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BETTING EXCHANGES - DISRUPTIVE INNOVATION AT WORK


New technology has revolutionised the nature of traditional betting markets. At the forefront of the revolution has been the betting exchanges; trading systems which facilitate person to person betting, allowing traders to either play or lay on a wide range of sports betting markets. A disruptive innovation if there ever there was one.

Betfair


Betfair is the dominant betting exchange and the bigger the company gets, the harder it is for competitors to keep pace: the network effect.

The Betfair exchange boasts a high degree of liquidity, across a wide range of sports betting markets, alongside a professional customer service operation and a fully integrated telephone and internet betting service.

At the end of November 2006 Betfair announced that it had acquired Portway Press Limited, the owner of Timeform, the world-renowned brand publishing horseracing ratings, form guides and analysis. In February 2007 it launched Betfair Radio.

The robustness of Betfair's business model is demonstrated by the fact that the company has continued to increase revenue growth month by month, despite facing fierce competition from other betting exchanges, many offering zero commission rates (Mansion betting exchange which opened in September 2004, offering zero commission, shut its doors in October 2007).

The strength of the Betfair brand has been demonstrated through the successful launch of online poker and casino sites.



Best odds!



Regulatory Matters


Put simply, regulation achieves public interest objectives, that would not otherwise be achieved. In the case of betting exchanges, matters such as fairness, transparency, integrity, privacy and general market stability fall under the radar of the regulators.

A policy paper issued by the Department of Culture Media and Sport (DCMS) in April 2003, revealed, for the first time, that the UK Government was prepared to embrace the concept of betting exchanges.

The paper stated that betting exchanges would be bound by the general conditions of an ordinary betting licence, but, that they would also be subjected to specific duties:


The paper also stated, that persuant to the steps which will be taken to achieve the Government's regulatory objectives, there will be no need for individual layers on the betting exchanges to be licensed;.


"the Government believes it quite unnecessary to license betting exchange customers. That would constitute superfluous over-regulation."

Two activities which directly threaten the integrity of any exchange based betting market, are insider trading (Jockeys, Stable Lads, Owners etc, laying their own horses) and price manipulation (giving a flase impression of market activity or price movement).

In October 2003 the government announced that the Gambling Commission would have the power to freeze bets on the betting exchanges that it believed to be unfair, and to void them if it transpired that they were. In February 2004, the DCMS extended the provision beyond bets that were not settled immediately.

The issue of taxing layers on the betting exchanges, raised its head in March 2004, when the Chancellor of the Exchequer Gordon Brown, as part of his budget speech referred to a review of "the tax treatment of betting exchanges and their clients."

The Joint Committee on the Draft Gambling Bill when making their deliberations in April 2004 stated;

"We believe that the best way of achieving a balance between these points is to ensure that those using the exchanges to lay bets professionally are identified, regulated, made subject to the appropriate levy arrangements, and have their status checked."

It was the Committe's contention that persons using the exchanges to lay professionally ("non-recreational users"), should be identified and dealt with appropriately;

On June 14, the UK Government had made its response to the First Report of the Joint Committee on the Draft Gambling Bill; Session 2003-2004. On the subject of betting exchanges, they have rejected the proposals put forward by the Joint Committee on the Draft Gambling Bill that layers on the betting exchanges should be required to register for integrity purposes, levy payments and, perhaps, additional taxation. However, the Government has said that those that use the exchanges to conduct betting operations in the course of business will require an operating licence;



The UK's Gambling Bill was printed on 18th October 2004; and contained no mention of the further regulation of individual clients of betting exchanges, or any attempt to tax non-recreational layers.

