The Betfair Exchange is an online betting exchange, a key component of making profit from matched bets.
The Betfair Exchange is the world’s largest betting exchange. It allows people from across the globe to place bets against each other. It allows people to become a bookmaker. In effect, to bet against sporting outcomes.
To explain what that means in real terms, let’s jump inside our betting exchange time machine and head back to Paris in July, 2016. The European Championship Final.
The dust is not yet settled on a breathtaking tournament. Portugal and France are set to battle it out for the trophy. And we’re back at the Stade de France, lapping up the atmosphere with 80,000 football fans.
You’ve never made a bet at a bookmakers. But you’re thinking about it. You’ve followed the tournament and you think you want to place a bet on Portugal to win.
But where will you find a bookie at the Stade de France? And can you speak French? You could log on to an online bookmakers and place a bet on Portugal.
But there are multiple betting options. Do you bet on Portugal to win in 90 minutes in a 1x2 bet?
(A non-patronising FYI - a 1x2 bet is a game where you can bet on either the home team to win , the away team to win  or the draw [x] over the course of the game’s 90 minutes.)
But France are at home. They will have a partisan crowd behind them. So you’re not sure. France might take them to extra time.
So what you actually want to do is place a bet against France to win in 90 minutes. This means that your bet will win so long as France don’t. So if Portugal win in 90 minutes or there’s a draw, you win your bet.
You can’t do that at a bookie’s. But you can at the Betfair Exchange.
Betfair is a betting exchange that allows punters - in the parlance of the betting industry - to place bets against each other.
One person might be betting on an outcome of a race or match (a Back Bet), while another punter will bet against that outcome (a lay bet).
In our example, one person is betting on Portugal to win; another is betting against them.
Betfair uses technology to connect those bets and match those bets together, removing the need for a traditional bookmaker.
This is the nuance of the Betfair Exchange.
Betfair was founded in 1998 and launched in 2000 by Andrew Black, a hedge fund manager, and Edward Wray, a trader on the London Stock Exchange.
To publicise its launch, Black and Wray set-up a false funeral procession through the streets of London. They proclaimed the event “the death of the bookie”.
To say it caused a stir is a gross understatement. The intense media coverage catapulted Betfair into the spotlight, where it stayed, fighting off its competitors to become the biggest betting exchange in the world.
Former CEO David Yu described the sheer scale and popularity of the Betting Exchange when he said the site generated "more transactions than all the European stock markets put together".
And you can see the similarity. Traders bet on stock. Betfair bets on sport.
In 2016 Betfair merged with Paddy Power, an Irish bookmaker with its own history of courting controversy. A year later the company had over four million customers and a turnover of £1.5bn.
Liability and the Betting Exchange
Which is all well and good and big congratulations to Betfair.
But you may ask “So how does the betting exchange work?” And, maybe more importantly, “How can I make it work for me?”
Let’s look again at our above example of Portugal v France.
You have decided you like Portugal. You’re not a fan of their overly defensive football, but you are impressed with their resoluteness. You think they might pip France.
So you want to place a lay bet against France.
All betting exchanges use colour coded systems to help differentiate between back bets and lay bets. At Betfair, all back bets are highlighted blue, while lay bets are coloured pink.
Say, for our example, you’ve placed your lay bet against France at odds of 2.75. I think that France could win this one and I like those odds, so I decide to back France to win.
Betfair matches us up and we are, in effect, betting against each other.
I am placing a back bet at odds of 2.75, so if I bet £10 and my back bet wins, you will pay my winnings of £17.50. If my bet loses, you’ll take my £10.
(If you have ever been into a bookies, visited a race meeting, or watched sport on TV you might be used to seeing odds written as 5/1, 10/1 etc. Betfair uses decimal places rather than fractional odds - a much easier to understand system. A 5.0 decimal bet translates to a 4/1 fractional bet.)
Since you’re placing a £10 lay bet at odds of 2.75, you are effectively saying that you are prepared to pay me, as the person placing the back bet, £17.50 if my bet wins. This is called your liability.
Betfair helpfully calculates our potential profit and liability as we enter our stake on any given outcome, so we can see just how much liability we are taking on when we place a bet. And how much profit we stand to make if our bets win.
Matched Betting Balances Exchange Liability
The principle behind matched betting is that we can place a bet at a bookmaker’s and lay that bet at a betting exchange like Betfair. We would effectively be betting on every outcome.
Because Betfair takes up to 5% commission from every winning bet, we would usually be down on this bet on every outcome, depending on the odds.
But because bookies offer their players free bets to keep them betting, we can extract profit from these potentially losing positions.
We can snatch victory from the jaws of defeat. Name me one sports fan who wouldn’t want that.