2015-12-14

Scientific American,
298(3), 38-45.

Griffiths, M. Figure 4 shows the home-countries of
21 of the major betting exchanges.

Betting exchanges themselves regularly claim they offer customers
up to 20 percent better odds than the online bookmaker. (2005) write, “experts today generally agree that Moore’s
Law will continue to govern the industry for another fifteen years, at
least.” As processing power continues to grow, new innovations will
be made possible. As Pitt et al.
(2005) puts it,”even with a valid betting slip, the bookmaker is
not obliged to honour a winning bet.” Mainelli and Dibb (2004)
conclude that in the absence of legal enforceability, the concept of
trust is essential in the betting industry.
. (6) In analyzing the role of the betting
exchange in reducing transaction costs, the focus should be on search
and information costs.

Match fixing

Recently, a new type of betting market has appeared, where punters
bet directly with each other (peer-to-peer betting). Although a betting exchange can in
theory offer a payout of 100 percent to its customers, commissions on
winnings (especially if these commissions amount to as much as five
percent) will make it likely the betting exchange in practice will not
be able to offer better odds than the discount-bookmaker. Economica, 73(292), 673-689.

Buchdahl, J. According
to Laffey (2005) “Betfair have stated that for some events they
have matched up to ten times more in-play than beforehand, showing the
appeal of this product.”

Since the beginning of sports betting, there have been many
examples of bettors trying to influence sporting events to secure a
favorable outcome. (23) During the U.S.
presidential elections of 2008 neither presidential candidate showed an
interest in repealing the Act, and in November 2008 the Federal Reserve
Board and Department of the Treasury announced the release of a final
joint rule, forcing U.S. By expanding the
offering to customers, the betting exchange hopes to not only increase
the total number of customers, but also to increase the spendings per
customer.

Wood, G. The functional form of network effects.
Information Economics and Policy, 14(3), 417-429.

Dahlman, C. According to Mark Blandford, founder
of online-bookmaker Sportingbet, the average bet size of their
Australian and Asian customers in 2003 reached an impressive 226 per
bet. In the United Kingdom bookmakers need
to apply for a (costly) license to operate legally, and also pay 15
percent tax on their winnings. (17) For that reason a number of betting exchanges have
already started offering their customers the possibility to play poker,
blackjack, and casino games through their own website. The
tool of a SWOT-analysis is not new, of course, but this particular
application is. Griffiths
also suggests the concept of electronic money will likely not be
perceived to have the same value as real cash, which could cause the
bettor to risk more money than he would have done in the offline world.

(26) Source: http://www.pinnaclesports.com

For now, Australia and especially Asia are pretty much unexplored
territory for betting exchanges. Australian bettors showed a tendency of betting up to
5.5% of consumer spending, while Asian bettors were inclined to bet
1.8%. J. To the dismay of the bookmakers’ lobby, at that
time the British government decided to ignore the advice of the
commission, because of practical problems implementing the proposed
measures. (2005) argue an important strength of the betting
exchange consists of the fact the betting exchange considerably reduces
transaction costs in comparison to the bookmaker. Musumeci and Peterson calculated that a bettor betting
on an event with two equally probable outcomes would need to win 52.4%
of his bets to break even with a typical bookmaker, while a winning rate
of “only” 51.2% would suffice to break even while betting with
Pinnacle. (2006) the popularity
of gambling through the internet is becoming more and more of an issue
for concern regarding problematic gambling behavior. In live-betting it is possible
for bettors to not only place their bets at the exchange before a game
starts, but also during the game as the match is being played. In fact,
some sports derive their very existence from the popularity of its
associated betting market (e.g., horse racing). & Strickland III, A. (30,31) The company has
obviously benefited greatly from its first mover advantage, and has
since its founding never allowed any threat to its leading position. Betting exchange chief loses
1,1m[pounds sterling]. (21,22) Despite national and
international concerns (e.g., Shaker, 2007), as well as a ruling by the
WTO indicating the Act is in fact in violation of existing free trade
agreements, it doesn’t seem likely the United States government
will be taking action to overturn the Act soon. Online exchange rocks sports betting. Strategic
management (12th ed.). (19) Not
unexpectedly share-prices of publicly traded betting companies lost up
to 70% of their value following the news of the Act. The economist intelligence unit and Merrill Lynch,
Sportingbet Annual Report. Potential customers will for that reason be less
inclined to join that specific exchange. In comparison, the average bet size of European and American
customers over the same year amounts to ‘only’ 22 and $59 per
bet respectively. The figure shows the payout offered by six differentmajor betting exchanges (Betdaq, Betfair, BetonBet, Betsson, IbetX,Parbet, and TradeBetX), as well as the average payout offered on averageby a sample of up to 72 different bookmakers (“Bookm. Therefore, it is
difficult to make an accurate estimate as to the worldwide size of the
betting exchange market. However,
this is not the only reason. It writes in its annual review of
2006 “a series of ‘MoUs’ (Memorandum of Understanding)
have been signed with sports bodies over the year.” These
Memorandums, which Betfair has signed with among others, the Jockey Club
(horseracing), the ICC (cricket), the FIFA (soccer), and the ATP
(tennis), include Betfair reporting suspicious betting patterns to the
relevant sports governing bodies, thereby making an investigation into
match fixing possible (which has already led to several suspensions and
lawsuits). Aiding betting. As Mainelli and Dibb
(2004) comment “liquidity, once established, is hard to
shift.” For obvious reasons, a start-up bookmaker does not face any
of these liquidity problems, because the bookmaker is by definition the
only party making offers on its own betting platform, regardless of the
number of customers.

Furthermore, the analysis showed a number of interesting future
growth opportunities; for example, the possibility to expand the product
offering with other gambling related products, but also identified a
number of factors that seriously threaten the position of the betting
exchange, like entry to the market by much larger online bookmakers.
Furthermore, it is worrisome several very important opportunities and
threats that were identified the betting exchange itself has little
control over, since these are of a legislative nature, like, for
example, the gambling laws in both the United States and the EU member
states.

(24) Source: http://www.casinoonline.co.uk/articles/
us-presidential-elections-race-gambling

Dey, E. According to Davies et al. (2005). However, the company
decided to close down its betting exchange in October 2007. These findings differ significantly from the rest of the world.
The propensity to bet in the United States amounted to 1.0%, in the
United Kingdom to 0.9% and in the rest of Europe to ‘only’
0.4%.

