In-play betting and the future of exchanges in the USA

It’s news to no one that the US betting market is about to explode, state by state, as betting on sports becomes legal. No doubt in-play betting will almost immediately be a hot potato. There’ll be scare stories, some justified, about how easy it easy for customers who display problem gambling tendencies to get in much deeper, in the heat of the action, than they intended.

One open question is whether betting exchanges, for which a huge driver of volume is in-play betting on a peer-to-peer basis, will be part of the picture in one or more states.

So what is a betting exchange? Around 20 years ago, some very smart people realised that the incredibly sophisticated market platforms available to traders in fields like commodities, forex, equities, and derivatives could be applied just as easily to what would traditionally have been considered to be sports betting markets. So, eventually, Betfair was born.

Betfair is a peer-to-peer betting platform, where participants can place bids and offers into the market, much as with any other trading platform. For each possible outcome (for example, the winner when two teams are competing in an NFL game) there is a “back“ and “lay” price, the equivalent of “buy” and “sell” if you’re a commodities trader. There’s no supervision as such, which means that at any given time a bettor could, for example, chose to “buy” the Patriots at the market price of 1.67 – meaning for every $1 they bet / buy, they’d get $1.67 in return if the Patriots win. But that buy must be matched to another player willing to “sell”, if the bet is to actually be placed.

The genius in the model is the charging structure. People generally don’t just treat the Betfair market as you would a Vegas sportsbook – place one bet and then watch the game. Instead, mid-level and sophisticated players in particular will be constantly in and out of the markets, adjusting their position to reflect injuries, score changes, and more subtle (and changing) factors in the game. The ability to bet in-play means skilled players can arrive at a situation, before the end of a game, via multiple “trades”, where they will be profitable on all outcomes. Betfair charges a commission on net winnings per market, as opposed to a commission per bet or trade, so there is no (fee) penalty for placing a stream of bets.

The house has no stake in who wins or loses – remember all the money on the exchange is placed there by players – so the result tends to be an incredibly efficient market. Where typically a sportsbook might have a 10-20% house edge, Betfair routinely has markets that are within 1% of perfectly efficient. This means the best odds to back are nearly always on the exchange, even allowing for that commission on net winnings (which starts at 5%, but obviously isn’t paid if you don’t win). This market efficiency also provides the opportunity for betting operators to level out their risk – if they are heavily exposed on one particular selection in a horse race, for example, then, laws permitting, they can simply lay any amount they need in a liquid exchange market to bring their book back in line.

It’s certainly fair to say that there are a number of parties interested in the opportunity, lurking in the UK and elsewhere in the world, of providing a betting platform for a potential market of tens of millions of new entrants to in-play sports betting. One key question in the U.S. will be whether state-by-state legislation and cross-state concerns will scupper the whole concept – exchanges thrive on liquidity, so a certain critical mass of money in the market is needed for it to be appealing.  The technical and security challenges of having one pool, but several companies feeding into it (as might be the case in online poker) may be too much to handle, and individual states may not have enough liquidity to maintain large enough live markets – this will be one to monitor.

Clearly there will be prospective operators with an eye on delivering a true category killer such as Betfair, whether for the larger individual states or, pending legal evolution, a national exchange. However, there will also be a good number of predatory exchange players looking forward to some easy pickings from the vast shoal of “fish” about to be delivered into what is by now a highly sophisticated algorithm-driven peer-to-peer betting pool. At this level it’s a little like poker – luck plays a part, but an analyst with exchange trading experience will demolish a newbie player in in-play trading in very short order.

Since Betfair began, the markets have become ever leaner and more efficient, and while it would be an exaggeration to say that the only people making money are bot operators and other technical wizards, there’s certainly a very top-heavy look to who makes the money off the less-educated players. The possibility of less-aware players being fed in by the millions will make stratospheric returns possible, at least in the short term, and one can imagine a feeding frenzy while slow and mass market money gets taught a tough lesson by players for whom 0.1 seconds is an eternity and a 0.5% edge on huge volume is a game changer.

Baseball in particular has been reduced to an incredibly stats-driven game by the Sabermetricians, and there’s no doubt that the combination of this science and the highly sophisticated cashout models already in use by fixed odds operators would leave amateur and “hunch” players in a world of pain. The other major U.S. sports at least have a little less scientific predictability, but one month of in-play odds knowledge is no match for the 15 years held by the sharpest players.

The level of naivety actually present in the US market has yet to be determined, although seeing statements on social media like “it’ll be easy to make money, just back team x in a sportsbook in city y, and team y in city x, and you’ll be guaranteed to make money out of the local bias” suggests an almost laughable lack of awareness of the tenacity of the genuine advantage player. It’s also going to be a whole new world of pricing, with some of the outright markets visible in Vegas, at about 100% overround, about to be blown apart by the new level of competition. One suspects there will be a few existing business models, based on current margins, that will look fairly foolish once the price wars from the land grabs begin.