Laptop ArrowsWhen betting exchanges first started to become popular in the late 1990’s, little did we know that it was going to revolutionise the way in which we can bet online. It’s probably fair to say that Betfair were the main driving force behind the concept, although there were and still are, other options in the industry.

The popularity of these types of sites has definitely shown how betting can be a very creative model and not one where you simply need to place a bet and wait. It’s allowed punters to increase winnings, limit losses and also become better punters as a result, and even though it’s not as widely available as traditional bookmakers, it can be just as, if not more beneficial.

What is a betting Exchange?

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A betting exchange is a Peer-2-Peer (P2P) betting platform that allows you both back and lay bets. The process means that you aren’t betting against a bookmaker and instead betting against another user of that betting exchange.

For example, when you go onto a traditional bookmaker or use their website you see a range of odds on screen. The odds will be the price that you can take for that result to come in. The bookmaker has set the odds and its they who you are backing against. So, if your bet wins, then you win money off the bookmaker. If your bet losses, then your stake will go to the bookmaker and they will win.

An exchange is technically removing the bookmaker and instead replacing it with another punter. So, you may want to back an outcome of a football match for example and to do this you need to find someone willing to take your bet. Once your bet has been placed if you win, you win money from the punter who laid the bet, if you lose then the punter who laid the bet wins your stake.

The exchange example could of course be flipped if you were looking to lay a bet. This means that you are offering a price instead of taking a price on a particular bet, in essence, working just as a traditional bookmaker would.

You may be wondering how betting exchange make money? Well, they do this by charging a small commission on every winning bet. We talk more about this later in this article.

Backing and Laying

The two main concepts for exchange betting comes in the form of backing and laying.

When you back a selection, you need that selection to win. When you lay a selection, you essentially need that selection to lose. The beauty of the exchange means that you are able to set your own price for either outcome. You then need to get that price matched by someone willing to take it for the bet to be live.

Let’s run through a quick example using Betfair’s betting exchange.

We’ve an upcoming football match between Newcastle United and Chelsea coming up. As you load up the page, this is what the page will look like the image below.

Betting Exchange Newcastle United v Chelsea Match Odds

These are the match odds for this game and include the home win, away win and the draw price. The blue column highlights the odds that you can take to back each result. These are currently the best prices that are available. As you can see, you can back Newcastle win the match at odds of 5.9.

Underneath the 5.9 you will see the amount of £1154. This is called the “liquidity” and is basically the maximum amount you can back at that price. Once this has gone at this price, then the odds will shorten, to 5.8, then 5.7 as you can see on the screen. We talk more about liquidity later in this article.

To back Newcastle at odds of 5.9, you simply click on the price and then it gets added into your betslip just as you would a normal bet with any other bookmaker. The same process occurs if you were to choose a Chelsea win or the draw.

Newcastle United v Chelsea Betting Exchange Match Odds

Once your bet has been made the screen will then show you your potential winnings and liability. So, after placing £10 on Newcastle to win, we would be set to make £49 profit if they do win and lose our £10 stake if either Chelsea win or the game finishes as a draw. Note, the £49 is reflective of the commission that Betfair takes from this bet, again more of which we talk about later.

The pink numbers at the lay odds and this is the price that you would lay or bet against the selection. You can see that this is always higher than the back price. To lay the bet, you simply click on the price and then enter from the betslip the amount that you want to stake.

So, let’s say that for this we want to lay Newcastle to win, meaning that need either a Chelsea win or a draw from this match. Our figures would now look like this:

Newcastle United v Chelsea Betting Exchange Match Odds

A successful lay would mean that we win £10 on either a Chelsea win or a draw. But, if Newcastle were to win then our liability would be higher, priced at -£50 given the odds on offer initially.

The lay process is essentially exactly how a bookmaker works. Remember, that you don’t have to set your lay price at what’s currently on offer. You can move as high as you like and simply wait for that price to be matched. Some might not be matched, whereas others might.