On the issue of licensing betting exchanges, sports minister Dick Caborn MP said in the Commons standing committee on the gambling bill (3 November 2004);

When appearing before the All Party Parliamentary Group Betting and Gaming in Decmeber 2004 Greg Nichols and Tristram Ricketts of the British Horse Racing Board were asked to comment on the Joint Scrutiny Committees recommendation that a distinction be made between recreational and non-recreational layers on betting exchanges. Ricketts responded;

The leading betting exchanges


There is no doubt that Betfair is the clear market leader. Of the other exchanges, the most liquid in no particular order are Livebetting, Betdaq, Betsson, Tradesports and the stateside facing Matchbook.

When publishing its results for the year ending April 2007 (see below)Betfair stated that its number of registered customers had now passed the one million mark, with active users up to 443,300 at the end of April, a rise of 57% on the previous year. Customers outside Britain contributed 38% of total revenues last year, up from 32% in 2006. By way of comparison, Betsson recently said that the number of players at its betting exchange had increased during the fourth quarter by 30 percent to 5,200.

Global Betting Exchange of Dublin, meanwhile, the Dublin based betting exchange company, funded by the Irish financier Dermot Desmond and the company behind the more well known Betdaq exchange, has begun to increase its global presence through a series of white label deals; these have included Betmate, which is owned and managed by Cassava Sports Limited, a private company, registered in Gibraltar.



European Betting Exchange plc (Betbull) recently reported a net loss of €560,000 for the first half of 2007, with net gaming revenue decreasing to €6.7 million from €7.0 million. For the first quarter ended March 31, 2007, the company reported a loss after tax of €94,924 on net gaming revenue of €3,963,505 compared with a loss after tax of €851,624 on net gaming revenue of €3,315,255 during the same period last year.

Subodh Agrawal and Darshan Desai’s Euromax Capital, backed by the Italian investor Alessandro Benedetti recently bought Nextra International, the Italian gambling company that owns the online betting exchange Livebetting.Com.

We compared the prices available on a selection of betting exchanges, on the Liverpool v Man Utd match on Sunday 16 December 2007 (Prices taken at 11.30 am). The best price available on Liverpool 2.74, was to be found on Livebetting.Com; available to 2621 Euros. The next best-price 2.72, could be found on the Betdaq exchange to 2712 GBP's. The draw was best-priced on Betdaq, where traders could have on 1736 GBP's at 3.2. The best-price on Man UTD, 3.15, was to be found on both Betfair (to 10379 GBP's) and Betbull (to 2793 Euros).

Casualties in the betting exchange sector to date have included; Abex88; Backandlay; Betbug; Betx, matchedbets; iwageru; ggbet exchange; bluevex; ubetanything; spomaxx; swapbets; Betbutler; Betxc; Fairoptions; Levelbet; Playp2p; mybetyourbet; bet-ex; bettingsociety, SportingOptions; Betmart; Mansion betting exchange and Parbet betting exchange.



Fiscal Issues


In May 2002 Betfair became the first betting exchange company to agree financial arrangements with both the British Horseracing Board, for a pre-race data licence, and the Horserace Betting Levy Board, over its contribution to British racing from betting activities taking place on it site.

On 1st November 2002, the 42nd Levy Agreement covering the year commencing 1st April 2003, was agreed between the Levy Board and the Bookmakers' Committee (the latter being a consultative body that is dominated by representatives of the "Big Three"). On the question of betting exchanges, it ruled that;


"(A) 10% levy will be payable by betting exchanges on the British horseracing gross profits achieved by individual successful layers, on an annual basis. There will be no aggregation between individual layers, and losses on backs cannot be offset. Layers' gross profits will be assessed before deduction of commission charges."

On February 5 2003 Sporting Options announced that they had applied for a judicial review of the 42nd Levy Scheme on the grounds that it is "wholly unfair and the process by which it was determined is totally unsatisfactory". In April 2003, Sporting Options was granted the right in the High Court to a judicial review of the 42nd Levy Scheme.

It was announced in in the 2003 Budget that the way in which betting exchanges were to be taxed was to be changed, so that operators would pay 15% gross profits tax on the basis of their commission.

