Niall O’Conner over at bettingmarket.com has written an informative article about the rise of the betting exchange. Written using Betfair the worlds largest betting exchange as an example. It describes how the betting exchanges have taken the betting industry by storm. Traditional bookmakers originally took offense to the idea that the public can bet that something won’t happen. There have been scandals surrounding abnormal betting patterns and the ease with which the system can be abused. Viz, it’s easier to ensure that a horse won’t win a race than it is for it to win the race.

Race fixing is an obvious concern but not without an agenda. Niall argues that the bookmakers are bashing Betfair because they are fearful of the competition. Competition which is essentially stomping all over a market which has been cornered by the big names of traditional sports bookmaking. Let’s face it corruption in horse racing is not a new phenomenon. Bookmakers have never been concerned about this before, well, not so publicly. Amongst other things there have been a number of complaints by bookmakers pertaining to Betfair’s advertising campaigns that highlighted the fact the bookmakers operate with fat margins. The fatter the margin the less money paid to punters. So traditional bookmakers weren’t happy. Others in opposition to the betting exchange includes the British Horse racing Board chairman Martin Broughton and various horse racing authorities. The Japanese Horse Racing Authority released a statement…

“Our position on betting exchanges has been and remains, quite clear. We strongly believe that it destroys the integrity of our sports and will ruin thoroughbred racing. Japanese racing is televised in Australia from time to time but they are not intended to be used for the purpose of betting exchanges. Therefore, we respectfully request that Betfair Pty Ltd refrain from using our race events for betting exchanges. I trust you understand our position and I thank you for your cooperation.”

But these concerns have not stopped the growth of the popular betting exchanges. Betfair has now reached over 1 million users and their profits are still growing. Whilst the betting exchange has some great selling points not all betting exchanges have been a great success. There have been many failures and none of Betfair’s peers can rival it’s success. Said peers include Livebetting, Betdaq, Betsson, Tradesports and Matchbook catering to the USA. Operators like Betsson have blurred the lines dividing the betting exchange model and traditional fixed odds bookmakers. The website offers normal sports betting and an option to use a betting exchange thus mixing the two types of betting. The others all offer a betting exchange only.

Betfair’s competition all suffer from the same problem, which revolves around the fact that there is not sufficient liquidity in their markets for all bets to be matched quickly. Betfair’s success can be attributed to first mover advantage. They where the first company to develop the best technology and corner the market. A higher number of users has really helped them create a thriving market for members to back and lay a wide range and many aspects of sporting events.

For users, the only potential problems they may have with Betfair is that large bets will not get fully matched by other members. Whereas traditional bookmakers will cater for the ‘high roller’. A slight concern is the commission that Betfair charges. Due to their dominance of the betting exchange market they have no need to compete with other exchanges for commission rates. One positive outcome of this is that Betfair’s competitors do compete for business by offering lower commission rates.

Let’s look at the reasons why the betting exchange has become so popular. This following peace has been taken from “Trading without Dark Pools – The story of how Betfair and the betting exchanges revolutionised the betting market” (Niall O’Connor 2009 All Rights Reserved).

Copied here for those thinking of trying a betting exchange.

* Transparent markets – Transparency equals fair betting markets, because it ensures that all players in the market are provided with the same market information. In its purest form, a betting exchange, which covers horse racing, presents a system, where all private information about a horses chance is incorporated in the price; in addition to information pertaining to Jockey; track, trip, form etc….Punters are able to learn of each others information by observing prices, and they are, for the first time, able to change their actions according to the prices that they see (they can play or lay, and bet in-running). There will be instances, for example, where the price of one horse drifts badly before the start of a race, whilst that of another contracts; punters may decide to lay the first horse, because they have concluded that the change of price of the second, contains important adverse information about the chances of the first. Transparency also facilitates arbitrage across the betting market, thus ensuring that different prices do not obtain on different markets.

* Longshot Bias – Research into betting exchanges supports the notion that the longshot bias is positively related to the transaction costs faced by bettors in acquiring information concerning the true probabilities of runners in a horse race/sporting event. Markets that are characterised by lower transactions and information costs, have a tendency to be more informative, and punters trading those markets are provided with a more realistic assessment as to the chance of longshots. Accordingly, the favourite longshot bias is typically diminished, if not eroded – a situation that pertains on Betfair.

* Low cost structure – The low cost structure of the trading system, ensures that transaction costs for traders are kept to a minimum. This ensures that the prices available on the betting exchanges are significantly better, when compared with those on offer from the traditional layers. Indeed, the prices available on the betting exchanges are often upto 20% more competitive than those offered by the traditional bookmakers.

* Breadth of bets – Punters are able to undertake in a veritable melange of betting transactions; in simple terms they can play or lay, and bet in running on all events, however, the more sophisticated may hedge, arb; cut in running; etc……. much more appealing, compared with the rigidity of fixed odds betting;

* Perception – Punters do not traditionally like bookmakers and in the exchanges they have been presented with a system which purports to be “betting without the bookies.” Every time one of the Big Three UK bookmakers is seen to knock the betting exchanges punters are more likely to migrate towards them in defiance. If the exchanges move offshore so will the punters. Betfair’s forum has been particularly successful in breeding a spirit of loyalty amongst its exchange users.

Traditional bookmakers have mellowed slightly with regards to their stance on the emergence of the betting exchange. They’ve decided that if they can’t beat em they’ll join em. In a sense they are eating their words because the big bookmakers now use Betfair or Betdaq for hedging their own books.

What’s in store for Betfair in the future? Betfair is pursuing a long term goal of becoming a global hub for horse race betting. They plan to steal business from popular Totalisator (Tote) systems, which account for approx 80% of international horse race betting market. Some have heralded the end of traditional Tote systems after Betfair purchased the TV Games Network. Other deals have given Betfair the rights to broadcast popular events live to their 1.4 million (2009) customers: including Victorias Spring Racing Carnival and the Melbourne Cup.

No doubt more deals will be on the cards as Betfair creep towards controlling international horse racing. In 2009 the first Betfair members where able to place common pool bets or Tote bets. Tote betting otherwise known as parimutuel betting is where all the betting money on certain bets is pooled. The house margin is removed and the pool is divided up and paid on all winning bets.

Betfair’s story is one of a technology company that has revolutionised the betting market. It offers it’s users a great alternative to traditional bookmakers which is not so much an alternative but the only way to go for many people. As Betfair innovates the future of the betting market is exciting. Betfair may be floated on the stock exchange at some point and not surprising it is mooted that the majority of shares will be snapped up by those critical international bookmakers. Truly, if you can’t beat ’em join ’em!