The Brief History of Betting Exchanges

Betting exchanges may still be youngsters in the gambling world, but in their short history they have revolutionized the betting industry, angered traditional bookmakers and enjoyed a fair share of controversy.

While traditional bookmakers have their customers bet against them in fixed odds betting, betting exchanges offer a fluid marketplace where customers play against each other.

The peer-to-peer betting system provided by online sportsbooks like Betfair adopt an exchange model, with options for in-play betting and even the chance to lock profit mid-play via the newly instated “cash in” features.

Betting exchanges are a trading system that facilitates person-to-person betting, where the consumers are allowed to back or lay a position.

However, as betting exchanges have taken off, they are also mired in controversy, with disgruntled competitors and accusations of sports corruption.

Playing the Exchange

On first glance, betting exchanges can seem daunting for customers accustomed to heading down the bookies to place a bet on a horse.

Traditional betting sees the punter go into their local bookmaker to place a bet on the Grand National, one of the most popular bets on sports in the UK, puts their stake of GBP 1 for their horse to win at the odds of 3-1.

In this case, should the customer win, they would get GBP 4 back, with winnings of GBP 3 and their initial GBP 1 stake. In this case, the client bets the bookmaker.

In the case of the betting exchange, the client would not play the bookmaker, but rather a client who decides to lay, back the horse to lose, their bet. In this case, the person laying the bet would risk GBP 4.

Betting exchanges match the players who looking to strike a wager, and whoever wins, the exchange takes a percentage in commission form the net winnings – making the betting exchange a low risk business for its owners.

Of course, there are some more complex ways of playing the game, betting exchanges allow for in-play betting, where bets can be made while a match or a race is taking place, and companies like Betfair offer the chance to lock bets mid game and cash in the winnings.

Facts about Betfair:

• Founded by Andrew Black in 2000
• Largest online sportsbook in the UK
• Charges a commission of 2-5% on all winning bets
• The company has most of its operations in Gibraltar

Betting exchanges take on wagers on football matches, boxing, athletics, horse racing and even darts. Sometimes it’s also possible to wager on elections or the name of the royal baby.

An attractive point about betting exchanges is that they are a free market. While traditional bookmakers set their own odds, meaning some customers will need to shop around, betting exchangers lets the players set the wager, and those interested in taken them on can place their bets.

The Rise of Betfair

Betfair might not have been the pioneer of betting exchanges, that title goes to the now deceased Flutter.com, but it is one of the first and leading betting exchanges.

Founder of Betfair started up his own business as a one-man-job with his laptop back in 2000, which has now grown into a business, with 1800 members of staff and a clientele totaling over 4 million.

In 2005, Betfair had a net worth of GBP 5.2 billion.

However, Betfair’s rise to the top with its open-market betting model rubbed some of its traditional sportsbooks competitors the wrong way.

Ralph Topping from William Hill was quoted in an industry magazine accusing Betfair of being “a massive secret society where illegal gambling is taking place.”

However, it appears the anger shown by traditional bookmakers came from the green-eyed monster. Since its 2000 launch, Betfair has become the largest online betting company in the UK and the largest betting exchange in the world.

The secret to Betfair’s success is the nature of the betting exchange’s transparent market, where all players are provided with the same market information. They also claim to have 20% better odds than those offered by traditional sportsbooks.

Other betting exchanges in competition with Betfair include the Ireland-based BETDAQ, which has recently been acquired by Ladbrokes in February 2013 and is set to become Betfair’s biggest competitor.

Sports Corruption and Other Issues

The accusations posed by William Hill stating that Betfair is a den of illegal gambling might be far fetched, but that doesn’t mean others haven’t abused the system.

The fact that betting exchanges allow customers to lay a bet, back a team or a horse to lose, has opened the door to sports corruption.

Since it’s easier to guarantee a bet being lost than won, insider trading and race fixing, most notably in horse racing, has cast a shadow on the supposedly transparent world of betting exchanges.

One notable case concerned champion jockey Kieren Fallon, who was accused of a “race-fix scam” on the Betfair betting exchange.

“The object of the conspiracy was to wager large amounts of money on a particular horse to lose in each of those races whilst knowing that the jockey was prepared, if necessary, to cheat by stopping his horse,” said Jonathan Caplan, the QC in the Fallon trial.

Although, Fallon was acquitted after the key witness was undermined, the topic has put Betfair in a negative light.

The exchanges themselves have signed agreements with sports governing bodies to clamp down on insider trading and race fixing.

The Future for Betting Exchanges

Betfair has struggled to enter the market in countries outside of the UK. It failed to enter the US gambling market with the new betting exchange format, suffered from complications in legislation changes in Australia and has had to jump hoops through European regulation laws.

However, the future is still exciting for betting exchanges. The new launch of mobile betting apps and cash in features are making things more exciting, and Betfair’s new rival with Ladbrokes’ take over of BETDAQ will certainly keep things interesting.

Betting exchanges are a complex arena rife with scandal and envy, but it’s a market that shows potential for growth and evolution in the sportsbook market. The question is can traditional bookmakers keep up with the likes of Betfair and the new runner in the exchange, Ladbrokes?