Bet exchange
Encyclopedia
A betting exchange is an entity
which provides "trading" facilities for retail or bookmaker
customers to buy and sell contracts. Contracts are structured as binary option
s. Some betting exchanges may also offer CFD products. Betting exchanges trade heavily horse racing
and sports markets, but also include elections and current events
markets.
by Flutter.com in May 2000. 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 an exchange model, but it took a year before Flutter adopted a similar technology. 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 has maintained from that point a dominant marketshare and controls a reported 90% of global exchange activity today.
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.
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 (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 operate on much tighter margins, which lessens their ability to absorb bad debt
s.
- 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.
That said, Betfair are licensed to give credit and have done in "exceptional circumstances".
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.
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 goal
s, penalty kick
s 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
due to local regulations.
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, rival exchanges have pledged not to introduce similar charges, perhaps in hopes of enticing traders to move their business (and capital) elsewhere.
, 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.
Entity
An entity is something that has a distinct, separate existence, although it need not be a material existence. In particular, abstractions and legal fictions are usually regarded as entities. In general, there is also no presumption that an entity is animate.An entity could be viewed as a set...
which provides "trading" facilities for retail or bookmaker
Bookmaker
A bookmaker, or bookie, is an organization or a person that takes bets on sporting and other events at agreed upon odds.- Range of events :...
customers to buy and sell contracts. Contracts are structured as binary option
Binary option
In finance, a binary option is a type of option where the payoff is either some fixed amount of some asset or nothing at all. The two main types of binary options are the cash-or-nothing binary option and the asset-or-nothing binary option...
s. Some betting exchanges may also offer CFD products. Betting exchanges trade heavily horse racing
Horse racing
Horse racing is an equestrian sport that has a long history. Archaeological records indicate that horse racing occurred in ancient Babylon, Syria, and Egypt. Both chariot and mounted horse racing were events in the ancient Greek Olympics by 648 BC...
and sports markets, but also include elections and current events
News
News is the communication of selected information on current events which is presented by print, broadcast, Internet, or word of mouth to a third party or mass audience.- Etymology :...
markets.
History
Peer-to-peer betting, the precursor to a betting exchange, was first released in the UKUnited Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
by Flutter.com in May 2000. Soon after, UK-based Betfair
Betfair
Betfair is the world's largest Internet betting exchange. The company is based in Hammersmith in West London, England. Since Betfair was launched in June 2000 it has become the largest online betting company in the UK and the largest betting exchange in the world. Betfair claim to have over 3...
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 an exchange model, but it took a year before Flutter adopted a similar technology. 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 has maintained from that point a dominant marketshare and controls a reported 90% of global exchange activity today.
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
Fixed-odds gambling
Fixed-odds betting is a form of wagering against odds offered by a bookmaker, an individual, or on a bet exchange.-Calculating fixed odds:It is customary with fixed-odds gambling to know the odds at the time of the placement of the wager , although this category also includes wagers whose price is...
because they are more popular globally.
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 oddsOdds
The odds in favor of an event or a proposition are expressed as the ratio of a pair of integers, which is the ratio of the probability that an event will happen to the probability that it will not happen...
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 (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
Credit (finance)
Credit is the trust which allows one party to provide resources to another party where that second party does not reimburse the first party immediately , but instead arranges either to repay or return those resources at a later date. The resources provided may be financial Credit is the trust...
. There are two obvious reasons for this:
- Exchanges operate on much tighter margins, which lessens their ability to absorb bad debt
Bad debt
A bad debt is an amount that is written off by the business as a loss to the business and classified as an expense because the debt owed to the business is unable to be collected, and all reasonable efforts have been exhausted to collect the amount owed...
s.
- 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
Online gambling
Online gambling, also known as Internet gambling and iGambling, is a general term for gambling using the Internet.-Online poker:Online poker tables commonly offer Texas hold 'em, Omaha, Seven-card stud, razz, HORSE and other game types in both tournament and ring game structures...
in general.
