A betting exchange is a mechanism by which individuals on opposing sides of a betting proposition can be brought together to form a wager against one another. As such, a betting exchange differs from a traditional bookmaker in that users may lay selections – that is bet against them, effectively acting as the bookmaker – as well as back them. This, and superior odds, are the main advantages of betting exchanges, although there are downsides too, of which more later.
The first betting exchange was founded in the late 1990s and the phrase “peer to peer” betting was coined. Betfair, by far and away the market leader, was created in 1999 and now has around one million registered, active users in all corners of the globe, handling more transactions every day than all the European stock exchanges combined, the vast majority managed in seconds with 100 per cent efficiency. There are other betting exchanges, including Betdaq and WBX, but none have been able to truly challenge the size, scope and liquidity of Betfair.
Liquidity is a key aspect of any betting exchange and refers to the amount of money available to either back or lay a given selection. A bookmaker will always have odds for any given selection but an exchange relies on there being two individuals (in reality lots of bookmakers and organisations also use betting exchanges) prepared to take up either side of the wager. In simple terms, I cannot bet on Manchester United to win if nobody else will bet on them not to win, that is to say, lay them.
Betting exchanges make their money by taking a small percentage of bets or profits, depending on the exchange and this is usually between 2% and 5%. This enables an exchange to offer, more often than not, odds far superior to a bookmaker who usually has a profit margin factored into the odds of closer to 15%. On outsiders in particular you will often find odds at betting exchanges, even allowing for commission, to be far higher than at any bookmaker.
Pros & Cons
Betting exchanges, as said, generally offer better odds than conventional bookmakers and they also allow punters to lay bets. This facilitates a number of things, the ability to hedge your bets, taking profits or cutting losses, being one of the most important. Laying bets is also popular simply because you may not be able to decide who will win but you may be confident about who definitely won’t win. Laying also facilitates trading, for example betting on a selection which you think will shorten. Whilst it might not win, if you back it at 2/1 (which at an exchange would be 3.00 written in decimal odds format) and it subsequently drops to 6/4 (2.50) you would be able to lay your pick in such a way as to lock in a certain amount of profit.
Another major advantage to using a betting exchange is that you can never be banned or limited for winning. Because there is no central bookmaker accepting your bets (or lays) the only limit on what you can stake is dependent on what liquidity there is.
The major downside about using a betting exchange, as alluded to above, is that you may not always find there is sufficient liquidity for the bets you want to place. Your ability to place a bet – or a lay – relies on someone else taking up the other part of the wager and, especially on smaller events and less popular markets this can be a problem. Exchanges do not offer quite as wide a range of markets either, in order to concentrate the liquidity and so those who like unusual specials may find them absent from the exchanges. They are also not designed for accumulators and whilst some offer “multiples” the odds often compare unfavourably with those at an exchange.