A Guide to Betting Exchanges

For more than a century, punters have been placing their bets against the prices offered by a bookmaker, whose commercial interests ultimately protect them from being truly 'bashed' thanks to the profit margins built into their odds.

If only there was another way to bet; a way in which the punter could maximise their return from a winning bet with minimal outlay.

Well, there is: these little beauties are called betting exchanges.

The Origins of the Exchange

The first betting exchanges coincided with the internet revolution in the early 2000s. With more and more households having access to the world wide web, commercial opportunities for those with a keen eye for an opening were rewarded; and none more so than in sports betting, when Andrew Black and Edward Wray founded Betfair, the world's first Exchange.

For more than 15 years, punters have been able to bet against one another rather than solely at the bookmaker of their choice. With the likes of Betdaq and Smarkets subsequently entering the market to create competition against Betfair, there has never been a better time to get involved.

How Do Betting Exchanges Work?

They are really simple to understand, and there is an opportunity for punters of all budgets to get involved.

First things first, we need to explain a little bit about the two parties that are involved in an exchange transaction. These are the Backer and the Layer.

The Role of the Backer

When you walk into your local bookies shop or log onto your preferred site online to place your bets, you do so at the odds offered by the bookmaker. You are a 'backer', e.g. you are the one who is putting a stake on a certain outcome to occur.

The same is true for exchange betting too: you can back a team, player or outcome in the usual way. The only difference you'll notice is that the odds available to you will be, in the vast majority of cases, much better than those available from the bookies. We will discuss why that is the case later in this article.

The Role of the Layer

So the backer is the person who is taking the bet on, but what about the individual who offers the odds in the first place?

In the man vs bookmaker example, the bookie is the 'layer', e.g. the party accepting the bet. What is interesting about betting exchanges is that anybody can take on the role of the layer, and thus ultimately bet AGAINST something happening.

Here's an example:

Imagine a discussion in the pub between two people regarding Arsenal's chances of winning the Premier League title in the upcoming season. John is adamant that the Gunners will lift the trophy, and is willing to put his money where his mouth is. He turns to his mate Gary and says the immortal words: "I bet you a tenner that Arsenal win the title this season."

Gary, sagely, scratches his chin and thinks about the possibilities. Will Arsene Wenger's men be successful? Probably not, he thinks, and shakes John's outstretched hand. “I'll take that bet,” he says.

In this example, John is the backer and Gary is the layer.

But here's the difference: on an exchange, the layer must present a price they are willing to accept to the backers out there. Gary is essentially laying odds of Evens - he could win £10 or lose £10, and so we would say that his liability is a tenner.

There will be occasions, however, as a layer where you will want to be a bit more creative with your pricing. Imagine that you are convinced that Rory McIlroy won't win the Open Championship. You would want to attract backers with an alluring price, maybe 10/1 for example, that entices them to 'match' your bet.

This leads us nicely to the mechanics of the exchange. Layers are the cog that make the machine go round, presenting odds for backers to wager on, but the good news is that they can limit their liability by naming a maximum price they wish to wager. For instance:

Bob thinks that McIlroy will not win The Open. He offers a price of 10/1, but places a maximum spend of £5 only. So if McIlroy doesn't win The Open, Bob wins £5. If he does, Bob's liability is £50 to the backer who matched his bet.

So that, in a nutshell, is how betting exchanges work. It is a peer-to-peer betting network that brings together two people and thus cuts out the bookies.

On Commission

You might have gotten to this point and thought 'what's in it for the exchange providers then?' Well, that's a good question, and the answer is a simple one: commission.

The exchanges take a commission from winnings only, so layers won't have to cough up and backers who do register a winning bet will only play a percentage of their return in commission. Each exchange has their own commission level, and for reference the current market base rate charged by Betfair sits at 5%.

The actual amount you will have to pay in commission is calculate by multiplying the market base rate with your net winning amount. A discount rate is applied by Betfair based on the amount of points you have accrued (each time you bet you earn more points to your tally).

Bookmakers vs Exchanges

It is human nature to pit one competing force with another, but the good news is that you don't need to bet solely with a bookmaker or an exchange: you can utilise both to maximise your returns! As we will see, there are plenty of benefits to being open-minded as far as the bookie vs exchange debate is concerned.