In the week beginning March 03, 2003, the Department for Culture, Media and Sport (DCMS) circulated a letter asking for comments on a proposed reconstitution of the Bookmakers' Committee. One of the options put forward in the letter, was the proposed representation of betting exchanges on the committee.

Pursuant to the publication of this letter, Sporting Options, in August 2003, won a Judicial Review case, which had challenged the manner in which the 42nd Levy scheme had been cobbled together. The judge in the case concluded; "For all these reasons I conclude that the manner in which the Levy Board reached its decision on 31 October was manifestly unfair."

In july 2003, the Secretary of State, in exercise of the powers conferred upon her by section 26(1) of the Betting, Gaming and Lotteries Act 1963 [1], and after consultation with such bodies as appear to her to be representative of the interests of bookmakers generally, passed new Regulations (cited as the Horserace Betting Levy (Bookmakers' Committee) Regulations 2003 and coming into force on 28th July 2003), which gave the betting exchnages a representative on the Bookmakers Committee.

The Bookmakers' Committee now consists of thirteen members of whom; two shall be appointed by Coral Racing Ltd; two shall be appointed by Ladbroke Racing Ltd; two shall be appointed by William Hill Organisation Ltd; two shall be appointed by the National Association of Bookmakers Ltd from amongst persons nominated for the purpose by associations for the time being affiliated to the National Association of Bookmakers Ltd; four shall be appointed by the Association of British Bookmakers Ltd to represent the interests of the members of that body; and one shall be appointed by the Sporting Exchange Ltd.

The annual report of the Levy Board, the body that returns money to racing from off-course betting, was published in July 2004. It revealed that the Levy yield for 2003-04 had reached £100m for the first time. The figure represents a year-on-year increase of £25.5m, or 34%. This is the second year in which the Levy has been based on bookmakers' gross profits.

In a report published in January 2005 the National Audit Office said that Customs had underestimated (and failed to understand) the popularity of new forms of gambling, such as internet betting exchanges, adding that these new services posed "new risks to [tax] revenue". It was also said that; "The duty returns for betting exchanges do not include commission rates and therefore do not reflect the relationship between commission rate and turnover. Customs were in October 2004 working with the industry to devise an appropriate return."

In his Pre-Budget Report Speech to the House of Commons on 5 December 2005, the Chancellor Gordon Brown announced that current taxation regimes were working well and would stay in place. This represented a considerable victory for Betfair in its long fought battle against the "Big Three" bookmakers; William Hill, Coral and Ladbrokes.

5.111 - "The Government is committed to a modern and fair gambling tax system, consistent with wider tax principles and with supporting social and economic objectives.

Budget 2004 announced that the Government would review gambling taxation in light of the Gambling Bill. This review has benefited from substantial input from stakeholders.

The Government has considered taxation arrangements within the wider context of changes to regulation, technology and gambling markets. It has concluded that the current taxation arrangements for gambling are generally working well at present and that maintaining stability in the overall structure of taxation is desirable in a period of transition.

In these circumstances, the Government has therefore decided to maintain the current regimes which are working well for betting, betting exchanges, lottery and bingo, and to retain the system of amusement machine licence duty (AMLD), rather than move to a gross profits tax."

In November 2005 the Tasmanian government announced a deal to licence Betfair in the state. The deal will see Tasmania receive AU$5 million up front and is projected to pay Tasmania about $40 million per year.

Betfair, the world's leading betting exchange, also now operates in the Irish market. In August 2006 the company agreed to pay 10 per cent of its gross profit on Irish horseracing directly to Horse Racing Ireland (HRI); guaranteeing revenues to HRI in excess of €1 million (£700,000) a year, for the first three years. The 10 per cent specifically relates to gross profit on all Irish racing trade, not just that from Irish residents.