In Figure 5 these betting exchanges have been compared on a number
of important characteristics, with regards to commission charged on
winnings, reliability, legal issues, and product offering.

(32) Source: http://quote.bloomberg.com/apps/news?pid=nifea&& sid=a8Y11XQeIcyY

In 2003 the CEO of Betfair, Stephen Hill, told British magazine New
Media Age in an interview he doesn’t see Betfair as a gaming
company, but mainly as a “internet technology company.” Hill
announced in the interview he plans to take Betfair “into entirely
new areas of business.” He emphasized the technology that is needed
to run a betting exchange, could be used for several other internet
concepts that are completely unrelated to gambling; for example, an
online auction site.

Shaker, P. New Betfair CEO keen to expand
business areas. The odds were taken from the Match
Winner-market, with three possible outcomes: home win, draw, and away
win. A first move was made by Betfair, which
managed to acquire a license to enter the strictly regulated Australian
betting market in the beginning of 2006. However, any measures taken by member
states must be necessary, proportionate, and non-discriminatory.
According to a study ordered by the European Commission and published in
2006, members states that restrict sports betting must have a
”desire to bring about a genuine diminution of gambling
opportunities.”

The rise of the betting exchanges has not gone unnoticed by their
main competitors, the bookmakers. NMA Magazine.

Betting exchanges are also expanding into other gambling products,
completely unrelated to sports betting. Applied to
the case of the betting exchange, Metcalfe’s Law predicts that the
more users a betting exchange has, the more offers will be made, and the
bigger the chance will be that any individual player at that exchange
will find a reasonable offer to his liking. Betting on the
future: Online gambling goes mainstream financial. According to gambling-review website
Bookmakersreview.com in August 2007 there were 31 different online
betting exchanges in business. (2006). (2003, October 18). However, beside there being no guarantee the British
government in the future will not again attempt to tackle these
practical problems, it remains unknown how other countries in the world
will decide and possibly impose restrictions regarding this subject.

Strengths

After reviewing the business climate for the betting exchange
sector as a sector, in the this section the major betting exchanges
worldwide will be identified individually and compared on a number of
characteristics. (11)

Since the betting exchanges have not been around for long, unlike
some of the online bookmakers who have a long history of offline
bookmaking behind them, the possibilities for building a decent track
record have been limited. An example of an expansion into sports betting-related
products is the offering of live-betting. For example, the Dutch
newspaper De Volkskrant started an exchange during the Dutch elections
of 2006, by using technology of American exchange solutions supplier
Newsfutures.com, to help predict which party would win the elections.
Also, betting exchange Intrade has focused exclusively on offering its
customers prediction markets on current events.

Individual Analysis

(11) Source: http://www.eubusiness.com/Competition/1182952802.06/

(6) Dahlman has based his study on the work of Coase (1937), who
first introduced the concept of transaction costs.

As can be seen in Figure 5 most betting exchanges are privately
held and do not disclose financial information. A few examples can be found
at: http://www.betbull.com/UI/Default.aspx,
https://secure.betonbet.com/portal/default.aspx?Redirect=1, and
http://www.betfairpromo.com

(18) Source: http://www.usatoday.com/news/washington/
2006-10-02-internet-gambling-usat_x.htm

(7) Source: http://networks.silicon.com/webwatch/
0,39024667,39125945,00.htm

Less restrictive legislation (Europe)

Expansion to related sectors

Firstly, the sector-analysis is performed by making use of a SWOT.
The analysis shows the betting exchange has a number of unique strengths
over the “traditional” bookmaker, like, for example, the
ability to offer better odds to customers. There is no reason why
the same mechanism should not also apply to betting markets, which is
also consistent with findings concerning a study about betting exchange
market efficiency by Smith, Paton, and Vaughan Williams (2006).

Endnotes

United Kingdom Parliament. Journal of
Economic Literature, 26, 2021-2064.

It is clear Betfair’s competitors will have to come up with
something special to be able to survive in the long term. (2005) Metcalfe’s
Law, a law related to the concept of network externalities, is an
important factor to explain the success or failure of a certain betting
exchange. A “complete
market” is defined by Figlewski and Webb (1993) as “one in
which, for each possible state of the world, an investor can create a
strategy that has a positive pay-off in that state and zero in every
other state.” Although Figlewski and Webb admit markets are
”bound to remain far from complete”, they have found, while
studying traditional financial markets, a higher level of market
completeness tends to improve market efficiency. Smith, M. Retrieved
January 11, 2003, from
http://cjonline.com/stories/110103/bus_betting.shtml

(14) For example:
http://www.betbull.com/HelpCentre/help_centre.htm# mobile_site.htm

(25) Source: http://www.federalreserve.gov/newsevents/press/bcreg/
20081112b.htm

Unlike a bookmaker, the task of the betting exchange does not
include actively monitoring a certain market. The payout offered by betting exchanges was revised for the
commission on winnings betting exchanges charge their customers, which
is necessary to be able to make a fair comparison.

Jones, P., Hillier, D., Turner, D., & Comfort, D. In the
earlier intervals, when the match is still a relatively long time away
from kicking off, payout varies from betting exchange to betting
exchange and in some cases is below maximum, and even below average
payout offered by bookmakers. Betfair has therefore decided
to take matters into its own hands. (2005, January 7). It is
likely this will remain to be the case for as long as American citizens
are not allowed to bet using these betting exchanges.

(1) Source: http://www.ey.com/global/content.nsf/UK/EOY_-_Awards_Recipients

(5) The results of the complete study is available upon request.

Bart van Velzen obtained a master’s degree in economics from
the University of Groningen in 2007. Rather than
trying to copy the Betfair business model, it also seems likely
individual betting exchanges that will survive in the long term are the
ones who will actually succeed in being different.

