Betting Exchanges Explained

Betting exchanges were first launched as “peer-to-peer betting”, the idea being that rather than use a middle man – the bookmaker – who takes a cut, they would connect everyday people who wanted to make bets; for example, allowing someone in London who thinks Arsenal will win the Premier League to bet against someone from Manchester who thinks that Arsenal won’t win the league.

The betting exchange is effectively an entity that links these people together and holds the money until the outcome has been decided. The betting exchange facilitates the bet but because they have no risk involved they are able to take a much smaller cut – in the form of a commission – than the bookmaker would. Using this model both people placing the two sides of the bet can, theoretically, get better odds than they would get anywhere else.

History of Betting Exchanges

flutter.com screentshot
Flutter.com Screenshot - via mess.net

Flutter.com was the first betting exchange ever, launched in May 2000 in the UK, with Betfair coming the following month. Flutter was originally marketed as “peer-to-peer” with Betfair calling itself “open-market betting” but both eventually became known as betting exchanges. The two merged not long after with Flutter ceasing to exist and since then Betfair has been hugely dominant in the market despite the attempts of several other betting exchanges.

Betfair has around 90% of the market share with Irish-launched Betdaq – sold to Ladbrokes in 2013 – the only serious contender with around 7% of the betting exchange market. Betdaq will have some serious financial backing under Ladbrokes’ ownership and it will be interesting to see how they go about trying to grow but for the time being it seems likely Betfair will remain number one.

How Do Betting Exchanges Work?

You can either back or lay at an exchange, meaning you can either make a bet as you would normally or you can lay a bet, acting as the bookmaker. The former requires you to place funds equivalent to your stake with the exchange, whilst the latter requires you to cover the liability of the other person’s bet should they win. Thus, if you lay £10 (like accepting a bet of £10 from someone else) at odds of 3.00 (both Betfair and Betdaq use decimal rather than fractional betting odds) then you need £20 to cover your liability.

Betfair screenshot showing back and lay

When you go to place a back or lay wager you will see the back odds in blue and lay in pink (at Betfair) and underneath you will see the amount of money that is currently available. Because a betting exchange is linking up people on opposite sides of a bet you can only place your wager if there is someone willing to take the other side. Alternatively, if there is nobody currently available to match your bet with, or not at odds you deem suitable, you can put up an offer. If the current best odds to back on 2.00 you could put an offer of 2.10 and that will be shown on the exchange as money available to lay should someone be happy to lay at 2.10.

Commission

When using betting exchanges, you are going to need to pay a commission on your bets that goes direct to the exchanges. This is essentially their business model and how they make money as with the exchange you are betting against someone rather than betting against a bookmaker. 

The process is pretty simple. The exchange will take a percentage of the total amount that you win from your bet. For the most part, if your bet loses, the exchanges will not charge a commission, although this isn’t always the case, as we will discuss a little later.

For example, let’s say you stake a £10 bet at odds of 10.00 and that bet wins. Your returns will then be £100. The commission for this bet is set at 5%, so they will take £5 from you, leaving your total returns as that of £95. 

It’s worth noting that whilst you won’t pay commission for losing bets, the exchanges are still going to be taking money, but instead from the person who you have matched your bet with. It may seem from the outside that they disregard bets that you win, but if you think about, on an exchange, for every single bet, someone will win, whether they have backed or layed the bet. Commission charges are the same for both back and lay winnings as well. 

What’s a Good Rate?

Ideally you want to be looking to get as low as possible as you want to pay the betting exchange (which is essentially what commission is) as little as possible. A flat rate across the board is usually around 5%, but this number can be as high as 10% and even as low as 1.5%. 

If you’re betting a large volume of bets, then commission is definitely something that you need to consider. Professional bettors can place hundreds of bets every day and their return on investment doesn’t need to be that high to make a good profit. So, a difference of say between 3% in commission can be huge. Let’s run through some real-world numbers:

Let’s say a professional better places 50 bets in a single day with an average stake of £100, which would be about right for most on the exchanges. This means their total outlay for the day would be £5,000. 

Let’s also assume that the bettors average daily return on investment is 10%. This means that they would be making £500 per day. So, their yearly income would be: £500 x 365 = £182,500 P/A. Not bad, right?