In November 2007, the British Horseracing Authority put a case to the Department of Culture, Media and Sport for a greater contribution from the betting industry in the 47th levy. With horse racing seeking a levy of somwhere between £135million and £153million for 2008-09, the BHA's document calls for the government to settle the levy on the basis of 15% of gross win on British horseracing. It also calls for betting exchanges to contribute to the levy on a "new and equitable basis". This would involve the imposition of a 1.25% Levy on net profits of punters on betting exchanges, raising the possibility that Betfair, may be forced to increase its commission charges.

Integrity Issues


In June 2003, Betfair and the now defunct Sporting Options signed a Memorandum of Understanding with the Jockey Club, alllowing it access to betting information on horse races which are "the subject of concern", including the personal details of those punters betting on such races.

When announcing the signing of the Memorandum, the Jockey Club, a private body that regulates horse racing, stated that it would only request such information whenever it had;

Users of both betting exchanges were asked to accept an agreement, which would see them surrender their legally enshrined right to privacy in the event of an investigation by the Jockey Club; which is, under law, a "private" body with no statutory mandate. Should they refuse to do so, they will not be allowed to trade on the respective exchanges.

Mark Davies, a spokesperson for Betfair, described the agreement as important initiative for his company and for the integrity of the sport of horse racing;


Since the MOU was signed, there have been a number of high profile cases involving the identification of irregular betting patterns on the exchanges. In March 2004, Miles Rodgers, who ran the Platinum Racing club, was warned off for two years after investigations into his laying of two Platinum horses, Uhoomagoo and Million Percent. Darren Mercer, a leading owner faced the Jockey Club panel in May 2004 over bets laid on his horse Joss Naylor before it was scratched from the Welsh Grand National; whilst four individuals, including the trainer Alan Berry, were accused of running a horse they knew to be lame in order to make a profit on the betting exchanges.

On the 3rd July 2006 City of London Police announced that eleven people had been charged with offences relating to allegations of fixing the outcome of horse races between 1 Dec 2002 and 2 September 2004, and money laundering. The Police had spent more than two years probing over 80 horse races in the investigation named "Operation Crypton."

Miles Rodgers, aged 37, of Silkstone, South Yorks; Kieren Fallon, 41, from Eire, Darren Williams, 27, of Leyburn, North Yorks, Fergal Lynch, 28, of Boroughbridge, York, Philip Sherkle, 39, from Tamworth, Staffs, Alan Berry, 43, of Lancaster, Steven O'Sullivan, 35, of Preston, Lancs, and Shaun Lynch, 36, of Minskip, North Yorks, were all charged with Conspiracy to Defraud Betfair Customers.

Paul Scotney, Director of Security, at the Jockey Club left most observers in no doubt as to how beneficial the betting exchanges were to him;

"I use the information from the exchanges almost on a daily basis and the audit trail they provide us at the moment is excellent. It makes my job a whole lot easier because of that. We do not have that situation with traditional bookmakers."

Betfair recently suspended payments following a tennis match between Martin Arguello and Nikolay Davydenko; "Betfair has suspended settlement of the match-odds market on this afternoon's second-round match of the ATP Orange Prokom Open in Poland between Martin Arguello and Nikolay Davydenko, pending consultation with relevant regulatory authorities." This represented the first time that Betfair had suspended payouts in an event after the conclusion of the event.

Opposition to Betting Exchanges


Betfair's competitive advantage is that it offers the punter value alongside a product architecture that is more easily accesible, more transparent and more versatile than anything that has gone before. That it is threatening the dominant market position of the Ladbrokes, William Hill's and Centrebet's of this world is clear clear -

  • Sean Boyce of Ladbrokes was recently quoted as saying; "We agree that betting at the current overrounds per runner is not sustainable either off-course or on-course, and we are concerned about the continuing downward trend of overrounds since the emergence of betting exchanges."

  • On January 29, 2003, David Harding, Hills' CEO was quoted as saying; "If you track the over-round per runner over the past twelve months, you can track it from the point where Betfair and Flutter merged (December 2001). Since then, there has been a steady decline in the theoretical overround per runner. ..........Some racecourse markets now return overrounds of only 1.2 to 1.3 per cent per runner. That is not sustainable. I cannot have a price mechanism for 50% of my business being desecrated."

