Exchanges for Dummies

In the below article (Exchanges for Dummies) we’ll run through the principles required to make profit using Betting exchanges.

Exchanges for Dummies

Betting Exchanges for Dummies

For most, the year 2000 brought millennia celebrations, ‘Y2K’ worries about the transition of computer systems and the peak of the dot-com bubble. For bettors, it brought about the introduction of Betfair and Flutter, exchange markets which utilised a combination of the internet and margin-minimising potential to draw in customers wishing to extract more value from markets.

The problem traditional bookmakers faced is that although they price outcomes as accurately as possible, a large margin (the amount you would lose if backing each outcome in a market) is necessary to compensate for implicit risk. Different outcomes mean different revenue for the bookmaker, too. Exchanges mean that the entire risk is held by customers, aggregate profits and losses (for customers) are equal to the total amount traded. The company’s revenue is characterised by commission charged, which varies between exchanges.

Lay bets | Exchanges for Dummies

Not only do exchange markets allow for smaller margins, or better odds, bettors can also bet against an outcome using the ‘lay’ function. It can be argued that this is becoming redundant, as ‘double chance’ and handicap markets have grown exponentially in popularity. Yet the lay function allows for betting against more obscure, statistical and player-specific markets in addition to the obvious outright markets.

When ‘hedging’ is the objective, the option to lay provides a simple way to calculate whether a profit can be ensured. Bettors can opt to match an existing back/lay option – exchanges handily display the amount available. Alternatively, if a certain price is desired, a stake can be placed and may be matched at some point. Many exchanges allow the stake to remain as the match goes in-play, handy if you wish to back ‘overs’ on a goal line market but expect the price to rise in the early stages of the game.

Which exchange is best? | Exchanges for Dummies

Betfair and Betdaq

Betfair remains the most popular exchange provider, with the largest selection of markets on almost all events (perhaps the closest substitute for the bookmaker); and the greatest volumes of trading (helps ensure a match). Yet, most exchanges can compete with Betfair in terms of the volumes traded on mainstream markets such as outrights (1X2) and over/under goals (though not necessarily goal line).

A substantial advantage of alternative exchanges is the commission charged. Betfair charges 5% on all profits, implying that an outcome with odds of 2 (1/1), returns will actually be

equivalent to 1.95 (19/20) at a bookmaker. Betdaq, a subsidiary of Ladbrokes, also charges a 5% rate of commission. Both Betfair and Betdaq apply discounts to commission, using a points based system

Smarkets and Matchbook

Smarkets has gained a substantial following since being founded in 2008, its 2% commission on winnings means that the net margin for traders is very small. The markets and events available are limited, so those who bet on a variety of markets will struggle to use Smarkets in isolation. Though the volumes traded don’t compare to the industry giants, bettors can generally rely on a match being available at the same price as elsewhere, especially close to the start of an event or in-play (where available).

Matchbook is a platform which charges 1.15% commission in the UK and ROI; this is the lowest amount at face value, yet both winning and losing bets are charged. Losing bets are charged at 1.15% of either the stake or ex-ante potential winnings, whichever is smaller. Matchbook claim to be in the process of introducing a loyalty scheme to reduce commission for frequent traders. It replicates the Betfair blue/pink back/lay format and although some markets aren’t always well traded, mainstream outcomes compete well with Smarkets for volume.

“Don’t be loyal, Be Greedy”

Use them all!

As someone who trades a large range of markets and events, I find it useful to have accounts with each of these ‘big four’ betting exchanges. This allows maximisation of value and minimisation of commission. It is also worth noting that exchanges often offer introductory offers – though you should not use these to formulate your choice of vendor. It is also important to acknowledge tha although odds might appear higher on an exchange, it isn’t always the case after commission.

It is uncommon, but not unknown, to find bookmakers offering the same, or better, odds than exchanges. It’s unusual to find odds high enough to secure significant profits from arbitrage (arbitrage means instantaneous hedging is possible); yet, if nothing else, the presence of exchanges has stimulated many bookmakers to offer more competitive odds. My rule number one for betting: don’t be loyal, be greedy. Getting the best odds for each bet will make a difference to your long run returns.

Bet Hedging | Exchanges for Dummies

If you were to back and lay outcomes in a single market at different times, you might reach a point where a profit has been guaranteed on that market regardless of the outcome. This is often referred to as some variation of having a ‘green book’ or ‘greening out’ – alluding to the Betfair Exchange format of showing the profit/loss (in green/red) incurred according to each outcome.

Exchanges for Dummies

example of “Greening out”

Of course, greening out is made obvious (and satisfying) when each stake is made on the same exchange, but the same logic is applicable when the stakes are made with a variety of bookmakers and exchange markets, though some manual accounting might be required.

Tournaments

Tournaments, whether in league format or competitions involving knockout matches, create a fairly obvious opportunity for hedging over time. In tennis, if a player has a good set of potential fixtures that they are likely to win, bettors might want to back them at some arbitrary odds. As the competition progresses, so long as the player also progresses, their odds to win the tournament will fall to some extent.

As soon as that player reaches a fixture that the punter considers tricky, a lay bet can be used to either secure a fixed profit, to cover the stake such that they are guaranteed to at least break even, or to reduce potential losses whilst maintaining a gamble. An ‘underlay’ would be a lay stake which minimises losses such that the profit from that outcome winning still provides greater profit. An ‘overlay’ effectively reflects a changed mind – now profits will be higher if that outcome loses.

In-play

Hedging can occur over the course of a single event; if the individual expects Team A to start a football match well (better than is reflected by the market) but falter late on, assuming the odds shift sufficiently once a goal is scored, the bettor can take advantage of an early Team A goal to lock in profits once their odds shorten. If Team B are expected to come back into the game and have a strong chance of still winning, the individual might overlay Team A in the outright market, such that they break-even if Team A win or the game finishes as a draw; yet taking advantage of odds for Team B which are now relatively high – a large profit will be won should Team B now go on to win, yet risk is nullified.

Ex-ante

An interesting way of hedging a bet involves what might be considered insider trading. This isn’t meant in the dramatic sense – we aren’t talking about fixed games or speaking to managers/trainers – rather, knowing more about a league or team than the average punter or having sources with information that might not be reflected by the markets yet. This might be that the star striker has subtle injuring problems or the manager is considering changing the team, to name some footballing  examples.

Clearly, this doesn’t guarantee a particular outcome, or necessarily make it much more likely; but if you back something early and the odds shorten once that information is made public (e.g. teams announced), then you can secure profit by placing a lay bet on the same outcome, before the event has even started!

Risk applies

It’s important to recognise that by using a hedging strategy, you cannot ensure a profit to any extent. Only in arbitrage situations, where the matching is available instantaneously via two different markets, can guarantee profit and even that might be dependent on how quickly the arbitrageur can place two stakes and whether the two prices are constant over that time. In fact, hedging is possible without the use of exchange markets.

Bettors could simply back one outcome and then use another bookmaker to back the other outcome once odds have changed, either because of events within a match or information becoming available. For the tournament example, a player could easily be backed in each match – the appeal of tournament outrights is the stake doesn’t need to be as large to provide the same return, though a greater number of matches need to be won.

 

Credit: Jack Tinn (@TinnJk)

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