One of key attractions of the Exchange is that odds are often better than traditional bookmakers especially so on outsiders compared to favourites. To understand that, we need to go into the mechanics of bookmaking.

What's an overround?

On a liquid Exchange market, the 'overround' is generally around 102%. Let's remind ourselves of what that means.

A 'perfect market' would operate at 100%. So, if it was Nadal v Federer and the two couldn't be split, they'd both be available at 2.01/1. A liquid market that wasn't quite 'perfect' would operate at around 102%. So, in this case Nadal might be 1.9210/11 and Federer 2.01/1.

As an example, a fixed odds bookmaker might offer a market with an overround of 110%. So, they'd make Nadal 1.654/6 and Federer 2.01/1. Or they might make Nadal 1.784/5 and Federer 1.855/6, which would also be a market with an over-round of 110%.

The percentage after 100 is the house's margin or to put it in simpler terms, how 'unfair' the market is. The more over 100% the market is, the more unfair it is. You can always see what the market overround is on a Betfair market. It's the number expressed as a percentage, just to the left of the back price. Fixed odds bookmakers don't tell you what it is because it's not in their interest to do so.

Laying a book

Let's say Betfair has just put up an (as yet unpriced) market on a six-horse race in two days' time at Wolverhampton. A fixed-odds bookie (let's call them BigBoybet or BBB) is laying the following prices on a market with an over-round of 110%:

Horse & Odds
Red - 3.02/1
Blue - 3.55/2
Black - 4.57/2
Purple - 8.07/1
Brown - 9.517/2
Yellow - 41.040/1

A Betfair customer (let's call him Tony the Trader or TTT) wants to replicate the market on the Exchange but is aware they can't offer an over-round of 110% or else no-one will take his prices. So TTT decides to run it at 102%. Why not 100%? Because if he did, he wouldn't make a profit.

A typical Betfair version of the race's market would see the runners priced up as follows to make up an 102% book. Let's call it Example 1:

Horse & Odds
Red - 3.185/40
Blue - 3.613/5
Black - 4.67/2
Purple - 9.08/1
Brown - 12.523/2
Yellow - 50.049/1

To get to that 102% figure, TTT's book as a whole needs to be more generous (102% plays 110%) than what BBB were offering but that could be all the runners being slightly bigger (as is the case here) or just one of them being bigger.

If TTT offered Black at 8.07/1 rather than the 4.57/2 BBB was offering and kept all the other prices the same as BBB (example 2), TTT would have close to an 102% book. Or if TTT offered the same book as BBB and made Red 2.915/8 rather than 2.01/1, (example 3), it would also be running at 102%.

In other words, it's the sum of all the different odds that determine the overround. But favourites take up a bigger percentage of the book. Just slightly lengthening the price on a warm or hot favourite (say from odds of 2.01/1 to 2.56/4) will have a big impact on the overround, whereas easing the price on an outsider (say from 40 to 42) will have very little impact at all.

So why are outsiders better value on Betfair?

Let's go back to the original question: why do you get more value on outsiders than favourites?

The answer is that TTT and other Betfair market-makers are wary about being too generous when laying favourites.

If using example three above, TTT offered 2.915/8 about Red when all the fixed odds bookmakers were offering 2.01/1, that price would stick out like a sore thumb and that 2.915/8 would be snapped up in no time.

Because TTT's odds were no better than what everyone else was offering on all the other runners bar Red, (remember TTT left all the other prices the same and just made Red bigger), that might be as much business as his market would see. TTT would then be hoping Red didn't come good rather than being in a position where he'd win on all outcomes, which of course is the whole point of laying a book.

Whether it's on Betfair or anywhere else, backers tend to prefer to side with favourites. After all, favourites are so-called, because the money is going on them. Value-seeking punters might be savvy enough to know that the value on a market is a 30.029/1 chance that should be 20.019/1; but your average punter may just decide they prefer to go with the 2.56/4 chance, because they have a far greater chance of getting a payout.

So when getting to that magic 102% number, layers are far more comfortable making the 15.014/1 chance available at 20.019/1 than the 2.56/4 chance available at 2.915/8.

By definition, the 30.029/1 outsider has far less of a chance of winning and also if the 30.029/1 chance did win, the layer still would have seen plenty of money for the 2.56/4 chance and other shorter-priced runners.