    On 12 February 2003, the CEO of Jupiters, one of Australia's largest gaming companies was quoted as saying; "European betting exchanges are taking some of our high value clients away . . . which is having a major impact on the business."

    In a speech entitled 'The Impact of Betting Exchanges on Horseracing', Peter Savill claimed that the growth of betting exchanges had served to put the future of the entire horse racing industry in jeopardy. To hammer home his point, he noted that racing received £14 million from every one billion bet in betting shops, and seven million from every one billion bet on credit or through the internet, the sport received only one million from every one billion matched on the betting exchanges;


    "their impact on racing's finances has been ignored by the Levy Board, and the charging mechanism by which revenues are raised by both the Levy Board and Government is fickle to say the least."

    In evidence given to the Joint Committee on the Draft Gambling Bill, the BHB stated that their data licence to bookmakers was based on gross profits, because a stable relationship had always existed between turnover and gross margin, prior to the arrival of the betting exchanges. The betting exchanges, they argued, because they have directly led to a lowering of bookmakers gross margins, have upset the funding model;


    "The gross profit model is unusual in charging for a product, the purpose of BHB's data licence. It is inappropriate where the relationship between turnover and gross margin dramatically alters, as is the case with a business which seeks to operate on low margins. It confers an unfair advantage on the low cost operator and creates an unwelcome market distortion. A supplier does not price his product lower simply because his customer is a low cost operator. In the case of low cost airlines, the example chosen by Mr Davies in his evidence, Ryanair does not get a pricing advantage on fuel over BA simply because it has adopted a low cost model."

    As previously noted - the annual report of the Levy Board, the body that returns money to racing from off-course betting, was published in July 2004. It revealed that the Levy yield for 2003-04 had reached £100m for the first time. The figure represents a year-on-year increase of £25.5m, or 34%. This is the second year in which the Levy has been based on bookmakers' gross profits.

    The recent 'Betting Exchange Task Force Report', made to the Australian Racing Ministers Conference, stated that "the two most significant issues associated with betting exchanges are the enhanced levels of risk (both real and perceived) to the integrity of the Australian racing product, and the likelihood of substantially diminished commercial returns to the racing industry and to State, Territory and Commonwealth governments."

    Whilst the Joint Committee on the Draft Gambling Bill received evidence from the Asian Racing Federation, stating that "it is the view of our Executive Council that betting exchanges are incompatible with the best interests of racing and should be prohibited from operating on our sport."

    In July 2004, the Australian Federal Government, as part of its review of the legislation dealing with interactive gambling services, the Interactive Gambling Act 2001, announced that it had decided against regulating betting exchanges in Australia; "The report found no compelling evidence to suggest that betting exchanges were likely to contribute to an increase in the level of problem gambling."

    In August 2004 the South Australian Racing Minister Michael Wright, who is seeking to have betting exchanges totally banned, announced that the International Federation of Horse Racing Authorities Chairman Mr Louis Romanet had agreed to form a strategic alliance with him in pursuit of his campaign. Both parties agreed that betting exchanges, in that they allow punters to be on horses that lose, seriously undermine the integrity of horse racing. Mr Wright said;

    "I am delighted to have the support of such a prestigious organisation supporting our push to have betting exchanges banned......The International Federation of Horse Racing Authorities shares my concerns about the very damaging effects this type of gambling could have on racing in Australia and overseas."

    During the Annual General Meeting of the International Federation of Horseracing Authorities IFHA held in Paris on 4 October, horse racing authorities of 50 countries agreed on the basic principles to be respected concerning the provision of cross-border betting services. These measures will form the cornerstone of an Action Plan to combat all types of unauthorised betting on horse races.

