A betting exchange allows gamblers to bet against each other rather than against a bookmaker. This differentiates them from traditional betting shops and bookmakers as the betting exchange allows the user to act as the bookie (by setting the odds for an event) or the customer (who bets using the odds set by the other user).
Whereas traditional bookmakers accept the risk of going head-to-head in various bets with gamblers, the business of a betting exchange does not involve any risk. The exchange simply provides the technology that pairs gamblers together in order for bets to take place, and takes a commission from the net winnings that result.
We have made this short video to explain it...
The introduction of betting exchanges opened up a vastly expanded range of betting options for gamblers, simply because people are willing to back bets that risk-averse bookmakers would not. The technology of betting exchanges allows users to instantly discover the people and the odds they are looking for in order to place the bets they want.
Other key differences in using a betting exchange is the option of lay betting, or backing a selection to lose. If a betting exchange can find someone willing to put a bet on the selection you wish to put a lay bet on, then your bet can take place.
Crucially, the prices at a betting exchange are determined by a free market, rather than being set by a bookmaker.
The emergence of online betting exchanges has caused a seismic shift in the way people gamble all over the world, creating exciting opportunities for gamblers who could never have existed before new technology was utilised in this way.
The success of betting exchanges
Perhaps unsurprisingly, betting exchanges have proved to be hugely popular with gamblers who seek a broader range of betting options and a wider variety of odds.
While there are many who prefer the traditional, favourite/long-shot style of bookmaking, and are happy to bet against a bookie in an attempt to overcome the odds and win, a 'new breed' of gambler has grown as the popularity of betting exchanges has spread around the world.
The role of Betfair in the rise of betting exchanges has been crucial. Dubbed "the greatest success story in the history of gambling", given its meteoric rise in what seemed like an unfeasibly short space of time, Betfair is now one of the most visited, most talked about betting sites in the world.
By allowing online gamblers to place lay bets for the first time, Betfair caused ripples that were felt throughout the gambling world, with bookmakers everywhere being forced to re-assess the way they operate in order to respond to the new proposition that had been made available to their customers.
Seemingly everyone connected to the world of gambling has an opinion on the rise of Betfair and other betting exchanges, for the simple reason that they have reshaped the industry.
Whilst thousands upon thousands of gamblers and commentators alike have embraced the new landscape of betting that Betfair has helped to bring about, there are still those who cling to the memory of a time before online betting was bigger than high street betting, and the idea of a betting exchange seemed a far-flung prospect.
But the evolution of betting exchanges and the online betting industry as a whole continues apace.
The story of Andrew Black
The history of online betting exchanges centres around the launch and subsequent growth of Betfair, and any examination of why betting exchanges are so popular today requires a telling of the story of Andrew Black, the grandson of Conservative MP Sir Cyril Black, who was - believe it or not - a lifelong campaigner against gambling.
Andrew was just 35 at the time he set the wheels in motion to create Betfair, and his life to that point had paved an unlikely path to success.
After leaving Exeter University without the computer sciences degree he had set out to get, Black's life was struck by tragedy when his brother contracted a brain infection that meant he required care for the last two years of his life. Black, who admits that he didn't have a "proper job" until he was 26, dropped everything to care for his brother, and was left understandably grief-stricken by his loss.
His return to the world of work saw him take up a position as a caddy on golf's European Tour for a brief stint on the fairways, before a career in software development in the City started to put his flair for mathematics to good use.
It was during this time that Black began to feel a pull towards the stock market, but he was in no position to become a trader due to his financial position at the time, so he began betting on horses to satisfy his urge to gamble.
Early successes - including a £25,000 win from a £20 bet - piqued his interest and, after programming his own models for betting on sports, and playing high stakes bridge as a hobby, he went into buying and selling shares.
Though his career as a trader was cut short by a disagreement over business ethics, Black had discovered his calling in life: to combine his passion for a challenge and a bet with his formidable IT skills.