Maker v Taker

Financial Market Data

You may (or may not) have heard of the term maker-taker when it comes to financial markets and more specially, trading. The term is derived on the process of one person creating a market and another person then taking a piece of that market.

It’s also an action where it rewards the maker over the taker, usually in the form of reduced fees. Betting exchanges rely on makers to set lines and in turn, create a busier betting exchange which increase liquidity.

So, just to recap, the maker is the person who creates the betting market and, in our case, is the person laying the price. The taker is the person who takes their betting price and in our case is the person backing the bet. The rewards for the makers is that they pay less commission. If you look at the example above, there was no commission paid from the lay bet, but there was commission taken off for the back bet.

Understanding Commission

Percentages in Hand

We’ve briefly touched on commission in this article, but we wanted to explain exactly how it works.

As the betting exchange isn’t actually laying a bet like a traditional bookmaker would, the way that make their money is by taking a commission of each bet. The process is one that means that this is automatically removed from any winnings, so you don’t need to worry about having any hefty bills to pay or outstanding balances on your account when it comes to commission.

Commission is only paid on winning bets. So, if you placed a simple £10 bet on Newcastle to win in the example above and they failed to win, you wouldn’t have to pay any commission on this. In fact, this is one of the things that a lot of people get confused about, so it’s worth noting this early.

The amount of commission that you pay will depend on the betting exchange in question. The base rate that you can expect to pay on winning bets is 5%. We would state that anything higher than this is poor value and anything lower than this is good value.

The deduction of the commission rate will come from the total amount of winnings. For example:

£200 winnings x 5% commission rate = £10. Total winnings = £190

This would be a typical look a the amount of commission that you need to pay for winnings bets. Whilst the number seems quite small, it can actually play a huge role in some people winnings over the course of a year. For a professional bettor a 5% ROI, which is essentially what you are giving up in terms of commission, can be a massive sum of money, so it’s imperative that you look for the best deals.

Discount Rates

One of the best things that you can find when betting on any exchange is that of discounted commission rates. These rates are usually a reflection of the amount that you wager, kind of like a loyalty scheme. So, you might need to earn X amount of points to get a certain discount on commission bets.

At places like Betfair it’s not uncommon to see rates of up to 60% discounted on commissioned bets. This would then reduce the 5% commission down to just 2%, a huge saving over the long term. It’s one of those where the more you bet, the more you will be rewarded.

Returns at Different Rates

To give you an idea of how the commission rate can affect your returns we wanted to highlight some difference between rates and the total amount that was made over the course of the year.

We’re going to base out findings on a player that has made £100,000 over the course of the year. Remember, that in the UK there are no taxes to pay on gambling winnings, so this sum is after tax, which shouldn’t be underestimated.

Commission rate Commission paid Adjusted winning based on £100k
1% £1,000 £99,000
2% £2,000 £98,000
4% £4,000 £96,000
5% £5,000 £95,000
7% £7,000 £93,000
10% £10,000 £90,000

As you can see, the difference between 1% and 10% is pretty substantial and pays for a more than nice holiday every year just for shopping around for a good commission rate. Whilst the for the majority of smaller bettor’s commission won’t have a seemingly huge impact initially, if you add it over, the course of several year, then the money starts to tot up.

For example, let’s say that the above table was then expanded over 10 years. Some on a 2% rate over a 4% rate would have £20,000 more in addition, for something that they are able to control and simply takes a bit of research to find the best place to bet.

Commission Promotions

One of the ways that betting exchanges get people through the doors is by offering up promotions on commission rates. It’s a bit like a free bet offer, but instead you pay little to no commission for this.

It’s also worth noting that they sometimes will run these for existing accounts as well. It’s similar to how eBay run their “fee-free” weekends when you list something to sell there. Well, exchanges do exactly that where they might run no commission over the course of a weekend. Keep a look out for these as they can be highly lucrative and cause a big surge in betting on the site.