That said, Betfair are licensed to give credit and have done in "exceptional circumstances".
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.
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 goal
Goal
A goal is an objective, or a projected computation of affairs, that a person or a system plans or intends to achieve.Goal, GOAL or G.O.A.L may also refer to:Sport...
s, penalty kick
Penalty kick
A penalty kick is a type of direct free kick in association football, taken from twelve yards out from goal and with only the goalkeeper of the defending team between the penalty taker and the goal.Penalty kicks are performed during normal play...
s and sendings off
Misconduct (football)
Misconduct in association football is any conduct by a player that is deemed by the referee to warrant a disciplinary sanction in accordance with Law 12 of the Laws of the Game. Misconduct may occur at any time, including when the ball is out of play, during half-time and before and after the...
would warrant such suspensions), so that unmatched bets can be cancelled.
In-play betting is not currently available on exchanges licensed in Australia
Australia
Australia , officially the Commonwealth of Australia, is a country in the Southern Hemisphere comprising the mainland of the Australian continent, the island of Tasmania, and numerous smaller islands in the Indian and Pacific Oceans. It is the world's sixth-largest country by total area...
due to local regulations.
Trading
The advent of the betting exchange has given rise to new types of gamblers - the trader and arbitrageur. Arbitrageurs (colloquially "arbers") 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, rival exchanges have pledged not to introduce similar charges, perhaps in hopes of enticing traders to move their business (and capital) elsewhere.
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 GroupGala Group
Gala Coral Group Ltd is a British betting shop, bingo and casino operator owned by private equity houses Candover Investments, Cinven and Permira. In October 2005 it merged with Coral Eurobet for £2.18 billion. The acquisition made it the UK's third largest bookmaker and largest bingo operator. It...
, Ladbrokes
Ladbrokes
Ladbrokes plc is a British based gambling company. It is based in Rayners Lane in Harrow, London owned by Bhavin Kakaiya. From 14 May 1999 to 23 February 2006, when it owned the Hilton hotel brand outside the United States, it was known as Hilton Group plc...
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
Horse racing
Horse racing is an equestrian sport that has a long history. Archaeological records indicate that horse racing occurred in ancient Babylon, Syria, and Egypt. Both chariot and mounted horse racing were events in the ancient Greek Olympics by 648 BC...
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
Integrity
Integrity is a concept of consistency of actions, values, methods, measures, principles, expectations, and outcomes. In ethics, integrity is regarded as the honesty and truthfulness or accuracy of one's actions...
of sport but by commercial
Commerce
While business refers to the value-creating activities of an organization for profit, commerce means the whole system of an economy that constitutes an environment for business. The system includes legal, economic, political, social, cultural, and technological systems that are in operation in any...
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
Jockey Club
The Jockey Club is the largest commercial organisation in British horseracing. Although no longer responsible for the governance and regulation of the sport, it owns 14 of Britain's famous racecourses, including Aintree, Cheltenham and Newmarket, amongst other concerns such as the National Stud and...
, 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.
See also
- Sports bettingSports bettingSports betting is the activity of predicting sports results and placing a wager on the outcome.-United States of America:Aside from simple wagers such as betting a friend that one's favorite baseball team will win its division or buying a football "square" for the Super Bowl, sports betting is...
- BookmakerBookmakerA bookmaker, or bookie, is an organization or a person that takes bets on sporting and other events at agreed upon odds.- Range of events :...
- GamblingGamblingGambling is the wagering of money or something of material value on an event with an uncertain outcome with the primary intent of winning additional money and/or material goods...
- Parimutuel gambling
- Spread bettingSpread bettingSpread betting is any of various types of wagering on the outcome of an event, where the pay-off is based on the accuracy of the wager, rather than a simple "win or lose" outcome, such as fixed-odds betting or parimutuel betting. A spread is a range of outcomes and the bet is whether the outcome...
- Betting exchange companies