Betting exchanges have completely transformed the online betting industry. In Genie’s Betting Exchanges Explained post, he covers everything you need to know. In the beginning there were fixed odds bookmakers down back alleys or standing on a beer crate at the local race track shouting at the top of their voice. In time these back alley smoke houses evolved into a very respectable and professional high street operation. Cue the invention of the internet which turned bookmakers into international businesses.
Still though the only way to bet though was for the bookmaker to offer odds on an outcome and the punter is free to say ‘yes’ or ‘no’. That is of course until Betting Exchanges were born. In June, 2000 Andrew Black and Edward Wray launched Betfair, the world’s first betting exchange, and revolutionized the face of gambling forever.
What is a betting exchange and how does it differ from a traditional bookie?
A betting exchange differs from a traditional fixed-odds bookmaker in that it allows punters to bet at odds set and requested by other punters. Members can make both ‘Back’ bets (normal bets on a selection to win) and ‘Lay’ bets (bets on the opposite side of the Back, against the selection), thereby eliminating the traditional bookmaker.
Punters can request a price and post it on the website. If someone else is willing to offer you that price they will do so and your bet will be matched. If no-one is willing to offer you the price then your bet will be unmatched and the funds reaccredited to your account balance (no charge).
Betting exchanges explained via an example
To understand it simply think of 2 mates (Paddy and John) down at the pub, having a pint and watching the game. Paddy is telling John that Barcelona have the best attack he has ever seen and are a cert to beat Real Madrid. John disagrees and thinks that their dodgy defence is going to cost them. John says to Paddy ‘I’ll give you 2/1 on Barca to win this game’ to which Paddy replies ‘you’re on’ That’s a betting exchange.
How does Betfair work?
Betfair works just like that except that instead of just Paddy and John, there are millions more punters just like them offering odds. Their identities are never known to one another.
In essence Betfair connects punters and allows them to become the bookmaker. It is essentially a no-risk bet networking site which makes guaranteed earnings by charging commissions on winning bets.
Betfair is the daddy of all of the betting exchanges. In order for a betting exchange to be successful it needs liquidity; i.e. it needs lots of Paddy’s and John’s offering their prices so that punters are able to have a decent sized wager at competitive odds.
Betting exchanges explained – how do they make money?
Betfair makes it’s money by charging commission on winning bets. The commission starts at 5% of winnings on a market and can be reduced to as low as 2% for high rollers. The level of commission that an individual pays can be reduced based on a loyalty points scheme.
Betfair turns over more money in bets than any other betting organisation in the world. It is not the only betting exchange however. Other betting exchanges include Betdaq and WBX (World Betting Exchange), both of which operate in much the same way as Betfair.
The impact of betting exchanges
The birth of the betting exchange is the most important occurrence in the history of sports betting. It made the fixed odds bookmakers review how they operated and ensured that they reduced their margins (improved their odds) in order to be competitive with the betting exchanges. Almost overnight the position of the punter was greatly improved.
Which are the largest betting exchanges?
| Betting Exchange | Key Features | Founded | Market Focus |
|---|
| Betfair Exchange | Largest globally, deep liquidity, multiple markets | 2000 | Global, wide range of sports |
| Smarkets | Low commissions, user-friendly interface | 2008 | UK and Europe, sports betting |
| Matchbook | Low commissions, popular with professional bettors | 2004 | Global, sports markets |
| BetDaq | Competitive commission rates, smaller liquidity | 2000 | UK & Ireland, horse racing, sports |
| Sporting Index (SPIN) | Primarily a spread betting service, offers exchange | 1992 | UK, football, horse racing |
Key risks when betting on a betting exchange
Betting exchanges offer unique advantages, such as better odds and flexibility, but there are key risks to consider:
- Liquidity Risk
- Description: Insufficient liquidity (lack of participants) can make it difficult to match your bets, especially on less popular events or markets.
- Impact: You may not be able to place a bet at your preferred odds or may struggle to find a counterpart to match your stake.
- Market Volatility
- Description: Odds on betting exchanges fluctuate more dynamically than traditional bookmakers due to real-time market changes based on user activity.
- Impact: Sharp changes in odds can result in less favorable terms for your bets if the market moves quickly before your bet is matched.
- Counterparty Risk
- Description: Betting exchanges require you to bet against other individuals, meaning you rely on counterparties fulfilling their bets.
- Impact: If liquidity is thin, your bet may not be matched, or it could be partially matched, leading to incomplete positions.
- Commission Fees
- Description: Betting exchanges charge commissions on your winnings, typically ranging from 2% to 5%, depending on the platform and the user’s activity level.
- Impact: These fees can significantly reduce profits, especially for frequent bettors or those with marginally profitable strategies.
- Market Manipulation
- Description: Some professional traders or groups might attempt to manipulate odds by placing large or small bets to influence the market.
- Impact: As a bettor, you could be misled by artificially inflated or suppressed odds, leading to poor betting decisions.
