Many people who are not familiar with online betting believe that a betting exchange is just the same as a bookmaker. However, this is not the case.
I’ve spent many years using the exchanges – and Betfair in particular – both as a value punter and as a trader. They are very different to bookies, and if you’re going to succeed as a trader you need to get your head around this before you start.
As betting exchange traders, we never, ever gamble. Instead, using the exchange, we are able to buy and sell other people’s bets, with the aim of securing a guaranteed profit no matter what the result of an event.
How does a betting exchange differ from a bookmaker?
A betting exchange is an internet based facility which allows peer to peer betting. What this means is that exchange customers always bet against each other rather than against the exchange themselves.
Imagine two friends in a pub who disagree on which team will win a football match and so they decide to have a bet.
Friend A thinks that the home team will win the match, Friend B thinks that the home team will not win the match. After some discussion, the two friends agree the odds at which they will bet, and how much money they wish to stake.
To make things official and to ensure that the loser will pay up, the friends ask an impartial third party to keep a record of the bet they have made and hold on to their stake money until the result of the match is known.
The third party will then pay the money to the winner after the match. This benefits both friends as it means that all bet money is offered up front and thus the payout to the winner is guaranteed.
The friends both agree that whoever wins the bet will pay the impartial third party a small commission for his services.
The role of this third party is fulfilled by betting exchanges on a much larger scale. Instead of betting just against friends, exchange users could be betting against any other user anywhere else in the world.
Compare this to the traditional bookmaker, and you can see that the two are very different animals.
When you bet with a bookmaker, you cannot negotiate and agree a price. You have the choice of accepting the price that the bookmaker offers, or not. There is no flexibility.
Furthermore, when you visit a bookmaker, you only have the option of betting that something will happen, it is always the bookmaker who bets that it will not.
In our example above, Friend A has managed to get better odds for his bet with Friend B that he would have got by placing the same bet with a bookmaker, because he was able to negotiate a fair price.
Likewise, Friend B was able to bet that something would not happen, i.e. that the home team would not win the football match. That means Friend B will win the bet if either the away team wins, or the match ends in a draw.
Therefore, both friends have gained benefits from their peer to peer betting exchange that they would not have been able to get if they’d bet with a bookmaker.
The betting exchange vs the stock exchange
To help understand exactly what a betting exchange is, it is helpful to compare it with the stock exchange rather than with a bookmaker.
The stock exchange is a regulated marketplace in which registered users can buy and sell shares in listed companies. Prices on the stock exchange aren’t set by the exchange themselves, they are determined by what users are prepared to pay.
Stock exchange users don’t know who they are buying and selling shares from, they simply see the current buy and sell prices for a share, and decide whether they want to accept them or not.
Similarly, the betting exchange is simply a marketplace in which users can buy and sell bets on listed betting markets. Prices or odds are not set by the exchange, they are determined by whatever odds users are prepared to offer and accept.
As a betting exchange user you won’t know who you are betting against, and the other person won’t know they are betting against you. All you would both know is that someone out there has a different opinion, the odds and stakes are agreed in advance, and the betting exchange will pay the winner once the result is confirmed.
People and organisations use the stock exchange in different ways. Some look only to buy shares with a view to keeping them and banking any dividends that they are due. Others try to profit by trading – predicting the direction in which share prices will move, and buying and selling at different prices.
Likewise, betting exchange users use the betting exchange in different ways. Some use the exchange simply to place outright bets, just as they would do with the bookmaker, but taking advantage of better odds.
Others try to predict which way the odds will move, and profit by trading – i.e. buying and selling the same bet at different prices. Therefore, just like bookmakers, traders effectively make a profit at the gamblers’ expense.