Betting exchanges have emerged from the ability of the internet to link people together from all areas of the world and have revolutionised the betting and gambling markets.
In a betting exchange there is no bookie, punters bet with each other - 'person-to-person', and the betting exchanges like Betfair act as the middle man providing the medium for punters to trade with one another, taking a small commission on the net winnings.
Punters who use betting exchanges have the option to 'back' certain events, as more traditional online bookies usually do. They also have the option to 'lay' an event, effectively becoming the bookie themselves, by offering odds to someone else.
'Laying' an outcome is effectively 'backing' a selection not to win.
Betting Exchanges Explained
Here's an example of how betting exchanges work. Let's say that someone thinks Team A will win a competition, he may wish to back that selection. An online bookie offering the punter that bet would be laying that selection.
The two parties agree the backer's stake and odds. If Team A loses, the layer/bookie keeps the stake. If Team A wins, the layer pays the backer the winnings based on the odds agreed.
Another attraction that online betting exchanges like Betfair offers over traditional online bookies is that punters can 'lock in' profits when betting on an exchange.
For example if a punter backs an event early at odds of 10/1, but then nearer the start of the event the odds have shortened to 5/1, the punter can lay the bet at 5/1 guaranteeing a profit.
This all becomes even more interesting with the introduction of free bets!
Online betting exchanges make their money by charging a commission which is calculated as a percentage of net winnings for each customer on each event, or market.
Punters whose betting activities have been restricted by bookies (normally for winning too much) have found these sites a boon since they are now able to place bets of a size unrestricted by the exchange - as long as an opposing customer is willing to match their bet.
Plus betting exchange odds are usually 10-15% better than those offered by the bookies.
Betfair's Betting Exchange
When Betfair first came onto the scene back in April 2001, about £1m worth of bets were being matched each and every week, today that figure is more like £40-£50 million.
This is money that punters would usually be betting using fixed-odds online bookies and so concerns were raised over the legality of the exchanges by more traditional bookies.
Betfair's popularity can also be shown by the usage of their website. Betfair Exchange was recently the third most visited betting portal by UK internet users.
The main advantage of betting via an exchange is that the odds available are nearly always better than traditional high street betting shops and the online bookies.
Online punters have an advantage because they can see via odds comparison websites how odds for sporting events differ between online bookies and betting exchanges.
If you search for the best odds for a specific sports betting event on these type of sites you will usually find that the price being offered on betting exchanges is the most competitive.
Generally the best bookies work to an over round of about 110%, a simple example is an event where there is a 50-50 chance of either result occurring such as the toss of a coin, there is an evens chance that it will be heads and an evens chance that it will be tails.
Online bookies won't offer you evens on the event, but instead he will offer odds of 5/6, meaning for every 6 you stake you will win 5. This is how the bookie makes his money.
On a betting exchange like Betfair the odds on offer are very competitive, this is because there are no set profit margins as punters are betting with each other. There are however fees associated with betting exchanges which can even out the odds.