Betting exchanges have completely transformed the online betting industry.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.
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).
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.
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.
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 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.