An exchange of bad ideas
The reality of peer to peer betting is full of pitfalls and unintended consequences, but we can't stop telling ourselves this time it will work
It’s over 20 years since betting exchanges first came looming into view like a group of teenagers desperate for attention. Right from the start, they ran around screaming “death to the bookmaker” and for a brief moment in time we really did all think exchanges were the future. But twenty years on it’s a claim that doesn’t really stand the test of time.
Betting exchanges did not, in turns out, kill off fixed odds betting. They did nearly kill themselves off by overreaching and underperforming. But due to their utility they remain a niche segment of the UK gambling market and an important part of the global black markets. Most notably they play a role for cricket and horse racing betting, with soccer still really a fixed odds game for the most part.
But what is curious around this is none of the promises they made were untrue. They do provide the best value, or at least the lowest overrounds, they do allow anyone to make a market or put up an offer and they do allow bettors to take either side of a bet. But they take a fraction of the bets of the fixed odds words, and an even smaller fraction of the bettors.
So what went wrong?
Well, nothing really.
Initially Betfair grew rapidly, was hugely popular with bettors and became a stock market darling. But in time it stalled and gradually began to choke under the weight of its own expectations. Increasingly complex technology overhead, doubling down on the idea it was changing the world of betting forever and forgetting to keep it fun.
Exchanges have a fairly low natural ceiling in their current guise. The product itself will only ever appeal to a certain value-driven type of gambler, and only to a subset within that group. And this is problematic because the ones it doesn’t appeal to are broadly the ones who pay for everything.
Aside from start-up capital, there is only one real input into an online gambling business and that is losing players. Call them whatever you want, mugs, wagons, squares or recreational bettors. Players making -EV bets and losing money in both the short and long-term are the people who keep the lights on and exchanges struggle to keep them engaged.
It’s just not that much fun. The UX is generally more utilitarian and the proposition is both too simple and too complicated. The stripped down interface is a necessity when providing so much information (back, lay, odds ladders etc) but is a turn-off for customers used to the bright lights of a traditional sportsbook.
At the same time the ability to lay, trade or make markets takes time to learn and even more time to get good and this time for value exchange doesn’t work if you are a losing player. Also in theory you are losing money directly to someone else. Someone who my implication is smarter and better at this than you. Now that’s no fun at all.
Market Makers and Liquidity Providers
The other big issues is the wider market ecology. With a declining input of losing money the exchanges also faced the issue of money draining out of the system to winning traders. The solution is to either ban those players or to put them on profit sharing deals where the exchange takes a share of any profit they make from their trades.
The concept is to protect what is absolutely vital to any exchange: liquidity providers.
Pure P2P wagering can never really exist as it relies on capturing the moment of intent between two players at exactly the same time. In other words you need to find two bettors who not only want to bet both sides of the same thing at the same price but at the same time. It just doesn’t happen.
Instead the only real way an exchange can function is having one side of the bet put up as an “offer” and wait for it to be taken up by a counterparty. This is much the same as any other financial market, but is something most bettors are entirely unused to as a concept. You see a price, you bet the price you take your ticket. Not here.
Very few recreational players want to be making offers, as they know a) they don’t actually know what the right price is and b) the market can easily move away from them even if they do. So instead offers are mostly, near entirely in some markets, left to large liquidity providers and market makers.
Follow the money…
Liquidity providers comprise roughly three groups.
The House or parties affiliated to the house
Large betting groups or syndicates
Other bookmakers
The first is fairly obvious, and should not be viewed as anything untoward. Having some liquidity on the site is vital, and a bet offered at at price you are willing to take from the house is no different to one offered by a third-party. Where it can get a little fuzzier are where these key providers are linked to, but not technically part of the group that operates the exchange.
A large investment group, betting syndicate, or other interested party could in theory be both invested in the exchange and one of the key liquidity providers to it with a very different strategic and operational goal for each part. That’s not to say this can’t work and be beneficial to the players, as clearly it can, but it does make everything a little messier.