Liquidity and Why it Matters

Liquidity is one of the key terms to understand when it comes to betting exchanges. Basically, liquidity is the amount of money that is available to get on each individual bet. Or, the amount of that people have either backed or layed on a particular market.

Manchester United v Tottenham Hotspur Betting Exchange Match Odds

In the top right corner of the above picture you will see that there has been £418,601 matched on an upcoming Premier League match between Manchester United and Tottenham Hotspur. This is the total amount of bets that have been taken – backed or layed – for the game.

In the blue and the red columns and either side of these, you will see a monetary figure under the odds. This is the total amount that you can place at those specific odds. So, if you were wanting to back a Manchester United win at odds of 2.6, the most you could bet would be £4523 at this moment in time. So, once this has gone, the next best odds would then be 2.58, with £11,854 currently at that price.

It’s worth noting that the amount of liquidity for each price can still go up and down, just as they would with a traditional bookmaker.

The importance of liquidity mainly comes down to availability for certain bets. The less money that there is to bet on (liquidity) a particular game, the more erratic and often lower the odds will be for that market.

Betfair and Betdaq are two of the biggest when it comes to betting exchanges, but in fairness Betfair are a lot bigger than Betdaq. Let’s compare the above game at Betdaq at the same time as Betfair to give you a comparison of the two. Bear in mind that this is one of the bigger games that they will have all season and one of the most popular.

Manchester United v Tottenham Hotspur Betting Exchange Match Odds

The first thing to note is the overall amount matched, which is just £29,310. This is just 7% of the total market with Betfair, which is a staggering amount. Similar trends appear with the odds as well, with Betfair having slightly better odds for a Man United win, but the real change comes when you see the amounts that you can bet on each price. The liquidity on Betfair is much higher and as a result, makes for a much more solid betting experience than the erratic nature of Betdaq with low liquidity.

Who Has Better Odds, The Exchange or The Bookmaker?

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The age-old question of who has the better odds, a bookmaker of a betting exchange! The answer is one that will vary with each sport and each market that you bet on.

But, the beauty of the exchange is that you are able to just sit and wait for the price that you want. You just plough in your odds and wait for it to be matched. Of course, it might never drift that high or be matched and technically you can do that with a bookmaker, although you have no way of knowing which way the market is going with a bookmaker, but an exchange you can see trends.

The only way to really work it out is by testing, so that’s exactly what we will do. We are going to make this tough on the exchange in that for each bet we are going to take the industry best price from around 20 or so bookmakers and for the exchange we will be using Betfair.

We will look at 3 matches/races from 5 different sports to see how they get on. But, we also need to consider commission and Betfair’s is 5% as standard.

Football – Manchester United v Tottenham

Result Betfair Price Betfair price inc. commission Bookmaker price Winner
Man United win 2.60 2.47 2.6 Bookmaker
Tottenham win 3.05 2.89 3.10 Bookmaker
Draw 3.4 3.23 3.4 Bookmaker

Horse racing – 1:55 at Epsom, top 3 horses

Result Betfair Price Betfair Price inc. commission Bookmaker price Winner
Indian Viceroy 1.51 1.43 1.44 Bookmaker
Water Diviner 4.7 4.465 5 Bookmaker
Jean Valjean 9.2 8.74 9 Bookmaker

Tennis – Ramos Vinolas v Khachanov

Result Betfair Price Betfair Price inc. commission Bookmaker price Winner
Ramos – Vinolas 8.8 8.36 8 Exchange
Khachanov 1.11 1.05 1.14 Bookmaker

As you can see, it’s a strong showing from the bookmaker over the exchange. The biggest problem that the exchange has is the commission. They were equal or better the bookmaker price from 5 of the 7 bets here before commission which just goes to show how important it can be to get the best possible commission when using an exchange.

Having said that, given where their prices are and how close they have been compared to the best possible industry price from all the top bookmakers, we would state that this is a mightily impressive result for the exchange and if you were looking to use just one betting outlet for all your bets, somewhere like Betfair’s exchange could offer better value than any single bookmaker, even after commission.