How do betting exchanges work?
Betting Exchanges take a very different approach to traditional bookmakers – which pit themselves against the bettor. While bookies use well-informed traders to set the odds for each market, exchanges provide a platform for users to be both the bookmaker by offering their own odds (laying) or the bettor (backing) by accepting odds from another exchange user.
1. Player B believes Chelsea will not beat Manchester United and offers odds of 4.00 for the Blues to win – risking £3 for every £1 staked against him.
2. Player A thinks Chelsea will beat Manchester United and bets £1 at 4.00
3. The exchange matches the two bets. Player A’s bet is matched with Player B’s
4. If Chelsea wins, Player A earns £3 profit (excluding commission). If Chelsea lose, Player B earns £1 profit (excluding commission).
Effieciency vs. liquidity
Studies suggest that this peer-to-peer exchange model results in near perfectly efficient markets, as the implied probability of an event (how often we would expect a given event to occur) matches the odds offered, with a negligible variance.
The benefit of the exchange disappears when you include the commission charged on your winnings
This means that if you followed a consistent betting system with a 50% probability – such as a coin toss – you would be all square in the long-run. The potential for turning a profit arises from factoring in the advantage of handicapping skills or privileged knowledge.
This may be true for mature markets, however opening markets are often less efficient, as the number of bettors and level of liquidity (amounts available to bet) is too low to correctly balance the market. That means exchanges punish (or reward) extremely early bettors, depending on whether they are backing or laying.
The hidden costs of betting exchanges
Exchange vs. Pinnacle
Irrespective of the issue of market efficiency, the benefit of the exchange disappears when you include the commission exchange’s charge on your winnings – up to 5%. Because this only affects your winnings, they aren’t factored into the odds, which make them appear better value than they actually are.
Assuming an average commission rate of 5%, your average bettor must now win at least 51.3% of their bets to achieve long-term profitability. That’s no competition for low commission bookmakers such as Pinnacle, which price many markets at just 2%, which translates to a 50.5% target for long term profitability.