- Risk of Account Limitations
- Description: Betting exchanges have policies that may limit or suspend accounts due to suspicious activity or successful betting patterns.
- Impact: Winning consistently could attract unwanted attention from the exchange, leading to account restrictions or even closure.
- Dependence on the Exchange
- Description: Betting exchanges, unlike bookmakers, depend entirely on the users for liquidity and odds.
- Impact: If the exchange’s popularity decreases, it could reduce your ability to place competitive bets.
- Complexity for New Users
- Description: Betting on exchanges is more complex compared to traditional bookmakers, involving “backing” and “laying” bets, which can be confusing.
- Impact: Inexperienced users might make mistakes in bet types or miscalculate risks, leading to losses.
These risks highlight the importance of understanding the mechanics of betting exchanges and staying aware of market conditions before placing bets.
Genie’s top tips for beginners starting to use betting exchanges
If you’re new to betting exchanges, it’s important to understand the basic mechanics of value betting before jumping in. Here are some essential tips to get started:
- Understand the Difference Between Backing and Laying
- On betting exchanges, you can either back a selection (betting on it to win) or lay a selection (betting on it to lose). Make sure you fully grasp how laying bets works, as it can be more complex than traditional betting.
- Start with Small Stakes
- As a beginner, it’s wise to start with small amounts until you’re comfortable with how the exchange works. This minimizes potential losses while you’re learning to navigate the platform.
- Focus on Liquidity
- Choose markets with high liquidity (more participants) as they offer better chances of getting your bet matched at the odds you want. Sports like football, tennis, and horse racing often have good liquidity on major events.
- Use the Exchange’s Learning Resources
- Most betting exchanges offer tutorials, videos, or FAQs. Take advantage of these resources to learn how to use their platform effectively. Understanding how to place, adjust, and manage bets will help you avoid beginner mistakes.
- Stay Patient and Don’t Chase Losses
- Betting exchanges require patience, especially since markets fluctuate more frequently than traditional betting. If your bet doesn’t get matched or if you face a loss, avoid chasing it by placing impulsive bets. Stick to your strategy and stay disciplined.
- Familiarize Yourself with Commissions
- Every exchange charges a commission on your winnings, usually ranging from 2% to 5%. Understand how this impacts your profits and factor it into your overall betting strategy.
Advanced Betting Strategies on Exchanges
For those who are more experienced with betting exchanges, advanced strategies can help you maximize your profits and minimize risks. Here are a few to consider:
- Arbitrage Betting
- How it Works: Arbitrage involves placing bets on all possible outcomes of an event in such a way that you lock in a profit regardless of the result. This often involves backing a selection on a traditional bookmaker and laying the same selection on a betting exchange at favorable odds.
- Tip: Watch for differences between bookmakers’ odds and exchange prices, especially in less liquid markets, to capitalize on arbitrage opportunities.
- Trading Positions (Scalping)
- How it Works: Similar to stock market trading, scalping involves placing a bet (either backing or laying) at one price and then placing an opposing bet when the odds move in your favor. This allows you to lock in profits before the event finishes.
- Tip: Scalping is best suited for markets with frequent odds changes, such as in-play football or horse racing. Stay alert to market movements and exit positions quickly to avoid losses.
- Dutching
- How it Works: Dutching is a strategy where you spread your stake across multiple selections in the same event to guarantee a profit if any of those selections win. You can do this by backing multiple outcomes on an exchange.
- Tip: Use dutching calculators to determine the appropriate stake on each selection for maximum efficiency. This strategy works well in events with a clear favorite and several equally competitive challengers.
- In-Play Betting Strategies
- How it Works: In-play betting involves placing bets while an event is ongoing. The key to success is reacting to real-time developments, such as a goal in football or a break in tennis.
- Tip: Use live data and watch the event closely to spot opportunities where odds swing dramatically. For example, if an underdog takes an early lead, laying them at lower odds could yield a good return if they eventually lose.
- Using Software for Automated Trading
- How it Works: Third-party software tools allow you to automate your betting and trading strategies. You can set parameters for when to place or exit trades based on odds movements or other market signals.
- Tip: Use bots to capitalize on minor fluctuations in odds, especially during high-liquidity events. However, ensure you fully understand how the software works to avoid costly errors.
- Focus on Niche Markets
- How it Works: While high-profile events have the most liquidity, smaller or niche markets can sometimes offer more favorable odds and opportunities for profit.
- Tip: Specialising in niche sports or lesser-known leagues can give you an edge if you develop expert knowledge in those areas. Look for markets where there is less competition from professional traders.
By mastering these advanced strategies, experienced bettors can gain a significant edge in the betting exchange markets, helping them generate consistent profits.
Betting Exchanges Explained – a conclusion
It should go without saying, but worth repeating – the house doesn’t beat the player, it just gives him the opportunity to beat himself – If you don’t understand how to price a market, start by understanding the fundamentals of betting, before diving into betting exchanges.