A secret GCHQ project saw Black working in isolation as an IT contractor, giving him ample space and time to incubate his ideas about his future career. It was during this time that he began to contemplate the many things he had seen and learned on the stock exchange, his professional gambling experiences, and his life as a builder and programmer of websites.
He hit upon an idea that he felt was too good not to pursue. All he needed was someone to help him begin it.
A chance meeting at the turn of the century
Having met numerous people and discussed his prototype idea for an online betting exchange with them, Black was getting nowhere. His maverick idea, when coupled with his unusual career history, struggled to strike a chord in people who saw it perhaps as being too new, or too risky.
But a chance meeting with Ed Wray at a garden party in the late 1990s changed everything.
Wray was the brother of one of Black's friends, and he was overheard discussing a bet he had won on a horse, that hadn't yielded very much money. When Black told Wray that, one day, bookmaking would change, and bets like his would be able to deliver much better value, the two began discussing Black's ideas.
Ed Wray was the partner Andrew Black needed in order to get Betfair off the ground. Ed had worked for one of the UK's largest financial institutions, JP Morgan, for eight years, climbing the ranks to become vice president in the debt capital markets and derivatives sector or the business.
Bringing financial acumen and a strong sense for business, Wray's expertise complemented Black's and soon the pair were on the hunt for financial backers for the idea.
Like so many great business leaders before them, Black and Wray had to endure a difficult period of struggle and frustration in order to get it off the ground. When financial backing for the project was not immediately forthcoming, doubt crept in, and the pair questioned each other and themselves as they assessed the risk they were taking with their lives.
But they persevered, and a series of presentations to banks secured them the backing they needed in order to launch Betfair on June 9th, 2000 - the day before the biggest racing event of the year, Derby day.
Rather than quietly launch the new site, or pursue traditional marketing avenues, Black and Wray made the decision to employ guerrilla-marketing tactics, and paraded a coffin through the streets alongside the slogan 'death of the bookmaker'.
The reaction was muted, and the £30,000 that Betfair made in its first week wasn't the overwhelming return that they might have hoped to report to their investors.
But the ball was rolling, and soon it became part of a merger with another start-up that brought a huge influx of customers to the site. Betfair was the betting site that people had been looking for, and before long Black and Wray were winning awards in praise of the entrepreneurial instincts that helped them push the idea through to fruition.
How the betting exchange works
The history of the betting market had been built around the 'favourite/long-shot' bias. Bookmakers were traditionally risk averse, and they typically knew a lot more about the markets they offered than the punters betting on them.
But the betting exchange changed all that. For the first time, anyone wishing to place a bet could carefully identify misperceptions of probability, and then benefit by removing or mitigating those misperceptions.
In simple terms, the betting exchange offered betting without bookies. Rather than being limited to the odds offered by bookmakers, and being limited to making only 'place bets' that backed a winner of an event, betting exchanges allowed punters to go head-to-head against each other and create their own markets.
The launch of the exchange meant that, for the first time, if you could find someone willing to bet against something that you were willing to back, then the exchange facilitated the market and allowed your bet to take place.
For over 15 years, customers have been doing just that. Week in, week out, across all manner of sporting events, visitors to online betting exchanges have been posting their own odds and the amount of money they are willing to accept in wagers. Other customers then bet on the market at the posted price, and the bets are matched.
Betfair brought a refreshing change from traditional bookmakers, which often left customers feeling as though their chances of success were low, and they were betting against a giant, faceless fountain of knowledge that could not be defeated.
The Betfair forum was testament to the vibrant culture that quickly sprung up around the site. Customers experienced a spirit of camaraderie, which only grew stronger when some traditional bookmakers spoke out against the rise of Betfair.
When any industry is shaken up by a dazzling new idea, there is bound to be a reaction. When that industry is as large and widespread as the betting industry is, the reaction is like an earthquake.
