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A bet exchange or p2p gambling web site is a fairly recent Internet phenomenon, and is used to describe a web site acting as a broker between parties for the placement of bets (gambling, in other words). The concept is similar to that of a stock exchange or a currency exchange, where in this case the commodity being traded is a bet, rather than a stock or UK website Flutter.com in May 2000 followed closely by UK-based Betfair in June 2000. Betfair more faithfully followed an exchange model and grew more quickly. Betfair soon merged with Flutter leaving Flutter shareholders very much in the minority. Flutter's customers were then transferred to Betfair's system. In late 2004, Betfair announced a rescue package that will see it absorb the customers of another bankrupt exchange, Sporting Options.
As of 2004, Betfair processes the majority of exchange betting transactions for non-US customers. However, Betfair blocks US users due to conflict with the US Wire Act. In response to this gap in the market for US users, BetBug was launched in late 2004. BetBug is a downloadable application that uses P2P file-sharing technology to connect users directly with one another to match bets, thereby avoiding a conflict with the Wire Act prohibition on sports books and centralized bet exchanges.
As with other types of exchanges, bet exchanges thrive on liquidity as customers have flocked to those websites where they are confident their bet can be paired up with a matching counterbet. The business model therefore favours the larger, more established operator (currently Betfair), whilst smaller competitors are caught in a vicious circle.
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. Commission is not usually charged on a net loss. Gamblers whose betting activities have traditionally been restricted by bookmakers (normally for winning too much money) have found these sites a boon since they are now able to place bets of a size unrestricted by the exchange - the only restriction is that one or more opposing customers needs to be willing match their bets. Moreover, the odds available on a betting exchange are usually better than those offered by bookmakers in spite of the commission charged.
"Laying" an outcome These exchanges also offer the opportunity to lay outcomes, which is to bet that a particular participant in an event will lose. This is the position bookmakers take when offering a bet for somebody to back that the participant will win.
For example, if someone thinks Team A will win a competition, he may wish to back that selection. A bookmaker on the offering the punter that bet would be laying that selection. The two parties will agree the backer's stake and the odds. If the team loses, the layer/bookmaker keeps the backer's stake. If the team wins, the layer will pay the backer winnings based on the odds agreed.
As every bet transacted requires a backer and a layer, and the betting exchange is not a party to the bets transacted on it, any betting exchange requires both backers and layers. Of course, the distinction is moot: A layer is always simply backing the opposite outcome. Laying Liverpool is the same as backing Arsenal to win or draw. Laying Prancing Steed is just the same as betting that one of all the other horses will win.
Controversy The fact that gamblers can now lay outcomes on the exchanges has caused tremendous criticism from traditional bookmakers with much of the anger coming from the UK's "Big Three" - Coral, Ladbrokes and William Hill. These firms argue that granting who they consider to be anonymous punters the ability to bet that an outcome will not happen is causing corruption in sports such as horse racing (since it is much easier to ensure a horse will lose a race, the bookmakers reason).
Exchanges such as Betfair counter that while corruption is possible on any gambling platform, the bookies' arguments are motivated not by concern for the integrity of sport but by commercial interests. Exchanges also assert that they are well aware of who their customers are and Betfair in particular has noted that they have signed numerous agreements with governing bodies of sport including the Jockey Club, with whom they insist they will co-operate with fully if the latter suspects corruption to have taken place.
In the summer of 2004, Betfair provided data to investigators, including the City of London Police which on September 1 lead to 16 arrests on charges related to race fixing. Among those arrested was champion jockey Kieren Fallon, whose case remains before the courts as of this writing.
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