What's the difference between a betting exchange and a regular bookie?
November 9, 2016 7:39 AM   Subscribe

I'm a part time UK resident, very unfamiliar with the gambling world, trying to understand what a company like Betfair is and what it does.
posted by Morpeth to Law & Government (6 answers total)
Basically it matches bets between people rather than take the risk on its own book.
posted by laukf at 7:42 AM on November 9, 2016

laukf, thanks--it sounds like you know a lot. Problem is, I know absolutely nothing. For instance, I don't know what "its own book" means.
posted by Morpeth at 7:45 AM on November 9, 2016

Betfair has a regular bookie part and a betting exchange.

The regular bookie part is where you bet your money against Betfair's money.
So if the odds are 3/1 (4.0 in decimal), you can bet £1 and the bookie bets £3 and the winner keeps the whole amount (£4). The bookie makes money from customers losing their bets.

The betting exchange lets you put regular bets on (back bets) but you are betting against another customer who's put money down to make the opposite bet (called a lay bet).
The winner pays a 2% commission to Betfair (which is how they make money out of this, since they can't just keep your bet if you lose - your bet goes to the person who matched your back bet with their lay bet or visa versa).
It's a little complicated but the way it works is that you can say "hey I want to bet that X will happen" (a back bet) or "...bet that X will NOT happen" (a lay bet), then you put in how much you want to bet and the odds you want, and wait for someone to match your bet amount and odds.
In practice you usually just take the best odds offered, becuase if you're placing a back bet you want the highest odds offered by people who are putting down lay bets, and if you're placing a lay bet you want the lowest odds offered by people putting down back bets.
So you put down £1 at odds of 3/1 (decimal odds 4.0) and another customer puts down £3 at odds of 1/3 (decimal odds 1.33). If you win, you get £4 (4.0 x your £1), if they win they get £4 (1.33 x their £3). Either way the winner's profit is actually minus the 2% commission.
This is all good for the bookie who are not risking their own money as with regular customer/bookie bets, and just get a constant stream of commission payments.
posted by EndsOfInvention at 7:55 AM on November 9, 2016

But why would people want to place lay bets? Matched betting.
posted by EndsOfInvention at 7:55 AM on November 9, 2016

"But why would people want to place lay bets?"

EndsOfInvention: While matched bettors and arbitrageurs often rely on exchanges, there are many more reasons than that. Bookies use exchanges to hedge their liabilities too (see the trackside BetDAQ interfaces at the dogs and horses) as well as to set sharp prices.

Traders use exchanges to hedge their positions too (green up). It's no different to a stock exchange - before a market closes, a lay bet is equivalent to shorting an option and a back is the same as going long.

Mugs (at least the smarter ones), of course love to use exchanges in the same way they'd use a bookie as the prices are almost always better.

And, of course, don't forget that there's nothing special about a lay bet. In a two-way market it's equivalent to betting on the opposite outcome and in any market, it's mathematically the same as betting on all the other alternatives.
posted by turkeyphant at 8:52 AM on November 9, 2016 [2 favorites]

"For instance, I don't know what "its own book" means."

Morpeth: a bookie's book is simply the list of liabilities dependent upon the wagers it's accepted.

Consider a football match between Green Athletic (playing at home) and Meta Utd. In the "match odds" market there are only three possible outcomes (1x2) - a home win, an away win and a draw.

A book might price up the market as follows:

Green Athletic: 2.0 (meaning for every £10 bet, your returns are £20 giving a profit of £10)
Draw: 3.5
Meta Utd: 4.5

Say a bookie takes three wagers:

£100 on Green Athletic, £10 on Draw and £20 on Meta Utd. They've taken a total of £130 in bets. The amount they'd have to pay out (and the amount of profit produced) for each of the outcomes is as follows:

Green Athletic: 2.0 × £100 = £200 (profit = £130 - £200 = -£70)
Draw: 3.5 × £10 = £35 (profit = £130 - £35 = £95)
Meta Utd: 4.5 × £20 = £90 (profit = £130 - £90 = £40)

So, depending on the result, the different outcomes produce a different profit for the book (a home win actually produces a loss). This is what's meant by the bookie's "book". In practice, they might alter the prices (e.g. boosting draw price to 4.0) to encourage people to bet on options where they have too much profit to offset some of the potential losses.

In an exchange, there is no bookie with a potentially unbalanced book like this. When someone bets £100 at 2.0 on Green Athletic on Betfair, it's not Betfair taking the risk of having to pay out £200, it's another Betfair user. In this way, all an exchange does is match bettors with people willing to take the risk (lay the bet). So Betfair never puts itself in a position where it makes more money on a certain outcome or potentially even makes a loss. Instead, they simply charge users a commission on their profit in each market to guarantee a profit regardless of the outcome. This make the markets much more efficient than traditional bookies and also reduces the overround (vigorish).
posted by turkeyphant at 9:04 AM on November 9, 2016 [2 favorites]

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