After identifying a number of important strengths of the betting
exchange in the first part of this section, especially the important
strength of better odds, it raises an important question as to why
online bookmakers continue to be profitable, despite the arrival of the
betting exchange. Pinnacle manages to offer it customers payout
books of 0.976. Also, in some cases of bankruptcies, other betting
exchanges have stepped up to help victimized customers. Like betting exchanges, Pinnacle uses the argument of better odds
as its main selling point to attract new customers, advertising on their
website with slogans like “we take on the high margin
operators” and “Pinnacle is where the pros play.” (26)

Hoare, S. If a bettor would question the reliability of a
betting exchange, he might very well prefer to keep on betting with the
bookmaker he has been betting for years, if that bookkeeper is perceived
to have a lower counter-party risk. Especially Asia offers huge growth potential, if simply
because of the enormous size (and growth) of the population. (2004) writes about the betting exchange “the odds on
offer are generally much more competitive.” Griffiths (2005)
confirms this statement, “they [the betting exchanges] provide
excellent value for the gambler. Similar to the model of a stock exchange,
the user can buy (‘back’) or sell (‘lay’) bets at
the price (‘odds’) he or she wants. Most bookmakers will soon limit their
maximum stakes for this particular kind of customer and he will
therefore typically only be able to bet small amounts. To make matters worse, some betting exchanges
(e.g., Sporting Options and Play121) have had to file for bankruptcy in
recent years, while others (e.g., Back2Bet and The Soccer Exchange) have
vanished, taking the funds of customers with them.

Musumeci, J., & Peterson, M. Mainelli and
Dibb (2004) predict “a future with exchange(s) at the centre as
mechanism for price formation.” As the concept of the betting
exchange will become more and more familiar to the big public and will
keep on growing in size at the expense of the bookmakers, it is not hard
to imagine this will attract outside interest. Another
betting exchange, Matchbook, does appear to have been successful in
creating a unique selling point. Traditionally, betting
markets have been cleared by bookmakers, who accept (or not) the bets on
a certain event. America’s bad bet: How the unlawful
Internet Gambling Enforcement Act of 2006 will hurt the house. Pinnacle, as well
as a number of Asian-based bookmakers with a similar business model, and
can best be described as a ‘discount-bookmaker’ since the
company has managed to offer extremely competitive odds on almost every
sport. (2002). There is no [...] bookmakers’
mark-up on odds.” A study by Ozgit (2005) that compares the returns
of Betfair to the return of two bookmakers also showed considerably
higher returns, although the sample chosen by Ozgit in his study was
admittedly limited.

(15) For example: http://forum.betfair.com/

A fundamental advantage of the business model of the betting
exchange to the business model of the bookmaker is the fact the exchange
(normally) is not a party in any of the betting transactions that take
place on their website. UNLV Gaming
Research & Review Journal, 10(1), pp 27-39.

It seems likely, due to reasons of liquidity, the future will only
have room for a very limited number of betting exchanges. As a consequence of the competitive odds Pinnacle is offering,
Musumeci and Peterson conclude “Pinnacle’s margins are
smaller.” These smaller profit margins are responsible for the fact
the discount-bookmaker is, like a typical betting exchange, very
dependent on volume to survive and therefore needs to attract not only a
large amount of customers, but also attract professional bettors, who
will typically shop around to find the best odds available for a certain
event. (2003, September 29). Retrieved October
4, 2006, from http://207.36.165.114/NewOrleans/Papers/5701876.pdf

(23) Source: http://www.gambling911.com/WTO-Antigua-Ruling-033007.html

The suspicion of match fixing is of course particularly damaging to
the public image of the betting exchange. However, although the online
betting industry is showing its willingness to fight the problem,
gambling addiction not only poses an important threat to the image of
the betting industry, but could also in the future remain the most
important reason for national governments worldwide to restrict their
citizens the possibility to gamble online.

However, Metcalfe’s Law can also be applied the other way. Fordham
Journal of Corporate & Financial Law, 12, 1183-1203.

[FIGURE 4 OMITTED]

Betting companies complain this desire from national governments is
clearly lacking, as state betting operators often even encourage
gambling by making use of aggressive advertising campaigns. To underline the potential,
according to the previously mentioned study ordered by the European
Commission, in 2003 the gross gaming revenues, the winnings of the
operator minus payments of prizes, in European member states reached a
level of approximately 51.500 million (compared to 60.700 million in the
USA), of which 17.2% was generated in activities related to sports
betting.

Stanley, B. Any other betting company is
restricted from offering betting services to the citizens of that
country, and risks legal action if the company does not comply with
national regulations. Study of gambling
services in the internal market of the European Union. According to Jones et al. (18) While betting
through the internet, as in many countries, has always been a ‘grey
area’ in American law, and rules on gambling vary greatly from
state to state, the American betting industry has shown enormous growth
in the last couple of years. The Unlawfull Internet
Gambling Enforcement Act has effectively created a protected market for
Matchbook. D. The most notable
example of this is the rescue package offered by Betfair, after British
betting exchange Sporting Options had to cease operations. Because the Gambling Enforcement Act, that
came as a big surprise to the betting industry, makes it almost
impossible for bettors to deposit or withdraw winnings from their
betting accounts, industry experts believe the Act could mean the end of
most of the off-shore online American betting industry. American betting exchange Betbug
had already decided to cease operations in February of that same year,
while TradeBetX ceased operations in November 2008.

(30) Source: http://www.smh.com.au/news/business/
betfair-out-to-conquer-the-world/2006/02/05/1139074110158.html

In many European countries it is only possible to bet on sports
through a state-owned subsidiary. customers. In 1998, online bookmaker Pinnacle Sports was founded, a
company that operates from the Netherlands Antilles. The liberalization of the European betting
market would offer a great growth opportunity for the entire betting
industry, including the betting exchanges. Science News, 164(16), 251-253.

The internet itself, the channel through which the betting exchange
operates, has worldwide already become an accepted factor in the daily
life of many people. Options, short sales and
market completeness. Draft gambling bill joint
committee reports. To be able to make a
definitive statement as to when to what extent the betting exchange
offers better odds than the bookmaker, more research is needed.

