Betting Exchanges Explained – The Principles of Exchange Betting

If a horse is backed to win, there are two options: The bet can either be placed with a bookmaker or on a betting exchange.

If a horse is backed to lose (layed), there is only one option: The bet must be placed on a betting exchange since bookmakers do not accept bets on horses to lose.

If a betting exchange is used to place bets, then it is absolutely imperative that the following is read and its implications understood:

Some time ago, I contacted a betting exchange concerning a technical issue. During the telephone conversation, the exchange representative just happened to casually mention that their horse racing markets are, for all intents and purposes, perfect. This was totally unexpected.

It wasn’t something that I had even considered, though I don’t know why. I immediately realised that this statement had some major implications.

For the benefit of the uninitiated, a perfect market is one in which the strike rate is proportional to the horse’s odds.

Therefore, if the odds of a horse are, for example, 10.0, then the horse will win, on average, 1 in 10 of its races. Likewise, if the odds of a horse are, for example, 80.0, then it will win, on average, 1 in 80 of its races.

This single fact is the main reason why those who place bets on exchanges lose money in the long term. It also signalled the start of a journey for me whose purpose it was to overcome this major issue.

To illustrate this point, let’s assume that a betting exchange is used to lay one horse in each of 10 races and that the stakes are £1 per horse.

Let us further assume that the odds of each horse are 10.0 and that the market on each race is perfect.

If the odds on each horse to be layed are 10.0, then each horse has a 1 in 10 chance of winning. The strike rate of each horse will, therefore, be (10 – 1) x 100/10 = 90%. In
other words, on average, 9 out of the 10 horses that are layed to lose will lose (and the bets will be won).

The 10th. the horse will win and the bet will be lost.

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Here are the results of the 10 bets:

Note that the Gross Profit on the 10 bets in the above table is zero i.e. a break-even situation is achieved over the 10 bets.

If the 5% commission, which is levied by the betting exchange on all winning bets, is now included, there is a loss of £0.45 over the 10 bets. This is shown in the Net Profit column of the above table.

Notice that the loss is equal to the sum of the commission paid on the 9 winning bets.

Is the situation any different if the selections are backed to win, rather than layed to lose?

Well, let’s look at this example in which one horse in each of 10 races is backed to win using stakes of £1 per horse.

Let us further assume that the odds of each horse are 10.0 and that the market on each race is perfect.

If the odds on each horse to be backed to win are 10.0, then each horse has a 1 in 10 chance of winning.

The strike rate of each horse will, therefore, be 1 x 100/10 = 10%. In other words, on average, 9 out of the 10 horses that are backed to win will lose (and the bets will be lost). The 10th. the horse will win and the bet will be won :

Note that the Gross Profit on the 10 bets in the above table is zero i.e. a break-even situation is achieved.

If the 5% commission, which is levied by the betting exchange on all winning bets, is now included, there is a loss of £0.45 on the 10 bets.

This is shown in the Net Profit column of the above table.

Notice that the loss is equal to the sum of the commission paid on the 9 winning bets.

As can be seen in the above two tables, regardless of whether the selections are backed to win or layed to lose, the outcome is the same. There is a loss of £0.45 in each case.

Regardless of the odds of the selections and assuming a perfect market, there will always be a resulting loss if the strike rate of the selections is equal to that which is expected, given the odds of the selections.

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In addition, the losses will always be equal to the sum of the commission paid on the winning bets.

hat this shows is that, in a perfect market, over the long term and with average luck, a break-even situation will be achieved.

When exchange commission is taken into account, a loss will be incurred.

So, if we always lose, who wins?

The answer to this question is the betting exchange which levies a 5% commission on every matched bet, win, lose or draw.

Basically, betting exchanges can’t lose.

So, if that’s the case, why doesn’t the book stop here? Surely, there is no point in continuing. Well, actually, there is. By using the information contained within the remainder of this book, maybe, just maybe, we can succeed.

Now, let’s move on because the situation is actually worse than the one depicted above.

Let’s see why.

Let’s suppose that we have a run of good luck and win £100. Given that 5% commission is levied on winning bets by the betting exchange, 5 x £100/100 = £5 should be paid in commission.

This leaves a net profit of £100 – £5 = £95. Well, this statement isn’t strictly true. Let’s see why.

Let us assume that a laying system is used to lay 14 horses whose odds are all evens. Let’s see what happens:

From the above table, we can see that the gross profit is £20.

Given that 5% commission is levied on winning bets by the betting exchange, the commission, in theory, should be 5 x £20/100 = £1.

However, we can see from the above table that £4.00 was paid in commission.

Why is this? The reason is that betting exchanges levy a 5% commission on each winning bet, not on the total gross profit.

Instead of paying 5% commission on the profit, 4 x 100/20 = 20% commission was paid on the winnings.

In other words, the actual commission paid was four times that which was expected.

Let us now look at this example where we lay 3 horses to lose.

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From the above table, we can see that the gross profit on the 3 bets is £1.

If the betting exchange commission of £1.05 is included, we see that there is a net loss of £0.05.

In fact, more was paid in commission (£1.05) than was won (£1.00).

In this instance, the commission rate wasn’t 5%, it was 1.05 x 100/1 = 105% i.e. a staggering 105 %!

Although the above is an extreme example, it is perfectly feasible for the commission payments to exceed the gross profit. This is not uncommon.

So, now we know why we lose money when we use a betting exchange.

Basically, it is due to the fact that the betting exchange markets on races are approximately perfect.

If bets are placed in a perfect market, long-term, a loss will be incurred due to the commission payments levied on all winning bets by betting exchanges.

As a result, the profits will be insufficient to offset the losses.

Therefore, over time, losses will slowly increase. This is why the methods in this book are required – to move the odds more in the punter’s favour.

It may appear from the above that I am anti-betting exchanges. I wish to state, here and now, that this is not the case.

In fact, betting exchanges should be treated in the same way that one would treat a friend for without them to accept our bets there would be no profit for us.

If you understand nothing else in these series of articles, then I would suggest that you familiarise yourself with the contents of this, and the previous on bookmakers.

I would also suggest that you also familiarise yourself with their implications.

In the first article, we read about the bookmaker’s Overround giving them an inbuilt advantage over us punters.

In this article, we read about the betting exchange’s commission which gave them an inbuilt advantage over us punters.

The remainder of the articles are concerned with following a set of strategies which are designed to give us punters an edge over the bookmakers, and the betting exchanges, that will allow us to compete on much better terms.