Before the advent of the Exchange, betting was a two-way thing; your high-street bookmaker set the prices and for the punter it was either: back at those odds or leave it. Here's how Betfair changed all that.
Acting as bookmaker 101
In our beginners' section, you can read about laying a bet on the Exchange. The simple act of doing that - for example betting against Manchester City to win the Premier League - is already a case of acting as a bookmaker, albeit at the most basic possible level.
But there's nothing to stop you from laying more than one outcome. If for example, you think that going into the last day of a golf tournament, it's anyone's to win, you might be tempted to lay the three shortest-priced runners before the round gets under way and have the field (anyone but those three) onside.
The next level of market-making
The problem with this scenario is that you still have a liability on those three golfers. In other words, you're still gambling rather than 'bookmaking'.
You still have a red position on the three of them meaning the best way to wipe out that liability would be to back all of them in-play at larger odds than your early lays. All well and good, but what if you never have the chance? If you started out by laying Rory McIlroy at [2.5] and he got off to a flyer you simply wouldn't be able to back him at a bigger price.
The above scenario is what all bookmakers try to avoid: a good outcome on some runners and a bad one on others. The better way to ensure slow-and-steady guaranteed profits rather than the outcome determining whether you win or lose, is to actually price up the whole book.
Let's say it's the semi-finals of the men's singles at Wimbledon and the following players are still in it: Novak Djokovic, Roger Federer, Rafael Nadal and Nick Kyrgios.
In such a high-profile event, you don't need to bother trying to work out their respective odds for yourself. You might as well just look at what all the other bookies are offering and focus instead on your margin.
The other thing you don't want to be doing is getting too cute and getting caught out. For example, if Djokovic is a best price of [2.5] with everyone else, there's no need to be offering him at [3.0].
Building in your margin
Of course, for a bookmaker to make a profit an edge must be built into those prices, and that edge is called the 'overround', a margin built into each and every bet laid. The most obvious example would be the toss in cricket. If you want to bet that the captain will win the toss for England in the first Ashes Test, you can. But rather than offering you the even money that the most basic laws of maths say you should be getting, a bookie will give you about [1.9] on either team, if you're lucky.
Given they are offering the same [1.9] on Australia's captain winning it and you can see how that margin is secured. In this case the overround of the market is 105%. That 5% is what the bookie would expect to make as a profit on the market or to put it another way: the market is 'unfair' by 5%.
It's actually not quite as simple as that because if everyone only wanted to bet on England the bookie would still probably have a liability on that outcome; but that's the general principle.
So let's go back to the tennis. There's no point trying to secure a margin of 10% on a Wimbledon winner market at the semi-final stage because you're unlikely to get it. But you might be able to secure 5%.
You'd do that by taking the true odds of each player winning and removing 5% from the price of each one. Alternatively, you could take the even 'lazier' approach and just mirror the odds offered by another bookie on all four players and lay those odds on the Exchange.
Remember that it's not just a case of putting those odds up and laying each runner for the same amount. If you need help balancing the book, you might want to use trading tools such as BetAngel or Geeks Toys.
But don't forget the issue of liquidity, which in Exchange terms is the amount of money waiting to be matched on a market.
The bigger the sport and the event itself, the more interest there is in betting on it so a Premier League match or an IPL match would have huge liquidity (on the main markets at least) whereas a Swedish third division football match or a non-televised county cricket match would have a lot less.
The disadvantage of this reduced liquidity as a market-maker is that you might be able to lay some runners but not all. The advantage is that in the absence of more competitive odds, would-be backers may be prepared to take much worse odds than they would in a more liquid market. And that is obviously good news for you, the layer.