    During the meeting, France-Galop's director-general Louis Romanet expressed his deep dislike of the betting exchange concept;

    "Betting exchanges encourage the professional punter to cheat small punters, and they are a definite threat to integrity. We will do everything we can to stop them coming into France. We prefer to get nothing from them byway of payment to keep them out."

    And, in its latest annual report for the financial year ending March 31 2004 the National Gambling Board (NGB) of South Africa warned against betting exchanges, which it said had "become a major threat to the stability of the industry, with more and more South African punters depositing money in the United Kingdom and betting via these exchanges".

    On Thursday, 14 October 2004 the Australian Jockeys' Association issued a statement saying that they support of the Australian Racing Board's campaign to oppose betting exchanges from operating in Australia. AJA chairman Paul Innes said his National Executive unanimously supports the ARB's view that online betting exchanges threaten the integrity and commercial future of the Australian racing industry. He said that -

    "They piggyback on the efforts of the jockeys, trainers and owners who stage race meetings, but are not prepared to pay anything by way of fair remuneration. Betfair has a very strange idea of what is fair - their investors get rich on the back of our members being cheated of their wages."

    Following the news in November 2005 that the Tasmanian government planned to introduce laws into its parliament to license Betfair, the Chairman of the Australian Racing Board, Andrew Ramsden was quoted as saying;


    "For the Australian Racing Board this issue is squarely about the integrity of racing - our capacity to run the sport in a way that the public has confidence in its integrity. It is an unshakeable fact that the presence of betting exchanges undermines this. The easy facility to make money out of horses losing is an undeniable temptation to cheat."

    The British Horseracing Board chairman, Mr Martin Broughton is no fan of exchanges, which he has claimed do not pay their fair share to racing. Announcing a reduction in prize money of 13.4 per cent for 2007, he said;

    "The real cause of lower margins is betting exchanges, and no progress has been made in seeking from them a fairer share for racing."

    The Japanese Horse Racing Authorities are also strongly anti-betting exchange;

    "Our position on betting exchanges has been and remains, quite clear. We strongly believe that it destroys the integrity of our sports and will ruin thoroughbred racing. Japanese racing is televised in Australia from time to time but they are not intended to be used for the purpose of betting exchanges. Therefore, we respectfully request that Betfair Pty Ltd refrain from using our race events for betting exchanges. I trust you understand our position and I thank you for your cooperation."

    A media release published by the New Zealand Thoroughbred Racing association headed "No to Betting Exchanges in New Zealand" stated that;

    "I have seen the independent economic analysis on the implications of exchanges for racing and anyone who thinks that betting exchanges would be a good thing for the New Zealand industry should think again."

    A media release dated 22 August 2006 from the chairman of the Australian Racing Board, Mr Andrew Ramsden stated;

    "So far as betting exchanges are concerned I reiterate my total opposition to this destructive form of wagering. The integrity issue that is at stake here is clear - allowing unlicensed persons to lay horses is a guaranteed recipe for undermining public confidence in racing. Mere access to the so-called "audit trails" of betting exchanges is no compensation for this attack on racing's integrity, and anyone who believes otherwise is deluding themselves. I believe that the best policy response is the path the WA government is taking, which is to take decisive action and explicitly prohibit betting exchange wagering."

    In October 2007 Betfair had its application to publish Western Australian race fields information rejected The decision, taken by Racing and Gaming Minister Ljiljanna Ravlich, was is in line with new legislation that prohibits the operation of betting exchanges in Western Australia, due to the threat they pose to the integrity of racing in the State;

    "The State Government’s legislation is not specifically about Betfair, but about betting exchanges generally whereby punters can back a runner to lose," Ms Ravlich said; "The integrity of the racing industries has to be protected at all costs....After serious consideration of these matters, I am of the view that it is not in the public interest to approve the application by Betfair.”