The second group is where most of the money on the major exchanges comes from, with large betting syndicates signing long-term agreements to provide market making. What do they get in return? That depends how good they are at making deals, but often it will be lower commission fees and a more stable, fast access to the markets via an API or similar.
This doesn’t mean they are front running, it just means they can trade without fear or the technology costing them money rather than their order book strategy. And other bookmakers looking to hedge will have a similar if different relationship with the major exchanges, with the exchange acting as an additional “out” for them.
Be careful what you wish for….
Beyond this there are lots of pro bettors, or betting groups also on API access paying more standard fees and generating a lot of turnover, semi-pro players doing the same to a smaller level, arbers and bots trading on rules, human traders playing the markets, matched bettors playing the bonus offers and mugs playing themselves.
The question really is where do losing bettors see themselves fitting in here? Many semi-serious bettors like to talk up some of the advantages of the exchanges as allowing them fairly unfettered access to markets the traditional sportsbooks have restricted them from betting into. But this comes with unintended consequences.
They create efficient markets. Yes, but you can’t beat an efficient market. That feels somewhat problematic to me.
They also create inefficient markets I can exploit. OK. Sure. But this is 2021 and information is cheap and what are the chances you are the one doing the exploiting?
The reason I can’t win is the margin. No. It really isn’t. But go ahead and find out…
The big promise of markets without player restrictions is everyone can be a winner, but the reality is even more of you will be losers. Betting is a zero-sum proposition, and somebody has to be a loser, in fact lots of people have to be loser. That is how it all works.
It’s a serious business
Where betting exchanges are fun is for more serious bettors, or to be accurate more engaged bettors. The ability to trade creates a new strategic experience around sports betting that both mitigates losses (in theory) and extends the sweat almost indefinitely in the case of some long-term markets.
There is an additional concept, which I don’t really have space to go into here, where exchanges or similarly low-margin, low-restriction, sharp books generate sufficiently stable, liquid and efficient markets they encourage a new range of participants to become involved. This could be hedge funds, HFTF, major investors or simply high-value bettors who have struggled to get their bets laid in the past.
You will often hear people talk of this turning betting into a true financial market. But bets have no underlying value and the entire system is a zero-sum game ultimately. While this can also be true in some financial markets, generally you are trading an asset or commodity with some underlying value and the ability to generate further value.
I’m not dismissive of this concept, but it’s something fundamentally different to what exists today. It sort of exists in other, less regulated markets, but that is also in part a factor of how money gets into said markets. The combination of cash and agents creates larger packets of liquidity than would exist naturally in a fully open market.
But we digress. Back to the point at hand.
Bringing back the fun?
So exchanges are good at creating serious betting opportunities? Partially yes. What they are generally terrible at is the casual betting experience. Operators try and resolve this by making ever sexier user interfaces, or by simplifying the experience and making it much closer to a fixed odds betting site.
But to-date this has never really worked.
The biggest problem with exchange betting is the exchange is always viewed as the end point. A betting exchange still seems like such a radical exciting concept the idea is always to present it as the product to the customer, trying to forget the last seventeen times this was done and the customer said lol no thanks.
What operators should be thinking of is the exchange as an underlying technology, an enabler, and not an end product in itself. The bettor of today doesn’t want to bet on a utilitarian platform that offers slightly more value and a lot less entertainment. They want something fast, fun and entertaining.
Stop thinking of the exchange as a mass market consumer product and start thinking of it as a technology you can build mass market consumer products on top of. This is pretty much what Smarkets is doing with its SBK sportsbook, and what Sportstrade is trying to do in the US market. But there is so much more potential here still.
As we enter the third decade of peer-to-peer wagering it defies belief we’re still using basically the same user interface and pretty much the same customer experience. There’s a few more bells, a couple more whistles, and a shit load more bots, but nothing really has changed. For the future of betting it does feel awfully like the past, and it’s really time someone did something about that.
Or perhaps, it’s time we just accepted the best place for it is where it sits now. The past. A good idea that didn’t really work…