Below we’ve formed a table to show you the amount of money they would lose on with different commission rates:

Commission Rate

Cost of Commission

Adjusted Pay

1%

£1,825

£180,675

2%

£3,650

£178,850

3%

£5,475

£177,025

5%

£9,125

£173,375

7.5%

£13,387.50

£169,112.50

10%

£18,250

£164,250

As you can see from the table, the numbers soon start to stack up. By simply digging out a betting exchange that offers 1% commission on bets, comparted with 10% commission on bets, this punter is going to save £16,425 per year for placing the exact same bets. 

In order to answer the original question, a “good” rate is simply the one that is the lowest you can find for the bets that you place. Now, not all players are able to obtain the exact same commission rates, which can be a factor of the country they are in and the amount that they bet. For the player from the example above, their rates are likely going to be low as they are still going to make the exchange a high commission each year and will entice them to bet with that exchange. 

Discounted Rates

Nearly all betting exchanges will be able to offer up some form of discounted commission rates based on the amount that you wager. They are likely going to apply them to points, with the more your bet, the more points you earn and in turn, the more discount you can get. It’s well worth keeping an eye on these offers if you are a high-volume player.

Exchanges that Charge for Losses

We stated earlier that there are some, albeit few, bookmakers that will charge commission for both wins and losses, so essentially for every bet you place. They often lure you in with a low commission rate from the off, which many think will apply only to winning bets. This is not the case.

The bookmaker’s low rates will be applied to both bets, which now makes them much less desirable. They will take money from any winning bets as a percentage of the winnings and also from losing bets, as a percentage of the stake. 

These are bookies that you want to avoid as long term, they will work out poor value due to the fact you are indeed paying commission more often on your bets. 

Market Base Rate

The market base rate is something that you will also need to consider when using the exchanges. These are rates of commission that are essentially based on where you live in the world. The rates can fluctuate quite a lot with one of the biggest exchanges starting from a base of 5% ranging up to 7.5%. May not seem massive, but for the punter in the example above, this would cost them over £4,000 a year. 

Unfortunately, there isn’t much you can do when it comes to these rates. But, not all exchanges offer the same rates for each market. So, if you’re from Croatia for example, one exchange may offer you 5% and a different may offer you 10%. 

The moral is to shop around and find as good as market base price that you can for the country that you’re based in.

How the Odds Compare

When the exchanges were starting to take off around mid-late 2000’s, there was often a marketing live that you get around 20% better odds when using the exchange to traditional bookmakers. This was and still is a little misleading, but it is fair to assume that on average you will get a better price when betting on an exchange as compared to that of the bookmaker. 

Example - Brazil v Mexico Football Match

The best way to look at it is with some real-world examples. The first one is an upcoming football match between Brazil and Mexico. 

Betfair Exchange:

Brazil Mexico Odds

Betfair Sportsbook:

Brazil Mexico Match Odds

Comparison of Bookie Odds:

Brazil Mexico Odds

As you can see, there is very little in the prices on offer when comparing Betfair’s sportsbook to their exchange. But, they are better priced on the exchange for both the Brazil win and Mexico win, with the draw betting the same price. So, how does this compare across the board? 

Well, Betfair’s betting exchange is still best priced across the industry for a Brazil and Mexico win, but you can get better prices for the draw, albeit slight. 

But, you do need to factor in that you will be paying commission on your win. Betfair are usually around the 5% mark, so if we adjust our winnings to reflect this we get the following:

  • Exchange: £10 on Brazil to win at 1.51 = £15.10 - £10 stake = £5.10 profit – 5% = £4.84 profit 
  • Sportsbook: £10 on Brazil to win at 1.47 = £14.70 - £10 stake = £4.70 profit 

So, in this example we would actually be better off using Betfair’s exchange over the sportsbook, even after commission. Interestingly though, if we took the best price from other bookies, we would actually be better off with the traditional bookmaker. 

What have we found? Well, there is no doubt that the exchanges have their place. The above example perhaps wasn’t the best outline for how it works, but it was a real-world example, so it shows how it can work. The bottom line is that even when using the exchanges you still need to shop around. 

But, the beauty of the exchange is that you are able to set the price you want to take and simply wait for it to match. If it does, you’re happy and if it doesn’t then you move onto the next one. 

Liquidity 

Liquidity is a term used for betting exchange that reflects the amount of money that you can bet a certain price. Each exchange will be different, and it will solely depend on the number of people wanting to bet on that market and more importantly, the amount of money they want to bet on the market. 