Advantages of Bookmakers

The first obvious advantage of using a bookie is that they carry prices for a greater set of markets and events. Remember, with exchanges the onus is on punters around the world to set the agenda, and for more obscure sporting events around the world this can mean a complete absence of available odds. At least the bookies will offer you a price; whether you like the numbers they deliver or not.

When it comes to placing ante post bets or an early wager, remember that it can take a while for exchange markets to become 'fully formed'. Even as a backer you can set your perfect price, but then you must wait for a layer to come on board and match your bet. At least with the bookies you can access ante post markets for a whole host of events - excellent if you have spotted some early value.

With a bookmaker, you'll never have to see your bet go unmatched. There is nothing worse as an exchange punter to see the bit of value you have identified go by the wayside as no layer is willing to take you on; the bookies will always be up for the scrap!

If you prefer multiple betting, then single wagers, then once again the bookies will come up trumps for you. From Yankees and Heinz to Lucky 15, 31 or even 63, the bookmaker will take your bet, whereas - for obvious reasons relating to payout size and risk - an exchange punter will not.

And how can we forget about those lovely bonuses and promotions on offer at sportsbooks? These are the lifeblood of many a punter who love to maximise their winnings and earn themselves some freebies. Exchanges simply don't follow the promo route, so you won't have the chance to get a little something for nothing.

To clarify, here is a list of advantages in betting with a bookmaker over an exchange:

  • Wider range of markets/events available
  • No need to worry about unmatched bets
  • Ante post markets readily available
  • Multiple betting options
  • Potentially lucrative bonuses, promotions and free bets

Advantages of Exchanges

Clearly, if you want to bet in a free market environment in which the bookmakers aren't cutting into your winnings with a protective profit margin, then the exchange is for you. Here you will find odds that are more respective of the selection's likelihood of happening, and who knows you might even find prices that are outstanding value. Why? Because people are occasionally unpredictable! Bookmakers run their affairs as a business, and individuals... well, they are capable of making bad decisions, shall we say.

One of the most outstanding features of exchanges are lay betting, which as we know is backing something not to happen. Betting with a bookmaker does not afford the punter this opportunity: we cannot artificially 'lay' Manchester United in a match with Arsenal by backing the Gunners and also the draw; mathematically it doesn't work. We could lay Man United in the Premier League title winner market by backing their leading rivals, but again our own profit margin is cut into. If you want a lay option, an exchange is the only way to go.

This will be of little interest to punters who place small bets once a week or so, but for serious bettors who have ambitions of turning over large sums of money the various trading strategies available within the exchanges are an attractive proposition. Back-to-lay is one such tactic, and involves backing a selection at a high price and then laying them at shorter odds following fluctuations. For example, a golfer who trades pre-tournament at 50/1 that leads with a round to play will see their odds tumble to 5/1 or less. Exchanges also present cover bet opportunities: backing a team to win and then laying them when they take the lead. There is plenty of literature surrounding exchange trading strategies out there, and these will certainly be of interest to more serious-minded punters.

Lest we forget, the prices on an exchange are set by punters just like yourself. What do we know about the human race? We are prone to bad decision-making and irrationality in times of stress and emotional anguish. One such occasion maybe if your favourite team are losing against their local rivals or in a 'must win' match. The consequence? We may place back or lay bets in-play at ridiculous prices, since we're not thinking straight. The person to benefit will be the individual who matches up the selection, so the exchanges offer an opportunity to bet match against an emotionally-led punter, rather than a cold, calculating bookmaker.

Again, this isn't something that will be of concern to those who wager a £5 a week, but for those who invest - and often win - large sums of money there is the constant risk that a bookmaker will limit the amount you are able to wager or even close your account altogether. There are numerous horror stories online of this occurring, and the bookies are able to legally do so with pretty much zero justification. The good news is that no limits are put in place by the exchanges; as long as somebody out there is able to match your bets, then you are golden.

Still unsure about the bookie vs exchange debate? Here's a recap of the plus points in favour of the exchanges:

  • Free market environment enables greater value betting
  • Lay betting option available
  • Unique strategies: back-to-lay, cover bets etc
  • 'Human' punters make more mistakes than the bookies
  • Bookmakers can limit bet size or close accounts; exchanges won't.

