stake then he can theoretically guarantee the same amount of profit regardless of the outcome. On the other hand, if the odds move against the trader he might be compelled to close out the bet for a loss. Trading can be done either before the start of an event or while the event is in progress if in-play betting is offered, although the latter situation can be much more risky.
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.
Most exchanges post the book percentages (colloquially known as the overround or "vig") prominently for each market. These percentages are essentially the cumulative implied percentage chances of the odds on offer for each selection and for a single winner market will usually add up to more than 100% for all back selections (but only marginally over in a competitive market), and under 100% for the lay selections. This ensures that simultaneously backing or laying all selections in a market will not normally guarantee a profit. Occasionally though (especially in circumstances where odds are prone to change rapidly) exceptions will arise where offers to back or lay all selections will be made that if simultaneously and cumulatively accepted at exactly the right stakes would permit an arbitrageur to guarantee a profit. However, such phenomena tend to correct themselves very quickly and exchanges generally try to dissuade customers from attempting to take advantage of such circumstances.
Furthermore, for a trader or arbitrageur to combine different exchanges and/or bookmakers for a profit requires a substantial price differential if a profit is in fact to be made once the exchange's commission is taken into account. Even between exchanges, such large price differences are rare, brief and usually involve relatively small stakes. Fortunately for traders, almost all betting exchanges charge commission on net winnings only and charge no commission at all in the event of a net loss. This suits the trader's high turnover, low profit strategy provided he bets exclusively with a single exchange.
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 his Internet connection or with the exchange).
While traditional punters' opinion of traders is decidedly mixed, exchanges have generally welcomed them on account of the vast amounts of capital and liquidity they bring. Traders and arbitrageurs are often credited with "seeding" markets with more competitive prices than would be present without them. However, Betfair's imposition of a premium charge in September 2008 was seen by some as being directed at the most skilled traders, whom it is speculated trade for a loss very infrequently and thus would otherwise pay little in the way of commission. In response, Betdaq and other competitors pledged not to introduce similar charges, perhaps in hopes of enticing traders to move their business (and capital) elsewhere.
[edit] 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 keep a complete record of all betting activity in case of enquiries. Furthermore, customers can monitor the odds on the exchanges' user-friendly platforms independently. Exchanges and the authorities can be immediately alerted should suspicious betting patterns become apparent. Some exchanges 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. Exchanges have co-operated with police investigations when asked to do so, sometimes leading to arrests.
[edit] See also
- Sports betting
- Bookmaker
- Gambling
- Parimutuel gambling
- Spread betting
- Matched betting
- Betting exchange companies
