The Betting Exchange Explained
The role of the betting exchange operator is to provide a well-regulated and safe environment for online and telephone betting.
Under the exchange model, revenue is generated by charging a commission on winnings. Betfair does not operate retail (or 'shopfront') premises, nor does it have an on-course presence like a TAB or traditional bookmaker. Services are exclusively provided via the internet and telephone.
A betting exchange is an online platform where punters with opposing views on an event bet at fixed prices, effectively between themselves at prices set by them. It operates in a manner resembling a stock market, in that a punter can either back (i.e. buy) or lay (i.e. sell) an outcome on a race or sporting event.
Betfair acts as the stakeholder of the funds (they are held in a ring-fenced account) and when the outcome of an event is determined, the winner is paid. All bets are pooled, so a customer may be betting against a number of others.
The identity of the opposing customer is not known to the punter, but it is known to Betfair. Revenue is generated by a commission of between 2.6% and 6.5% on a punter's net winnings for Australian and New Zealand racing; and between 2% and 5% on a punter's net winnings for all other markets.
Unlike a traditional bookmaker, Betfair doesn't take any risk. A bet is only accepted if it can be immediately 'matched' and the risk offset through a wager from another customer with a contrary view.
A punter must open an account with Betfair before placing a bet and must always have sufficient funds deposited to cover their maximum potential loss. Betfair validates the identities of all users by applying a 100-point identification check .
The use of technology allows Betfair to introduce higher standards of probity, consumer protection and integrity than is possible under cash-based systems.
The betting exchange model offers participants a number of advantages over traditional wagering products such as bookmakers and totalisator operators.
Because betting exchanges have lower costs, and carry no transactional risk to the operator, they are able to offer a "lower price" to the customer. This "price of wagering" is sometimes referred to as the "takeout rate" or margin.
In the case of Betfair's racing product offerings, this lower price makes racing more competitive with other low-margin forms of gambling such as poker machines, casinos, sports betting and online poker. The end result is that Betfair customers secure odds that are, on average, 20 per cent higher than those offered by competitors.