In conclusion

As we originally hypothesised, there is a lot to be said for running a bookmaker and exchange account concurrently; hopefully the bullet points listed above have convinced you of that!

A Question of Liquidity

Of course, the success of any betting exchange is in the liquidity of its markets. The more people that are betting, and thus having their selections matched, the more fluid the market and the richer the punting experience.

A number of the mainstream exchanges are still working on their traffic levels, and in truth you may find that some markets and events are still lacking horrifically in liquidity. If this is the case, the betting conditions are rather poor.

Using the example of the France vs Germany semi-final of Euro 2016, here was how the liquidity of the leading exchanges looked some 24 hours prior to kick off:

  • Betfair Exchange - £488,712 traded.
  • Smarkets - £268,833 traded.
  • BETDAQ - £38,459 traded.
  • Matchbook - £34,932 traded.

You might look at these numbers and assume that Betfair is the 'best' exchange, and in terms of getting a bet matched you are probably right. The volume of wagers is there, and as such your chances of getting the odds you want are greater.

But there are other things to consider. What is the nature of the punters at each exchange? Is the Betfair community made up of serious punters who run their activities like a business, and thus build their own unique profit margin in to their backs and lays? Will you be able to get the price you want at a smaller exchange, and thus miss out on an important bet? Much of the Matchbook audience is based outside of the UK; will their players be familiar with the minutiae of English sport? These are all worthy considerations.

A Look at the Most Popular Betting Exchanges

Each betting exchange is different in terms of style, design and ideology. But the basic principle is the same: bringing together backers and layers in a secure environment to place their bets.

Here's a look at the key players in the game:

Betfair

The godfather of the exchange world, Andrew Black developed Betfair himself on his laptop….and changed the face of sports betting forever.

More than a decade later, Betfair's Exchange remains the most widely used on the planet, and with liquidity in the most obscure markets and events that trend is likely to continue.

Betfair clearly values its Exchange customers, and rewards them occasionally with free bets and bonus cash (alongside the generous sign-up offer). That is always handy.

Their commission level remains set at 5%, which is higher than most of their competitors, but that can be offset by the likelihood of you being able to a) bet on the event you want to, and b) secure the kind of price that you believe to be fair and accurate.

You will find bets matched across football, tennis, golf, horse racing, basketball, baseball and so much more, with tens of millions of pounds traded each and every year. If you are new to exchange betting, Betfair is perhaps the best place to start.

Smarkets

This is an innovative exchange that is rapidly eating into Betfair's liquidity levels. With a 2% commission level, and a lavish welcome offer, it's not hard to see how Smarkets got their foot in the door, but they continue to exceed expectations with their offering.

Both their website and app are a doddle to use and offer a quick-fire betting experience - so you'll never have to miss out on those time sensitive wagers again - and the design is deliberately similar to that of a bookmaker to aid with new users' experiences.

The company was founded in 2008 by investment professionals, rather than sports enthusiasts, and that kind of sums up Smarkets. This is an exchange for serious punters rather than fair weather fans, and that ever-increasing volume of trading will ensure their enhanced appeal continues to grow at pace.

BETDAQ

BETDAQ was one of the first exchanges to the market in 2001, and so it is a surprise that their liquidity is not higher. But, having been purchased by Ladbrokes in 2013, it will be interesting to see how the company grows from here.

They claim to be the second largest exchange today with a 7% market share, although one glance at the liquidity on offer at Smarkets perhaps pooh-poohs that assertion. To try and entice new punters, they offer a £25 no lose bet as their welcome offer; which leaves the other exchanges in the shade somewhat.

It's an easy website to navigate and even the most cursory of inspections reveals their odds for major markets to be on a par if not more generous than Betfair et al. But a lack of traffic means that niche events and generally less popular markets are off limits here.

Ladbrokes: BETDAQ Integration

The hook up between Ladbrokes and BETDAQ means that existing Ladbrokes punters can dip their toe in the exchange waters without signing up for a new account. If you don't have a Ladbrokes sportsbook account, then why not take advantage of their uber-generous sign up offer?

It is the standard BETDAQ platform that has been remodelled slightly to fit into the Ladbrokes branding. But the basic mechanics are the same, and you will be able to match bets with punters who have logged in to the BETDAQ site or app, so liquidity is good.