Sauer, R. This can be explained by the fact that a bet
placed with a bookmaker, in almost every country in the world, is very
hard to enforce by the bettor. Ozgit (2005) calls the fact “bookies attract a
lot of betting although better returns are available elsewhere” the
’bookie puzzle.’ A solution to the bookie puzzle could very
well be bettors’ aversion to risk. However, it’s a different story for a
customer that manages to ‘beat’ the bookmaker by actually
making a profit in the long term. Issues like competitiveness and survival of betting
exchanges are addressed. Given the very dominant position of
Betfair, it seems unlikely the much smaller betting exchanges copying
Betfair’s business model will succeed, since it is impossible for
them to match the liquidity Betfair’s customers are used to.
Betting exchanges that are successful in finding niches around Betfair,
for example, by charging significantly lower commission to make up for
the loss of liquidity, or focusing on different sports altogether, seem
to have a better long term possibilities for survival.

Although the European Commission is quick to emphasize in press
releases this investigation as such has no implications for the
liberalization of the sports betting market, it does seem to be a small
step in that direction. Metcalfe’s Law predicts that network value is
proportional to the size of the network, and that individual user’s
utility is a linear function to network size (Swann, 2002). www.betfair.com:
World wide wagering. (2003). (2002). (10) While most of these
investigations are still under way, some of the member states have
already been threatened in 2007 by the European Commission they will
have to face legal action before the European Court of Justice if they
do not change their gambling laws in the very near future. writes “simply provides the platform.” The
concept of the betting exchange can therefore significantly reduce
search and information costs (and therefore also reduce total
transaction costs), in comparison to the traditional bookmaker.

Ozgit, A. In this study odds offered by a large sample of
bookmakers were compared to odds offered by betting exchanges in
different intervals during every fixture of four major sporting events
in 2006 (World championships soccer, ice hockey and floorball, and the
European u21 Championships soccer). Betfair was launched in June
2000 by Andrew Black, a professional gambler, and Ed Wray, former
vice-president of JP Morgan. It’s therefore essential for
the betting exchanges to gain the trust of the bettors. Laffey (2005)
writes “its [the betting exchange] main innovation was that it
allowed users to set their own fixed odds against an outcome [...]
something which had previously been the preserve of bookmakers.”
According to Davies et al. Bettors’ aversion to risk

According to Dahlman, this factor only exists as a consequence of
”imperfect information about the existence and location of trading
opportunities or about the quality or other characteristics of items
available for trade.” In sports betting traditional bookmakers also
incur search and information costs. (20)

Introduction

Sports and betting have always been strongly connected. Most of these exchanges are based in
Europe, either in the United Kingdom or Ireland, or in tax-friendly
locations like Gibraltar or Malta. The results of the SWOT-analysis of the betting
exchange are shown on page 44.

Whereas online betting companies have previously targeted Europe
and the United States as their primary sales region, Asia and, to a
lesser extent, Australia, seem to have been overlooked up until
recently. In economic literature
Dahlman (1979) identifies three different types of transaction costs:
search and information costs, bargaining and decision costs, and
policing and enforcement costs. (2004). (1993). (15) Also, betting exchange Betfair has recently started an
experiment offering customers free live-stream coverage of football and
tennis matches through its website. Fixed odds sports betting. His research interests include competitive balance in
sports, market efficiency, and applied econometrics applied to sports
phenomena.

(3) The claim of “up to 20% better odds” is made
regularly by different betting exchanges. sports, also Betfair, and other betting exchanges, are still
accepting bets on, for example, NBA basketball, NFL football, and MLB
baseball placed by their non-U.S. Economists explore betting
markets as prediction tools. (2)

Less operational risk

(31) Source: http://en.wikipedia.org/wiki/Bet_exchange

Most authors agree the most important strength of the betting
exchange is they offer customers better odds than the online bookmaker.
Jones et al. Market
efficiency in person-to-person betting. Scotland on
Sunday, p. CyberPsychology & Behavior, 6(6), 557-568.

A British parliamentary commission investigated this issue in 2004
and overthrew the argument of the betting exchanges in their report.
They advised the government to start considering bettors that lay a bet
at a betting exchange as a bookmaker and therefore to subject them to
the same rules. For that reason some agencies
start operating their own future predicting betting market to be able to
more accurately predict a certain future event. However, the internet has also created many new
possibilities for other, related innovations, like the invention of the
betting exchange. Some betting
exchanges have tried creating a unique selling point by trying to be
different with regards to, for example, the percentage of commission
charged on winnings. (16)

Lower transaction cost

Swann, G. Retrieved August 26, 2007, from
http://www.sportingbetplc.com/90

(20) Source: http://www.bloomberg.com/apps/news?pid=20601087&
sid=a6BTLrSohXn0

In October 2006 President Bush signed a law, called the Unlawful
Internet Gambling Enforcement Act, which makes it illegal for
American-based banks, credit card companies, and online payment systems
to process payment to online gaming companies. However, as the match approaches, the
payout offered by betting exchanges increases, while the payout offered
by bookmakers remains more or less constant. Harpenden, UK: High
Stakes.

A SWOT-analysis, which identifies the Strengths, Weaknesses,
Opportunities, and Threats, is an often-used tool of situation analysis,
and can be used to determine whether a firm’s business position (or
in this case, a sector’s business position) is fundamentally
healthy or unhealthy (Thompson III & Strickland, Jr., 2001).

Technological progress

Klarreich, E. The company has grown astronomically to
become the largest online betting company in the United Kingdom, and has
been widely recognized as one of the more successful entrepreneurial
innovations of recent times, being awarded the British Ernst & Young
Emerging Entrepreneur of the Year Award in 2002.1 Also, in 2003 Betfair
won the British Queen’s Award for Enterprise, in the category
Innovation. (4)

Figure 3 shows odds offered by betting exchanges are indeed most of
the time, but not always, higher than odds offered by bookmakers. com), British (e.g.,http://www.wbx.com), and American (e.g., http://www.matchbook.com)origin. Online betting exchanges: A brief
overview. (2005). The managing director of
the company told The Guardian in 2005 “it became immediately clear
that to develop [it would be necessary] to seed the markets to create
liquidity and attain a critical mass of clients to support the business
model.” Seeding could indeed be a solution to creating more
liquidity at a betting exchange, but needless to say it is also a
financially very risky solution. Entrepreneurship and innovation in the UK:
Betting industry: The rise of person-to-person betting. Moore’s Law, an observation that dictates that
the speed of microprocessors, at a constant cost, doubles every 18 to 24
months, predicts this trend will continue in the future. Retrieved March 25, 2004, from
http://www.publications.parliament.uk/

(27) Source: http://www.businessworld.ie/livenews.htm?a=1613598

This paper investigates the situation betting exchanges are
currently facing, both as a sector, as well as on an individual level.

