In a nutshell
The Betfair Exchange allows customers to bet against each other rather than a traditional bookmaker. By matching customers, rather than taking the risk itself, the Exchange provides the option to 'lay' - betting on something not to happen.
How does it work?
The Betfair Exchange is the world's largest sports betting exchange. It follows the model of a stock exchange, but replacing share trading with betting odds on events in the world of sport, politics and entertainment.
On any betting market, there are two sides of the bet. On one side, there are those who think an event will happen (backers) and on the other, those who think it won't happen (the layers).
Backers and layers get bets 'matched' as long as they agree on a price (the odds) that an event will or won't happen.
Betting against other customers removes the need for the margin that fixed-odds bookmakers incorporate into their prices and provides the opportunity for a more efficient marketplace, which is why you can often get better odds on the Betfair Exchange.
Instead, customers pay a small commission, but on winnings only.