Whilst the term isn’t branded about as much with more traditional bookies, it does still apply. So, a bookmaker might have the maximum bet amount for a certain market that they want to take, which is essentially the liquidity for that bet.

Liquidity will range from each exchange. The larger exchanges are going to get more money through the doors and essentially, a higher liquidity than that of smaller exchanges. It can be vital from a punters perspective as there might not be enough money to place at the odds and stake that they want, meaning they need to take lower odds than those with high ranges of liquidity.

Below we have listed a market from the Brazil v Mexico match from three exchanges in that of Betfair, Ladbrokes and Smarkets. 

Betfair

Betfair Exchange

Ladbrokes

Ladbrokes Exchange

Smarkets

Smarkets Exchange

The wager amount that you see below each price is essentially the amount of money that is available to take at those odds. For example, in the Betfair price for Brazil to win, there is currently £25,936 at odds of 1.50. Interestingly at Ladbrokes, there is no money at all for this price, with the best price being 1.49 with £4,425. At Smarkets you can get odds of 1.50 with £21,294. 

If we were to compare the prices that you can get for each, Betfair has £16,781 at odds of 1.49 and Smarkets has £6,281, both more than Ladbrokes’ £4,425. So, if you were wanting to place £10,000 at odds 1.49 for Brazil to win then only Betfair would be able to accommodate your bet and to place the same stake at both Smarkets and Ladbrokes, you would need to take some of your wager at lower odds.

So, to conclude, Betfair has a higher liquidity than that of Ladbrokes and Smarkets (combined) for this bet. In a market like the one above, for the majority of punters the numbers are going to be high, so plenty of liquidity to get decent odds. But, as you work down into smaller markers and bets, the changes really start to become apparent. 

Maker v Taker

One of the keys to being successful when using the betting exchange is knowing when to make and when to take the odds. Each punter will have their own view on what price they think offers value, which is essentially what it all comes down to. Whether you decide to make (lay) or take (back) the price is important to work out. 

The most common situation is that the maker will be able to have better odds as it is they who are setting the line for the bet. This means that they are in control of the price that they want to take. The flip side to that is the price might not always be fulfilled. So, whilst you are settling a price of 1.90, if others are trading that same bet at 2.00, then punters are obviously going to take the higher price. 

As a market taker, you are in control of the price that you want to take. It’s pretty simple really, if the odds are right, you take the price, if they aren’t you wait it out. 

In the end, it can all get quite subjective. The odds that you see from traditional bookmakers will reflect this as they are never the same for each market or even bet, across the board. This shows that the price they want, often based on the bets that have come in, isn’t always the price that they are going to offer. The key to success for these bets will determine whether punters will be successful in the betting exchange markets. 

Exchanges

As with all forms of betting these days, there are numerous betting exchanges that you can choose from. Some are better than others, but below we have listed some of the better companies to work with:

Betfair

Betfair's Exchange

Betfair are by far the biggest and probably the best betting exchange in the industry at the minute. They were formed in 2000 and with it were one of the first into the marketplace. The company has since been able to expand to that of traditional bookmaking as well, making it a great all-rounder. 

The recent(ish) merger with Paddy Power in 2015 with a deal worth £5billion now makes the company the largest online gambling business in the world. The merger, in truth, has changed very little from the outside looking in, but there is no doubt that the added revenue and player base has only extended their arm within the industry.

When it comes to liquidity, no betting exchange can really get near them. The example that we used above for the Brazil v Mexico game highlights this better than we can and the facts are there on the table. The increased liquidity also means that they are able to offer more markets and a wide range of bets to place for punters compared to the competition. 

Commission is worked out on a market base rate, which is dependent on where you live in the world. They range from a flat 5% fee, to 6% and 7% respectively. It is possible to get reduce commission rates through their loyalty scheme and as you earn more points when you bet, this commission rate can almost be halved, offering up highly competitive rates for high volume punters. 

Betdaq/Ladbrokes

Betdaq's Exchange

Betdaq have been another of the longer running betting exchanges in the industry alongside Betfair. The company was actually formed in the same year, 2000, but they have had to play a very much second fiddle role to Betfair over the years.