(19) Source: http://www.law.duke.edu/journals/dltr/articles/
2003dltr0016.html

(12) Source: http://www.themanufacturer.com/britishindustry/
content_page.html?article_id=146

“Discount” bookmakers

New entry from bookmakers

Griffiths, M., Parke, A., Wood, R., & Parke, J. (29)

To overcome the effects of Metcalfe’s Law new betting
exchanges often try to ‘seed’ their own markets; in other
words, to start making attractive offers themselves (and in the process
sacrificing the previously mentioned strength of less operational risk).
Betting exchange Sporting Options even went bankrupt, partly because of
the losses incurred in seeding its own markets. 2004 Financial
Management Association International Annual Meeting. (2005, January 9). The problem of externality. The evolution of prices in
the 21st Century American football betting market. The betting
exchange, for obvious reasons, does not much care whether a customer
actually wins or loses; the more money any customer bets, the better.
Laffey (2005) writes “this neutral position enables the P2P
websites [the betting exchanges] to offer stakes only limited by market
liquidity, and to promise not to ban successful punters, something
bookmakers would reserve the right to do.” Laffey adds “[the
betting exchanges] were drawing in the ‘high rollers’, those
prepared to stake enormous sums, who bookmakers would often refuse to
take bets from.” Of course, as Laffey emphasizes, also in the
betting exchange bettors might not always be able to bet the amount of
money they want to stake; not because the betting exchange will limit
them, but because it is possible there is simply just not enough
liquidity available at the betting exchange to match larger bets at the
requested odds.

(9) Source: http://www.eu-ba.org/legislation.html

References

Conclusion

Like many online bookmakers, more and more betting exchanges are
investing in broadening their product offering with other gambling
products. (2001). Experts agree, however, that Betfair is by far
the biggest betting exchange in the world, having obtained a market
share that is estimated to be around 90%. (1979). It also shows, however, that
the betting exchange is very dependent on customers providing liquidity
to succeed, since due to the effects of Metcalfe’s Law a lack of
liquidity will make it almost impossible for an exchange to attract new
customers, and therefore to survive.

Effects of Metcalfe’s Law

[FIGURE 3 OMITTED]

The previous two threats have shown traditional bookmakers have so
far challenged the betting exchanges to both a legislative battle, and
by developing a new business model focused on increasing payout.
However, bookmakers have not yet challenged the betting exchanges
’heads on.’ The future might be different though. Different forms of betting markets are discussed
extensively by Sauer (1998) and Buchdahl (2003).

Many innovations are focused on trying to simulate the environment
of the old-fashioned brick-and-mortar betting shop, which to many was
(and still is) a social meeting point, but also offered live television
coverage of many sporting events. Besides
Matchbook, that specializes almost exclusively in offering markets in
U.S. Journal of Law
and Economics, 22(1), 141-162.



Weaknesses

Better odds/higher average pay-out to customers

Opportunities

Increase of gambling addiction

Migration of technology to unrelated sectors

New markets (Asia/Australia)

Currently, only three betting exchanges, Matchbook, EHorseX, and
Intrade, still accept American customers, but will constantly need to
keep thinking of (legitimate) ways to being able to accept deposits and
process withdrawals from and to American customers. Koning [1] and Bart van Velzen

The EU has repeatedly stated it does allow member states to
restrict the access of sports betting operators on a national level, but
only to maintain public order (e.g., to prevent fraud), to protect
consumers (e.g., to prevent gambling addiction), and to ensure
maintenance of the social order. Smart money is on black. By offering customers a one-stop
shop for all of their gambling needs, exchanges hope to profit from the
growth in other gambling sectors; for example, the enormous growth of
online poker. (2005) “with a click of the mouse they
[the bettor] can essentially do what Ladbrokes or William Hill [the
bookmaker] does.” Also, the bettor has the opportunity to adjust
his own betting position at a later time; for example, buying or selling
back his own bet at different odds, thereby possibly even securing a
profit before the event he was betting on has even started. These practices have always been seen by sports
governing bodies as a serious threat to the integrity of sports, but
have also been very difficult to prove. The
International Herald Tribune Online.

More restrictive betting legislation (USA)

Pitt, L., Watson, R., & Shapiro, D. Lawyer, 16(46), 18.

Also, there’s an increasing interest of polling and news
agencies in the exchange-technology. Centre for the Study
of Financial Innovation, London.

Laffey, D. (2004). In short,
the betting exchange has opened up a whole new range of betting
strategies for the bettor, which were not possible while betting with a
bookmaker. In combination
with a commission rate of the standard five percent, these exchanges are
in effect offering customers very little (if not nothing) Betfair is not
already offering with much better liquidity. A gambler’s broker. Odds were measured in terms of payout, a number that reflects the
percentage of the original amount of money staked a bettor would be
returned if he would place relatively equal bets on every possible
outcome. As a consequence, though, liquidity in this markt needs to be
provided by American bettors. When markets beat the polls. Therefore, according to Davies et al.
(2005),”Betfair has no interest in the outcome of any event it
makes available.” Unlike the bookmaker, the betting exchange
typically does not take any trading position and consequently makes
money regardless of the outcome of the event. (2002). Department of Economics, UCLA.

(4) In 2007 betting exchange Parbet was renamed to MatchMyWager,
before closing down in April 2008.

According to an article by Griffiths et al. This
prediction is confirmed by the relatively large number of betting
exchanges that have closed in 2007 and 2008 (see Figure 5). According to Davies et al.
”traditional bookmakers need to be well informed (studying horse
racing and sporting events carefully) in order to make odds, and need to
monitor market changes constantly in order to avoid being taken
advantage of, or of being over-exposed.”

(22) Source: http://www.antiguawto.com/index.html

In Figure 3 the measured payout is shown during the biggest of thefour events that were part of this study, the World Championships Soccerof 2006 in Germany. (13) As Betfair’s
co-founder Andrew Black told the newspaper Scotland on Sunday in 2005:
”Geography is an absolute priority. Therefore they claim only they should be obliged
to acquire a license and pay taxes on their winnings, not their
customers.