    Following the arrest of three jockeys and a trainer, as part of a police investigation into the corruption of horse racing in the UK the Association of British Bookmakers (ABB) issued the following statement;

    "The ability of betting exchange customers to act as unlicensed bookmakers without revealing their identities to punters is the equivalent of the sport sitting on a smouldering powder keg. For the betting exchanges to say that cases of alleged corruption would not be identified but for the excellence of their audit trails is akin to a householder leaving his doors and windows wide open and then claiming credit for reporting a burglary."

    In November 2007 Tabcorp chief executive Elmer Funke Kupper allegedly wrote to the NSW and Victorian premiers seeking a ban on betting exchanges. In a five-page letter to Victorian premier John Brumby he is said to have recommended that the state government "legislate a ban on betting exchanges". In the letter to Mr Brumby, Mr Funke-Kupper allegedly called on the premier to introduce basic reforms that "put competition over the internet and phone on a level playing field". He is said to have proposed the introduction of a fee of 1.5 per cent to 2 per cent of turnover on all corporate bookmakers and betting exchanges that publish Victorian race fields.

    The advertising of betting exchanges



    In 2003 the traditional William Hill objected to a Betfair national press advertisement that ran; "You get better odds at Betfair" and included a table of the odds available from Betfair and three other bookmakers. The table was headed "West Indies v New Zealand" and claimed "West Indies Betfair 1.82 William Hill 1.66 ... New Zealand 2.2 William Hill 2.1 ...".

    William Hill objected that:

    Firstly, that the comparison was not clear and fair, because the advertisers offered a different betting medium from the competitors named in the advertisement and because the advertisers'' odds were subject to limited availability and a maximum stake;

    Secondly, that the comparison was not clear and fair, because the advertisers charged commission on the quoted odds.

    Thirdly, that the advertisement denigrated the complainants'' business.

    Concerning the first objection Betfair said that members of the public could place bets on their website, at specified fixed odds, in the same way as they could place bets with a conventional bookmaker. They said the complainants'' odds were, like theirs, subject to limited availability and maximum stakes.

    The Authority understood that the complainants would accept bigger stakes and a bigger risk exposure than the advertisers, for the event referred to in the advertisement. It concluded that the comparison was not clear and fair.

    Concerning the second objection Betfair said that they charged a commission, on the whole event, of between 2% and 5% of net winnings. They said they were willing to mention their commission in future comparative advertisements.

    The Authority considered that, because the advertisement did not state that the advertisers charged commission on their advertised odds and the complainants did not, the comparison was not clear or fair. It asked the advertisers to state, in future advertisements, that they charged commission on net winnings and to ensure that comparisons were clear and fair.

    Referring to the thris complaint Betfair said the advertisement did not refer to the complainants except to state their odds. They said that was a factual statement and was not denigratory.

    The Authority considered that the advertisement did not denigrate the complainants'' business.

    Betfair aired a television advertisement in October 2007, containing the lines; "Next time you're looking to place a bet, go to Betfair. Unlike traditional bookmakers Betfair punters bet against each other and matching a bet means they can chose their own odds."

    A complaint was subsequently made to the Advertising Standards Authority questioning the notion that Betfair punters do actually "bet against each other."

    It was suggested that as bookmakers and spread betting companies also make use of betting exchanges, the notion that Betfair punters bet against each others was misleading, in that it suggested that Betfair was a pure play person to person betting exchange, when in fact it was not.

    The Advertising Standards Agency responded to the complaint as follows;

    "We have assessed the ad and your complaint and consider that there are insufficient grounds for ASA intervention at this time. You do not state in your complaint why you believe that big companies are involved in the betting process on Betfair, and on the information we have obtained we have no reason to belive that this is the case. In any case, as customers decide on their own odds for their bets, there does not appear to be any consumer detriment in the bet being matched by a bookmaker instead of a member of the public - the odds have already been decided by the person placing the bet."

    Liquidity Matters


    When comparing exchanges, of any sort, it is a common practice to focus on the matter of liquidity. In terms of betting exchanges, this can be measured in terms of depth (the size of the bet on offer), tightness (the spread between the back and lay sides) and immediacy (the availability of the bets on offer).