In 2013, Ladbrokes bought the Betdaq brand in a deal worth around £25million. It was at the time a fairly small acquisition given some of the numbers floating around for other mergers, but nonetheless, allowed Ladbrokes a fast-track route into the betting exchange industry. 

Whilst they still run under separate brand names, the actual exchange is the same on both the Ladbrokes and Betdaq platforms. This means that the liquidity for Betdaq will be the same that you seen on Ladbrokes’ betting exchange and vice-versa. 

There is little doubt that the merger has been a good thing for Betdaq though and as stated, offered Ladbrokes a step into exchange betting. The liquidity is lower than that of Betfair, but it’s not too bad to be honest. The issues start to arise when you get to more niche markets or sports/games, but for mainstream betting, actually works out really well. 

The plus side to Betdaq and Ladbrokes is that they offer one of the lowest commission rates in the industry of just 2%. This is a flat rate as well, meaning that you don’t need to wager a certain amount to get this rate. It’s worth noting that even with their loyalty scheme, you can’t get a lower commission with Betfair than you can with Betdaq or Ladbrokes. 

Smarkets

Smarket's Exchange

Smarkets has been online since 2008 now and the company are based our of the UK, founded by Jason Trost and Hunter Morris. They’ve gone under the radar for several years, mainly down to the dominance of Betfair, but in more recent years have started to make a real stake within the industry.

The company have seen great success by consolidating the sports and markets that they have on site and instead really working on the core sports, such as football, tennis, golf and American sports. The liquidity of the site as a result has grown substantially and they have become a very impressive alternative to the bigger companies listed above.

What’s also good about Smarkets is that they too have include the 2% commission fee on profits made, which is one of the lowest structures that you can find. This, coupled with their impressive liquidity rates, has made them a more than viable alternative to Betfair in what is an increasingly competitive marketplace.

Matchbook

Matchbook's Exchange

Matchbook has been about since 2005 and for many years worked within the US and Canadian marketplace. The company struggled to be fair, but in 2011 were able to seek a substantial investment and from there have continued to grow, albeit slowly. 

In the same year the company took the decisions to withdraw from both the US and Canada, opting for a European Gambling license and now work within Europe, mainly concentrating on the UK market. One of the pros to this is that they still work with multi-currency accounts, meaning you can bet in GBP and USD, along with others, if you wish. 

The downside to the site is that they have a relatively small liquidity as compared to that of the other exchanges we have already mentioned. They also charge commission on both winning and losing back and lay bets, which again is something that only they do. However, the commission rates are low, set around 1.50%, which means it could actually even itself out over the long run if you are successful enough. 

Disadvantages

The betting exchange model is very strong but it does have some disadvantages over a traditional bookmaker.

  • Liquidity – If there is nobody willing to take your bet you will not be able to match your wager. With a bookmaker you know your bet will be allowed (subject to maximum bet restrictions).
  • Minimum Bet – The minimum bet is usually £2 whereas bookies often allow much smaller bets.
  • Smaller Odds Range – Exchanges usually limit odds to 1.01 to 1000, whilst bookies sometimes offer lower odds and often offer higher ones.
  • Credit – Exchanges do not (generally) take bets on credit, whilst some bookmakers do.
  • Accumulators – Exchanges are not really compatible with accumulators and many of the special bets that bookmakers offer and whilst the introduction of multiples at the exchanges has improved this you still have more options – and often better odds – for accumulators with a bookmaker.
  • Odds Change – Because the betting exchange is a free market the odds can sometimes change very quickly, much more so than at a bookmaker, meaning you sometimes have to be quick to get the best odds.

Advantages

Whilst that may seem like a lengthy list there are also many advantages to a betting exchange and they usually outweigh those negatives.

  • Better Odds – With no middle man the exchanges almost always offer better odds, even allowing for their commission. This is by far the most common reason that punters choose to use an exchange over a traditional bookmaker.
  • Lay as well as Back – The ability to lay bets is a huge advantage giving you more options and more fun.
  • Trade and Hedge – Laying allows you to trade positions, limit losses, hedge your bets and cash-out any profits.
  • In-Play Betting – Betting exchanges offer better in-play betting than anywhere else on the widest range of markets.
  • No Limits – Although bets are limited by liquidity (the money available on the other side of the bet) otherwise you can bet as much as you want without the bookmaker restricting you. In addition you will never be limited for winning, betting on an out of line price or anything else.

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