However, as sports betting in general will grow worldwide, it is
likely the number of incidents of match fixing will also increase. New York: McGraw-Hill

Political lobby by bookmakers (UK)

Winning customers welcome

(17) Source: http://www.betfaircorporate.com/pdf/2006_10_16_casino.pdf

Davies, M., Pitt, L., Shapiro, D., & Watson, R. (2006). (2004, December). This would
obviously pose an important threat to the most important strength of the
betting exchange: offering better odds than the bookmaker.

Nevertheless, Matchbook seems to be an exception. Youth Gambling International Newsletter.

(2) Source: http://www.queensawards.org.uk

A betting exchange and a discount bookmaker have a lot in common,
and are very much targeting the same kind of bettor, although both are
operating in entirely different ways. In
the current market it seems Betfair has grown to such a scale
there’s hardly any serious competition the company needs to take
into consideration. itself, it hasn’t stopped the possibility to bet with betting
exchanges on sporting events taking place on American soil. For this reason Mansion decided to terminate its exchange
business altogether in October 2007. Figure 5 of this
paper shows a majority of betting exchanges appear to be focusing their
offering on soccer, which also happens to already be one of the
strongest and best developed sports on offer at Betfair. In economical terms, it is therefore safe to say betting
exchanges have increased market completeness. (28)

Thompson, Jr., A. For example, Owen Byrne of the Jockey Club commented on this
issue “there is a threat to the integrity of racing” (Stanley,
2003). Only if the offer is
matched by another user, the bet has ‘action.’ An example of a
typical market is shown in Figure 1.

Ruud H. In the past prediction markets have
proved to predict future events better than traditional opinion polls.
The Iowa Electronic Markets have been successful in predicting outcomes
of American presidential elections and are more accurate than
’regular’ polls (Stix, 2008). The exchange should, because of
the effects of Metcalfe’s Law, have a very hard time achieving a
scale large enough to become profitable, especially when the competition
has already been more successful in the past. (1998). Counterparty risk seems to be non-negligible and bettors take
that into account. Recently though, both online
bookmakers and sports governing bodies have claimed the rise of the
betting exchange has made it easier for bettors to profit from insider
trading. Also, we compare the most important players in
the market. These markets are
known as betting exchanges. European
Commission.

(28) Source: http://news.bbc.co.uk/sport1/hi/other_sports/horse_racing/ 3616748.stm

The success of Betfair has left other betting exchanges fighting
for tiny marketshares. According to Musumeci and Peterson (2004), who performed a study
on betting on American football with two possible outcomes, most
(American) bookmakers tend to offer their customers payout books of
0.955 in these markets. For example, some betting exchanges have, in
cooperation with mobile phone companies, recently started offering
customers the possibility to bet by making use of their mobile phone.
(14)

Following the footsteps of Betfair dozens of new entrepreneurialonline betting exchanges have seen the light, especially of aScandinavian (e.g., http://www.betsson. Laffey (2005) writes
”in facilitating betting as a neutral intermediary the website [of
the betting exchange] does not take on the risk function of the
bookmaker and generates revenue by taking a commission from the
winner.” As long as bettors make use of an exchange, bettors will
pay commission to that exchange, and the exchange is guaranteed to earn
a steady flow of income.

Although betting exchanges are still a relatively uncommon
phenomenon in the United States, a few particular betting exchanges had
already built a solid American customer base. Most authors doubt whether these exchanges will
be able to take market-share from Betfair in the near future: Mainelli
and Dibb (2004) point out that even if the competition of Betfair would
succeed in offering better service or value, “the propositions
needs to be a great deal better to compensate users for the loss of
liquidity.”

David Hood, a spokesman for leading British bookmaker William Hill,
commented on this issue in 2003 in the International Herald, “if I
stand [...] outside a betting shop and offer to lay a bet which you
take, I am breaking the law, because I am not a licensed
bookmaker,” but “if we both boot up laptops in the street and
strike the bet using a betting exchange, I am not breaking the law? What
is the difference?” Betting exchanges have defended themselves by
claiming not the bettor, but the exchanges themselves are in fact acting
as a bookmaker, because they are the ones who collect the deposits and
pay out the winnings. 7.

New Media Age. (2003). The betting exchange does not need to hire a
specialist to determine the odds on the probabilities of any of the
parties winning, and adjust odds if necessary, but the betting exchange,
as Davies et al. As Martin Oelbermann, a director of German
research-firm MECN, told press agency Bloomberg in 2005, “You
can’t beat the first-mover advantage. European
Management Journal, 23(3), 351-359.

At about the same time as the business model of the betting
exchange was introduced, another new, less radically different, business
model was born. financial firms to establish and implement
policies and procedures to prevent payments to gambling businesses.
(24,25)

In his article Griffiths made a list of recommendations for
Internet gambling service providers to act ‘socially
responsible,’ which have been for a large part picked up by both
online bookmakers and betting exchanges. The most
important arguments made by Griffiths include the fact the internet
makes gambling much more convenient than betting in the casino (the
bettor does not even have to leave the comfort of his own home), the
much higher event frequency of gambling opportunities on the internet,
and the asocial and anonymous character of internet gambling. The Guardian.

Probably the most important potential weakness of a betting
exchange is not having enough users (and liquidity) to be able to
attract new users. A remarkable finding is that it seems there is very little
difference between the betting exchanges in terms of commission charged
to customers and product offering. Communication of the Association for Information
Systems, 15, 149-161.

Secondly, the betting exchanges are also analyzed on an individual
basis. While some betting
exchanges, including Betfair, did not accept American customers even
before the Act was introduced because of unclear legislation, others,
like Mansion, had to turn down a large part of their clientele because
of the Act. J. Mainelli and Dibb rate
such a possible venture as ‘a formidable challenger’ to in
particular Betfair, if only because of its “established customer
base, resources and marketing skills.”

Sector Analysis

Threats

These kind of stories are obviously particularly bad for the image
of the betting exchange and could induce risk averse behavior from
bettors. (2004), while a betting exchange allows
bettors to bet against a certain outcome, “unscrupulous horse
racing trainers and jockeys, for example, could lay their horse to lose,
[...] securing winnings for themselves.”

