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Betting Exchanges and Trading

Whilst traditional bookmaking dates back to the late 18th century, betting exchanges belong to the 21st century. The dominant leader in the market is Betfair, and is known to almost everyone with even a moderate interest in sports betting. There are a number of fundamental differences between betting exchanges and the majority of bookmakers. These are:

  1. At an exchange you are betting against other punters, whereas with a bookmaker you are, in theory at least, betting against the bookmaker himself. (We’ll see why this isn’t necessarily the case in practice for some bookmakers in the last lesson on living with and understanding your bookmaker.)
  2. Whilst bookmakers gain their advantage via the overround, exchanges take a commission from winning bets (or profitable trades). At Betfair this will be anything from 2 to 5%.
  3. Betting prices (before winning commission is taken into account) are generally better at exchanges, and for heavily traded markets will be very efficient and closely approximate the fair odds. Of course, don’t forget the commission.
  4. At a bookmaker you can only back a price. In other words you can only bet on what he makes available. At a betting exchange you can make bets available yourself for other punters. This is called laying.
  5. Despite the obvious price advantages for exchanges, they do have some limitations. Exchanges tend to offer fewer markets than bookmakers, to help keep the odds as competitive and as efficient as possible. In particular it is much harder to place multiple or accumulator bets. Additionally, the odds tend to be limited to a range of 1.01 up to 1,000.

Perhaps the biggest advantage the exchange has over the bookmaker is to allow the punter the ability to lay bets. Go back to our example in the first lesson on betting odds. Here, Joseph and Daniel had entered into a betting agreement over the football match between England and Brazil. Joseph was backing England to win at odds of 3.00, whilst Daniel was laying that bet for Joseph to take. Essentially a backer is betting on something happen. A layer is betting on something not to happen. In this case, by laying England at odds of 3.00, Daniel was in effect betting on England not to win at a price of 1.50 (since if England have a 33.33% chance of winning, they have a 66.67% chance of not winning). In this case being just a two-way betting proposition with no draw possible in a cup tie, England not winning is the same thing as Brazil winning.

By allowing laying exchanges like Betfair effectively allow punters to operate as bookmakers themselves. Indeed, when traditional UK bookmakers saw their market share eaten away by Betfair, they argued that since the company was allowing customers to behave as bookmakers, they should face a tougher tax regime suffered by the bookmakers themselves.

Being able to back as well as lay a price also opens up an entirely new world of sports trading. A trader looks to back a price and then lay it off at a shorter price some time later, or conversely lay a price and then subsequently back it at a longer price. In both instances, the punter will be guaranteed a profit no matter what the outcome of the betting market. Trading is a lot like arbitrage at the bookmakers. (You can refer to the lesson for a reminder of how that works.) The main difference is that whilst an arbitrageur looks to secure an immediate profit at time all the necessary bets are placed (hopefully within seconds of each other), a trader is willing to take on some additional risk by allowing some time to elapse before he chooses to close the trade at more favourable odds.

Naturally, with such a risk, trades can fail. For example, suppose we decide to lay Liverpool to beat Manchester United at 2.50, having received a good insider tip that Luis Suarez will likely not start the game. When that news becomes common knowledge, Liverpool drifts out to 2.70. We then back them to win and lock in a profit no matter what the result, provided we’ve calculated our stakes correctly for each part of the trade. But suppose instead, our information source was wrong, Suarez was on the start list for the game, and in fact Wayne Rooney gashed his head again in training. Having laid Liverpool at 2.50 we now watch as their price shortens to 2.30. We’re now faced with two choices: either let the lay stand on its own and run the risk of Liverpool winning or complete the trade for a guaranteed loss, albeit a lot smaller than if Liverpool wins the match. As for regular betting, successful trading will again be a matter of having access to better information than the majority of other punters and would-be traders.

One very popular form of trading is in-play or live trading, where punters are following the game as they place their backs and lays. Many of the in-play markets see a natural direction of movement in price. For example, suppose at the start of the second half the score between Liverpool and Manchester United is 0-0. The price for fewer than 1.5 goals might be 1.50. As the minutes tick by without another goal, that price will gradually shorten. Provided you are confident that no goal will be scored during a couple of minutes of play, you might be able to back 1.50 and then lay it for 1.49 or 1.48. Of course if Suarez or Rooney go charging up the pitch you’d better be ready to close your trade in case one of them does score and the odds jump to 2.25. Since Betfair impose a time delay on live trades, the possibility always exists that you will be too late, and then either have to sit with your original bet until the price has shortened sufficiently again or close the trade for an overall loss if you’re not confident that no more goals will be scored. Anyone who said trading was easy was either lying or foolish.

The beauty of completing trades at a single exchange like Betfair is that they will not charge you commission on your winning play, but only on the overall profit for the trade. Suppose, for example, you back Liverpool at 3.00 for £10 and then lay them off for £20 once the price has fallen to 1.50. (The lay stake is equivalent to what the backer accepting your lay has to stake to match your offer.) If Liverpool wins you make a profit of £20, whilst giving up £10 to the punter who accepted your lay when they backed Liverpool a 1.50, for an overall net profit of £10. On the other hand if Liverpool loses, you lose your £10 stake backing 3.00, but gain a £20 profit from the backer who accepted your lay at 1.50, again for an overall profit of £10. The commission you then pay is then just 5% (or whatever your commission rate is) of £10, not 5% of £20. Should you end up with a loss from a trade that has gone wrong you would pay no commission at all.

The commission rate you will pay will depend on how much turnover you have at the exchange. For Betfair, the standard rate of commission is 5%. This can be lowered to just 2% for the heaviest Betfair players. However, many of these “professional” punters will face an additional premium charge to their profits. When these are taken into consideration, some of the most efficient bookmakers with the lowest margins, like Pinnacle Sports, can actually be more competitive than Betfair, given that their overround for heavily played markets can be as low as 102%. Furthermore, whilst Betfair won’t ever restrict the amount you can stake, you will only be able to match what other Betfair players have made available. Often this will be less than market limits offered by bookmakers, and for those bookmakers who tolerate winning players, the advantage the exchange betting model had over the bookmaker begins to melt away. Nevertheless, anyone serious about sports betting and trading, and particularly those who have been limited or banned by many of the traditional bookmakers, should expect to be using exchanges on a regular basis. Why some bookmakers should ban a customer at all will be covered in the final lesson.

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