What is a betting exchange?
A betting exchange is a platform where players bet against each other rather than against a bookmaker. The exchange itself does not set odds or take positions on the outcome of events. Instead, it provides a marketplace where one player can offer odds and another can accept them. The exchange earns revenue by charging a commission on the net winnings of each player.
This model is fundamentally different from the traditional bookmaker model. In the bookmaker model, the bookmaker sets the odds, accepts all wagers, and bears the risk of paying the winners. In the exchange model, every bet has two sides: a player who backs an option (bets that it will happen) and a player who lays that option (bets that it will not happen). The exchange merely matches these two sides.
Backing and laying
On a betting exchange, two types of actions are available:
Backing is equivalent to a standard bet: the player wagers that an option will win. If the option wins, the player receives the prize. If it loses, the player loses his stake. This is identical to placing a bet at a traditional bookmaker.
Laying is the opposite: the player wagers that an option will not win. The layer effectively takes the role of the bookmaker for that specific bet. If the option loses, the layer keeps the backer's stake. If the option wins, the layer must pay the backer's prize.
For example, suppose a player lays option A at a decimal odd of 3.00, accepting a back stake of ¤50 from another player. If option A loses, the layer keeps the ¤50. If option A wins, the layer must pay ¤50 · (3.00 − 1) = ¤100 to the backer. The layer's liability — the maximum amount he can lose — is ¤100.
The liability of a lay bet is:
Liability = back stake · (d − 1)
Where d is the decimal odd. This means that laying at high odds carries substantial risk: laying at an odd of 10.00 means the layer risks 9 times the backer's stake to win the backer's stake.
The order book
A betting exchange operates through an order book, similar to a financial exchange. Players submit orders specifying the option, the odd they want, and the amount. These orders are either matched immediately against existing opposing orders or placed in a queue waiting for a counterpart.
For each option, the exchange displays:
— The best available back odd (the highest odd at which a player can currently back).
— The best available lay odd (the lowest odd at which a player can currently lay).
— The amount of money available at each odd level.
The difference between the best back odd and the best lay odd is the spread. A narrow spread indicates a liquid market with many participants; a wide spread indicates an illiquid market.
For example, the order book for option A might show:
Best back odd: 2.90 (¤500 available)
Best lay odd: 2.94 (¤300 available)
A player who wants to back option A can do so immediately at 2.90. If he wants a better odd, he can place a back order at, say, 2.92 and wait for a layer to match it. Similarly, a player who wants to lay can do so at 2.94, or place a lay order at a lower odd and wait.
Commission
The exchange charges a commission on the net winnings of each bet. This commission replaces the bookmaker's margin as the exchange's source of revenue. Typical commission rates range from 2% to 5% of net winnings, depending on the exchange and the player's volume.
For example, if a player backs an option at 3.00 with a ¤100 stake and wins, his gross profit is ¤200. With a 5% commission, the exchange deducts ¤10, and the player's net profit is ¤190.
Commission is charged only on winning bets. If the player loses, no commission is charged. This means the effective cost to the player depends on his win rate: a player who wins frequently pays more total commission than one who wins rarely, but the commission on each individual win is a small fraction of the profit.
Because the exchange does not embed a margin in the odds themselves, exchange odds tend to be better (higher for backing, lower for laying) than the odds offered by traditional bookmakers on the same events. The total cost to the player — the effective margin — is the commission, which is often lower than the bookmaker's margin.
Advantages of exchanges
— Better odds: Because odds are set by market participants rather than by a bookmaker with an embedded margin, exchange odds are frequently better than bookmaker odds. The effective cost (commission) is often lower than the bookmaker's margin.
— Ability to lay: The option to lay — to bet against an outcome — provides flexibility that is not available at most traditional bookmakers. This enables strategies such as hedging, trading positions during an event, and profiting from options that the player believes are overpriced.
— No account restrictions: Exchanges generally do not limit or close the accounts of winning players, because winning players do not cost the exchange money. The exchange profits from commission regardless of which player wins. This is a significant advantage for sharp players who are routinely restricted by traditional bookmakers.
Disadvantages of exchanges
— Liquidity: Exchange markets are only as deep as the participation of their users. For major events in popular sports, liquidity is high and the available amounts at each odd level are large. For minor events, liquidity may be low, and a player may not be able to place a large bet without moving the odds against himself.
— Complexity: The order book model, the distinction between backing and laying, and the commission structure add complexity that does not exist at a traditional bookmaker.
— Commission on winnings: Although commission rates are low, they reduce the effective odds on every winning bet. A player must account for the commission when calculating expected value. The effective decimal odd after commission is:
d_eff = 1 + (d − 1) · (1 − c)
Where c is the commission rate. At an odd of 3.00 with 5% commission:
d_eff = 1 + (3.00 − 1) · (1 − .05) = 1 + 2.00 · .95 = 1 + 1.90 = 2.90
The effective odd is 2.90, not 3.00. This adjusted odd must be used in all expected value and Kelly criterion calculations.