(29) Source: http://news.bbc.co.uk/sport2/low/football/europe/
5215260.stm

(10) Press announcements from the EC about this topic can be found
at: http://europa.eu/rapid/

While, as already mentioned, Figure 3 only shows the results of one
of the four studied sporting events, other events showed roughly
identical findings. Recently betting companies, both betting exchanges
and bookmakers, have filed complaints with the European Commission to
overturn these national laws. M. (2006).
Internet gambling: An overview of psychosocial impacts. (2005). P. According to Laffey (2005) there were problems of definition
and also problems enforcing British legislation on the foreign users of
the exchange. (2004).
Betting on the exchanges: Changing customer relationships in the sports
betting market in the UK. Internet gambling: Issues, concerns and
recommendations. As Davies et
al. A notable example was the effort by Mansion, which
cut commission on winnings to as little as 1%. This is why Mainelli and
Dibb estimate it’s “extremely likely” traditional
bookmakers will in the future open their own betting exchange. He is currently self-employed and
betting on sports professionally.

Figure 1: Screenshot from http://www.betfair.com, 24-08-2007 15:00h.

Man Utd v Tottenham

Change: Express view | Full view

Matched: EUR 206,072 Refresh

Selections: (3) 100.4% Back

Man Utd 1.56 1.57 1.58
765 [euro] 17998 [euro] 4524 [euro]
Tottenham 6.8 7 7.2
419 [euro] 309 [euro] 108 [euro]
The Draw 4.1 4.2 4.3
291 [euro] 1012 [euro] 722 [euro]

Selections: (3) Lay 99.1%

Man Utd 1.59 1.6 1.61
806 [euro] 11320 [euro] 6816 [euro]
Tottenham 734 7.6 7.8
91 [euro] 232 [euro] 599 [euro]
The Draw 4.4 4.5 4.6
680 [euro] 501 [euro] 1227 [euro]

Figure 2: SWOT-analysis of the betting exchange

Strengths: Weaknesses:

–Better odds –Effects of Metcalfe’s Law
–Less operational risk –Bettors’ aversion to risk
–Lower transaction costs
–Increase of market completeness
–Winning customers welcome

Opportunities: Threats:

–Less restrictive betting –More restrictive betting
legislation (Europe) legislation (United States)
–New markets (Asia / Australia) –Political lobby by
bookmakers (UK)
–Technological progress –”Discount” bookmakers
–Expansion to related sectors –New entry from bookmakers
–Migration of technology to –Match fixing
unrelated sectors –Increase of gambling addiction

Figure 5: Individual analysis of 20 major betting exchanges
(“Y” = “Yes”, “N” = “No”)
Reliability Legal

Name Commission (2) (3) (4) (5)

BetandGame 4.25% N N Y N
(closed per
February 2008)

Betbull (*) 2.5% – 5.0% Y Y N N

Betcruise 0% (**) N N N N

Betdaq 2.0% – 5.0% N Y N N

Betfair 2.0% – 5.0% Y Y Y N

Betmate (*) 2.0% – 3.0% Y Y N N

BetonBet 1.5% – 3.0% N N Y N

Betsson 4.0% Y Y Y N

EHorseX 1.75% – 5.0% N N Y Y

IBetX 1.0% – 3.0% N Y Y N

Intrade $0.00 – 0.15 / N N Y Y
lot (***)

Live-betting 5.00% N N Y N
per payout

Mansion 0.0% – 1.0% N N Y N
(closed per
October 2007)

Matchbook 2.0% N Y Y Y

MatchMyWager 1.5% – 4.0% N N Y N
(closed per
April 2008)

MyBet 5.0% Y Y Y N

Redbet 4.0% Y N Y N

Supporterbet 3.0% – 5.0% N Y Y N

TradeBetX / 4.0% N N Y Y
Tradesports
(closed per
November 2008)

Winitoo 4.0% N N Y N

WorldBet- 0.9% – 5.0% N Y Y N
Exchange
Product offering

Name (6) (7)

BetandGame N Y Limited selection of
(closed per major world sports;
February 2008)

Betbull (*) Y N Selection of major world
sports; wide selection of
major and minor soccer
leagues;

Betcruise N Y Limited selection of
major world sports;

Betdaq Y N Selection of major world
sports; wide selection of
major and minor soccer
leagues;

Betfair Y Y Wide selection of major
and minor world sports;
wide selection of major
and minor soccer leagues;

Betmate (*) Y Y Selection of major world
sports; wide selection of
major and minor soccer
leagues;

BetonBet Y Y Limited selection of
major world sports;
selection of major and
minor soccer leagues;

Betsson Y Y Selection of major world
sports, as well as minor
European sports; major
and minor soccer leagues;

EHorseX N N Limited selection of
American sports; focus
on American horse-racing;

IBetX Y N Limited selection of
major world sports;

Intrade Y N Selection of non-sports
political, financial and
current events;

Live-betting Y N Limited selection of
major world sports;

Mansion N Y Limited selection of
(closed per major world sports;
October 2007) selection of major and
minor soccer leagues;

Matchbook Y N Limited selection of
major world sports; focus
on North-American
sports;

MatchMyWager Y Y Limited selection of
(closed per major world sports;
April 2008) selection of major and
minor soccer leagues;

MyBet N N Selection of major world
sports;

Redbet N Y Very limited selection
major world sports;
selection of major and
minor soccer leagues;

Supporterbet N N Selection of exclusively
soccer;

TradeBetX / Y N Selection of major world
Tradesports sports; focus on North-
(closed per American sports;
November 2008)

Winitoo N N Very limited selection of
major world sports;
selection of major soccer
leagues and regional soccer;

WorldBet- Y N Selection of major world
Exchange sports; selection of major
soccer leagues;

(*) Company operates as a “skin” of an established betting exchange;

(**) Reduced commission is part of a promotional launching campaign;

(**) Commission is calculated including both trading fee and expiry
fee;

(1) Percentage of commission charged by exchange on net winnings;
Promotional offers not included;

(2) Exchange is (part of) a publicly traded company, and/or is
disclosing full financial information, and therefore giving
customers insight into its financial “track-record”;

(3) Exchange claims to hold and manage customers’ funds in a
segregated account, to ensure customers’ funds remains separated
from company funds (if unclear, listed as “No”);

(4) Exchange is currently accepting customers from all nine
European member states, whose gambling policy is currently
under investigation by the European Commission;