From its very earliest days, betting exchanges have been met with questions and doubts, mainly from bookmakers who aren't able to offer a competitive range of betting options and flexibility to their customers since the likes of Betfair arrived on the scene.
Betfair has always dealt with these questions in an open, transparent way, in keeping with the business approach that has underpinned Andrew Black's work from the beginning. It was his vision to create a betting website that brought more fairness to customers, and communicating openly and honestly has always been a key part of the ethos.
As well as bringing this openness and the sharing of ideas to the betting industry, Betfair contributes to fairness through a system called Bet Monitor.
With more than six billion transactions taking place each year on Betfair, sophisticated technology is required to ensure that everything that takes place on the site is above board and in line with gambling industry regulations.
To detect instances where wagers might have been placed with an unfair advantage, Betfair employs more than 400 people in its software development department, carrying out intensive work to continuously improve the integrity of its systems and security protocols.
Betfair has created integrity memorandums with sporting organisations, so that information about the betting exchange is freely available to those who need to access it. It is this open and transparent approach that enables Betfair to best protect its customers, and it is that protection that has made it one of the most popular, successful betting sites in history.
Going from strength to strength
After their first meeting in 1998, Andrew Black (whose nickname is 'Bert' after one of his schoolteachers decided to shorten his name, somewhat inexplicably!) and Ed Wray formed The Sporting Exchange Limited in 1999, and then launched Betfair in 2000. The very first market on Betfair was The Epsom Oaks, and it was won by Love Divine.
In 2001, Betfair merged with Flutter.com to bring the power of the betting exchange to a wider audience, and a year later the company was thriving. Bert and Ed were named the Ernst and Young Entrepreneurs of the Year in 2002, and a move to the company's new offices in Hammersmith, London, was coupled with a lucrative shirt sponsorship deal with Fulham Football Club in the Premier League.
Betfair was finally on the map in a big way, and the popularity of the site began to spread its reputation around the world. In 2003, Betfair won the Queen's Award for Enterprise on the recommendation of the Prime Minister, and as gamblers around the world sought the freedom and fairness that Betfair had brought to the UK, the Betfair website was translated into German, Danish, Chinese, Finnish, Norwegian, Italian, Greek, and Swedish.
Maintaining its commitment to customer protection, Betfair also signed a training initiative with Gamcare - the charity that works hard to promote responsible gambling and identifies areas where people might fall into difficulty.
By 2006, Betfair's betting exchange was operating in 18 countries across the world, including Australia, France, Bulgaria and the Czech Republic, and sponsorship of events like the St Leger and the Grand National helped the site to become one of the most recognised names in sports betting.
Having hit the milestone of more than three million customers by 2010, Betfair listed on the London stock exchange, in a move hailed as "an important landmark" by Ed Wray.
Since then, the site's success has continued throughout the emergence of mobile betting technology, with more than £1 billion of bets placed on Betfair mobile in 2011 alone.
The final piece of the jigsaw was slotted into place in 2013, when Betfair obtained its first gaming license in the USA, and launched its first sportsbook, giving customers the option to bet in the traditional way as well as via the hugely popular betting exchange, which changed the betting world for good.
Betting exchanges today
UK Government statistics in 2011 showed that betting exchanges yielded one fifth of the gross gambling yield in the country. Since then, betting exchanges have become better understood by gambling communities on the web, and a wealth of resources now exists for anyone wishing to try their hand at a betting exchange to utilise.
Betting exchanges are becoming an increasingly integral part of the global gambling landscape, in many cases offering customers much better odds, more transparency, and an experience that feels intuitively fairer.
Mobile gambling apps have only added to the appeal of the betting exchange, by delivering updates on available markets and odds directly to people's pockets, making it easier than ever to take advantage of the features of betting exchanges.
Still a relatively new development in the betting industry as a whole, online betting exchanges will continue to be the subject of some discussion and debate for a few years yet.
But one thing is clear, online betting exchanges are here to stay.