    Betfair, the clear market leader in the betting exchange sector, enjoys a significant competitive advantage, stemming from having "first mover advantage," namely, a positive network externality.

    A new trader is more likely to see his order matched on the Betfair exchange, than on any other betting exchange, because of the high number of users already using it. Accordingly, there is also an inducement for all traders to send their trades to the Betfair betting exchange at the same time, in the knowledge that they will all stand a better chance of having them matched.

    Other betting exchanges, may offer better technology, or a lower commission rate than Betfair, but unless they are able to redirect the entire order flow away from that exchange, they will suffer liquidity problems.

    Such is the extent of Betfair's dominance of the betting exchange space that it is to a large extent free from having to to compete on the basis of commission. Its competitors, on the other hand, have little choice but to do so.

    Initial low barriers to entry, saw a wave of new market entrants into the sector, but this only led to the fragmentation of that liquidity that existed away from the Betfair exchange.

    The history of stock exchanges teaches us that there would be significant advantages to be had, were all of the small players in the betting exchange sector to pool liquidity. The history of the betting industry, however, tells us that this is unlikely to happen.

    Competitive Pricing - The Over-round


    Betting exchange markets are characterised by lower transactions and information costs. Accordingly they have a tendency to be more informative, with punters trading those markets being provided with a more realistic assessment as to the chance of longshots. In simple terms this translates into the fact that the over-round to be found on the betting exchanges (including the exchanges' own commission) is consistently low relative to the traditional bookmakers' over-round.

    Our analysis of outright betting on the 2006 World Cup revealed that Betfair's book on the top twelve teams in the betting market was betting to an over-round of 100.92 against an average over-round of 112 elsewhere.



    Teams SvenskaspelWilliam HillLadbrokes Betfair
    Brasil3.503.253.503.85
    England9.07.08.08.6
    Germany9.09.08.09.8
    Argentina7.509.99.010.0
    Italy9.009.09.012.0
    France13.015.013.014.5
    Holland12.013.0 13.018.0
    Spain15.015.015.018.5
    Portugal20.023.023.027.0
    Czechs30.034.026.040.0
    Sweden30.041.041.042.0
    Croatia75.067.051.0110.0
    Mexico50.051.041.060.0
    Over-Round112.9111.6112.9100.92


    The issue of Starting Prices


    When the news broke that Betfair was in the race to sponsor Channel 4 racing, it was reported that the company would be keen to have Betfair "starting prices" included in the coverage in addition to the SPs used by traditional bookmakers, and real-time betting information during races to publicise the exchange's frantic in-running markets.

    In October, it was then reported that representatives of Betfair had made a submission to the Starting Price Regulatory Commission suggesting that the prices available on their betting exchange should form part of the overall calculation of the Starting Price. This offer was rejected by the Commission. Jack Houghton, a spokesperson for Betfair, was quoted as saying; "Betfair offered to provide data from its audit trail to assist in returning an SP that was more equitable, transparent and fair than the incumbent system....Betfair's concern is that the new approach, regrettably, does not prioritise the interests of punters."

    A new phase in Betfair's unarmed struggle against the traditional bookmakers kicked off on December 12 2007, when the company launched its own starting price service. Turning to the Southwell meeting of December 12, and the average over-round per runner on Betfair was 0.54 compared with an official over-round per runner of 1.52.



    Betfair SP vs Traditional SP*




    RaceBetfair SPTraditional SPBetfair OPR**Bookmaker OPR**
    1102.71130.271.3
    2104.11070.681.16
    3105.81080.971.33
    4103.61110.361.10
    51071230.632.09
    6105.81160.641.77
    7103.41150.4251.88
    Average104.6113.20.561.52

    * = Southwell December 12 2007. Betfair commission factored in at 5%. ** = Over-round per runner.


    Unique selling points of betting exchanges?