(5) Exchange is currently accepting customers from the United States;

(6) Exchange offers its customers the possibility of live-betting;

(7) Exchange offers its customers a complete one-stop betting portal,
consisting of at least a casino and a poker platform;

Davies et al. Only
in the last couple of years several big betting scandals have been
discovered, reaching up to the very highest level of professional
sports, for example, in horse-racing, soccer, and recently possible
match-fixing in tennis. Betfair, as well
as other exchanges, have addressed this issue by making a promise to
customers all funds will be held in so called ring-fenced subsidiaries,
to prevent the company funding itself by customers’ deposits
(Hoare, 2002). (2003). [...] Nobody will be able to
beat Betfair unless the management makes a massive mistake.” (32)

There have been attempts by American congressmen to repeal the Act,
as well as an effort by the country of Antigua and Barbuda to make the
United States change its laws by filing an official complaint to the
World Trade Organization (WTO). Management Research News, 27(1/2), 95-103.

Nevertheless, it’s important to emphasize while the Act has
blocked a large part of gambling-related financial transactions in the
U.S. This has led to intensive competition between not only theexchanges themselves, but also between the exchanges and the traditionalbookmakers, whose market shares are increasingly under pressure.

In this paper we provide a SWOT-analysis of betting exchanges. (3) Whether this
claim is accurate has been the subject of our own study, which took
place in 2006. (2005).
Betfair.com: Five technology forces revolutionize worldwide wagering.
European Management Journal, 23(5), 533-541.

Griffiths, M. In the betting industry the
success of a bookmaker has always been dependent on its ability to build
a reliable track record. Markets for sporting
events need to be created, and, when the event has taken place, settled
according to the result, but that is where the responsibilities of the
betting exchange end. In an earlier
publication Griffiths (2003) already pointed out why gambling through
the internet could lead to a rise in gambling addiction. We will argue that liquidity is a prime determinant of
long-term success.

(16) For example: http://livevideo.betfair.com/

(21) Source: http://.www.online-gambling-insider.com/online-gambling/ ogi-Barney-Frank’sOnline-Gambling-Bill-Gathers-Momentum-07-24-07.html

In this paper the SWOT-analysis of the betting exchange has been
performed by doing a literature study, including both academic studies
and recent news articles about gambling in general and the betting
exchange in particular. Mainelli and Dibb (2004)
have noted “existing competitors all have business models and value
propositions similar to Betfair” and therefore conclude
”it’s hard to see why they [these betting exchanges] should
succeed in the future when their efforts to date have largely fallen
short.”

Stix, G. Koning is a professor in the Department of Economics &
Econometrics. AVG”),and the maximum payout offered by any of the bookmakers (“Bookm.HIGH”). (9) The
European Commission seems to have taken these complaints seriously and
has recently been investigating national gambling legislation in no less
than nine different EU member states. The company is focusing its efforts on
offering a wide selection of North American sports, an area in which
Betfair has never been particularly strong. The economics of wagering markets. A, Paton, D., & Vaughan Williams, L. Of course, if every bettor that has ever
laid a bet at a betting exchange would be obliged to follow these same
regulations, this would pose a very serious threat to the business model
of the betting exchange.

[1] University of Groningen

(13) Source: http://www.betfaircorporate.com/pdf/australia_licence.pdf

Phillips, T. Therefore, betting exchanges are
searching for ways to encourage the customer to interact with other
customers during the betting process, for example, through internet
forums. A. For example, in the United Kingdom, seen
by many as one of the most liberal countries in the world with regards
to betting, a bet is not legally enforceable (and therefore often
referred to as a ‘gentleman’s agreement’). The bookie puzzle: Auction versus dealer markets
in online sports betting. (2008). The prices offered by Matchbook may not
reflect all information that is available globally.

Figlewski, S., & Webb, G. (5) Nevertheless, the study should, next to the
study of Ozgit, be regarded as a pilot study. As a result the likelihood
that the user will join the exchange and start making offers for himself
will also increase.

Ruud H. The Journal of Finance, 48(2), 761-777.

Institut Suisse de droit compare. In the final minutes before
the event starts, a bettor would have been better off betting with any
of the six betting exchanges.

The business model of the betting exchange allows its users to bet
(back), but also to offer (lay) money, against whatever odds they like,
at whatever time they like, on whatever event they like. Asian and Australian bettors also seem to
be betting more money per person. It’s a land grab right
now.”

A customer that bets with a bookmaker is not only restricted to the
prices offered by the bookmaker, but also to the maximum stake that is
accepted by the bookmaker. (12) These results are in line with findings of the
OECD, The Economist Intelligence Unit, and Merrill Lynch, who have
performed research into the propensity to gamble as a percentage of
consumer spending. (2005, Fall). (7)

Increase of market completeness

(8) For example: http://fairplayers.com/en/magazine/
hot_news_fairplayers_11.html.

OECD. (2007). However, these offerings
are generally not as well developed as the offering for European sports,
with markets being characterized by below-average liquidity. Clearly, the passing
of the Gambling Enforcement Act has had big consequences for the entire
gambling industry, including the betting exchanges.

One of the first, and by far most successful, betting exchange is
named Betfair (http://www.betfair.com). Mainelli
and Dibb write “despite frequent attacks on the exchange model,
traditional bookmakers would be commercially naive, if they were not
also looking into opening their own exchange.” Furthermore, there
has been talk of British bookmaker-giant Ladbrokes being interested in
the take-over of Irish betting exchange Betdaq.27 Also, according to
Laffey (2005) there have been rumors regarding a possible launch of one
or several new betting exchange(s), offering down to zero percent
commission, by the ‘Big Three,’ the three biggest British
bookmakers William Hill, Coral, and Ladbrokes. Many of these bookmakers claim that
bettors that ‘lay’ a bet at a betting exchange are in effect
taking the role of the bookmaker, and therefore should be subject to the
same regulations as the bookmaker. In
the start-up stages of a new betting exchange, the number of customers
may be limited, and as a result the number of offers will also be
relatively small. (8) Betting companies have argued that in
many cases national legislation is in contradiction to policy of the
European Union (EU) regarding free movement of services, as well as the
goal of the EU to create one single European market.

Mainelli, M., & Dibb, S. (2003, July 17)

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