A betting exchange allows members to bet against each other rather than a bookmaker. Customers can offer odds to, or request odds from, fellow Betfair gamblers.
Where traditional bookmakers risk going head-to-head with gamblers on markets, a betting exchange takes on no risk at all. Instead, a betting exchange provides the platform for its customers to match bets against each other and takes a small commission on winnings.
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.
How does a Betting Exchange work?
The big difference with exchanges compared to bookmakers is they allow lay betting. This means backing a selection to lose rather than win.
Every bet placed on a betting exchange involves two bets really - one bet backing the selection to win, and a second bet backing the same selection to lose.
So if I want to place a £10 bet on a horse to win at 10/1 which returns a profit of £100, I need someone else to risk £100 at 1/10 to win £10.
This option to lay a bet makes it much easier for customers to guarantee a return if the odds shorten after they've placed their bet.
Where backing a horse with a bookmaker would require you to back every other horse in a race to "green up", on a betting exchange you can back your selection to lose after the price has shortened to lock in a profit.
Why use a Betting Exchange?
There are many benefits to using an exchange instead of a bookmaker.
A betting exchange provides greater choice for punters. Before, if a bookie wasn't willing to risk the odds or the stake you wanted, you simply couldn't have your bet. With an exchange, you only need to find another member willing to take on the risk, or in other words to lay your bet. Betting exchanges allow users to find odds and markets they want.
Second, value for bettors will generally be better on an exchange. Bookmakers, in order to make a profit, do not offer the "true" odds on a selection, but rather take a fraction off the odds of an event happening in order to make money.
On an exchange, the market isn't priced up by one person, but by hundreds or thousands of bets placed by others, and that means there is more pressure on layers to offer fairer prices, because if they don't, they risk not getting their bets matched.
Exchanges also allow greater flexibility for bettors to trade their positions on markets than traditional bookmakers.
Like the stock market, the value of a bet can go up or down. Imagine the team you've bet on is winning, but they've just had a player sent off. Are you still as confident in them now as at kick off?
On an exchange, you can lay them to get your stake back and possibly some profit.
How have betting exchanges changed betting?
Betting exchanges have been central to the online betting revolution.
Betfair was the first betting site to allow bettors to place lay bets, and that move re-shaped the sports betting industry. Many common features of online betting today would not exist without the betting exchange model.
For example, though taken for granted today, in-play betting is a result of exchanges allowing members to offer prices throughout events, rather than bookies ceasing bets when an event starts.
Another popular online betting feature is cash out, and Betfair is the home of the Cash Out because it is an exchange. Customers on Betfair always had the opportunity to cash out on bets placed to guarantee profit or manage a loss.
To make the process simpler for customers, Betfair added the Cash Out button. This places the lay side of a bet to ensure the same profit whatever the result of an event. Bookies now offer cash out features directly as a result of Betfair's innovative exchange model.
Betfair has also led in the mobile betting sphere, being the first online betting company to have their app available on the Apple store, and this commitment to mobile continues today. It's never been easier to place your bets on the exchange thanks to the lay exchange mobile apps, where you can easily navigate between markets, stream events live on your phone, or explore Betfair's virtual and casino games.
What do betting exchanges do to protect customers?
Betfair promotes the GambleAware.co.uk campaign, telling customers "When the Fun Stops, Stop", providing support and promoting the message that customers should bet responsibly and within defined limits.
Betfair has also signed a training initiative with Gamcare - a charity that works to promote responsible gambling and identifies areas where people might fall into difficulty.
How does Betfair help ensure bets are fair?
From the start, betting exchanges have been met with questions and doubts. Bookmakers, naturally, were wary because it undermined a monopoly of sorts on market-making and put pressure on their margins.
Questions of integrity have also been raised, as it is difficult to know who is laying a bet, meaning it could be someone involved in the event.
Betfair has always dealt with these questions in an open, transparent way, with fairness to customers, and communicating openly and honestly always a key part of the Exchange ethos.
To this end Betfair agreed deals with various sporting organisations, so that information about the betting exchange is available and can be used to investigations questionable results.
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 online.
Where did the idea of a betting exchange come from?
The history of online betting exchanges is the history of Betfair, its growth showing a path for other exchanges while reshaping the wider betting industry.
Andrew Black was 35 when he had the idea that became the Betfair Exchange, but his career did not follow a conventional route to online entrepreneurial success.
Having dropped out of a computer science degree, and enjoyed a stint as a caddy on the European Tour, a career in software development allowed Black to use his gift for mathematics productively.
Without the means to play the stock market seriously, Black began betting on horses with success, and this allowed him to build up enough cash to start trading in shares.
While working as an IT contractor for the UK security services, Black found he had plenty of time to develop his interests in markets and sports betting. Allied to his knowledge as a computer programmer, he formed the kernel of his betting exchange idea.
Black and Ed Wray, who worked in finance at JP Morgan, met by chance, and happened to start talking about the lack of value on horse racing markets. Black's interest in combining the stock market and sports betting came up, and the two began looking for backers for the exchange idea.
Betfair was launched on June 9, 2000 - the first Oaks of the new millenium.
Their guerrilla-marketing stunt - parading a coffin through the streets alongside the slogan 'death of the bookmaker' - brought in £30,000 in that first week, and soon, a merger with a start-up, Flutter.com, brought a huge influx of customers to their new site.
How did the Betfair Exchange grow?
The growth of the exchange showed they had hit on an excellent idea, with the two founders named the Ernst and Young Entrepreneurs of the Year in 2002, and agreeing a prominent sponsorship deal with Premier League side Fulham. A year later Betfair won the Queen's Award for Enterprise on the recommendation of the Prime Minister.
Betfair has expanded across Europe and the globe in languages including German, Russian, Danish, Chinese, Bulgarian, Finnish, Norwegian, Italian, Spanish, Greek, and Swedish.
Betfair was listed on the London Stock Exchange in 2010 and, in 2013, obtained its first gaming license in the USA, while also launching its sportsbook, giving customers the option to bet in the traditional way as well as via the exchange.
In 2015 Betfair merged with Paddy Power to form Paddy Power Betfair, bringing two of the most recognisable sports betting brands together in a deal that will define sports betting globally for years to come.
UK Government statistics have shown that betting exchanges yielded one fifth of the gross gambling yield in the country. Betting exchanges continue to be better understood by gambling communities around the world, and the growth of the industry generally only serves to help grow interest in betting exchanges.
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 betting exchange features.
A relatively new development in the betting industry as a whole, online betting exchanges will continue to be a source of innovation and change for years to come.
This article was update on January 19, 2018