How betting exchanges work

By thewaltman, 12th Dec 2009 | Follow this author | RSS Feed | Short URL http://nut.bz/1mtgr8mg/
Posted in Wikinut>Gambling>Sports Betting>Betting Exchanges

Betting exchanges are one of the newest forms of betting. In fact they don't really offer a new type of betting, but rather an opportunity to bet directly with other people.

Betting exchanges explained

Betting exchange guide

Essentially, for years the only way to bet on sport or racing was with a bookmaker. The punter would back, or place the bet, and so the bookmaker would be the party that laid the bet.

The advent of the internet, and some observation of the way stock exchanges had computerised the buying and selling process, led to the concept of the betting exchange.

In this new model, the firm plays the part of the middleman and simply facilitates the process of forming a market and attracting buyers and sellers. In betting terms these are backers and layers, both of which are members of the public.

An example shows how simple the system is. If in the Wimbledon final, you thought that Andy Roddick was going to lose, in the past you would have to bet on Federer to win. Using an exchange, you'd be able to lay Roddick instead; that means that you are inviting other people to place a bet with you that Roddick will win.

Therefore, if Federer beats Roddick, you'll keep the stakes of anybody who bet with you. Conversely, if Roddick wins you need to pay out.

The betting exchange acts as a middleman, guaranteeing that all funds required are held. Therefore, a person staking £10 on a bet at 10/1 just needs to give the exchange £10. However, the person laying the bet has to commit £100 to the exchange as that is their liability on the bet.

There is therefore £110 held by the exchange, and this will be passed to the winning party. It would therefore yield a £10 profit for the layer (£110 minus their original £100) or a £100 profit for the backer (£100 minus their £10 stake).

At this point you may be wondering how an exchange makes any money. Well, again following the stock market model, the exchange charges a commission on transactions. The beauty of this is that regardless of the outcome of the event, the exchange will always take their commission and so can never lose money.

This means their profit is simply a function of their commission percentage and the volume of transactions.

Read our Horse racing glossary for explanations of some of the terminology used here, and see our Betting explained section for details of other types of betting.