It’s no exaggeration to say that the advent of internet betting fundamentally changed the gambling industry forever.
If you’re old enough, you might recall the unique culture of the local bookies: the smoke, the noise, the surprising level of optimism amid the constant reality of seemingly endless losing streaks.
The problem was back then, the bookmaker’s over-round – or the ‘house edge’; the unfair advantage that a bookmaker has against you.
Even the most finely-tuned betting system, or the most exacting pre-race analysis, would fall victim to the unfavourable odds that the bookie, needing to make a profit, offered to his weary and frustrated clientele.
But something wonderful, glorious – and entirely out-of-the-blue – was about to happen. And that thing was called the Betting Exchange.
In June 2000, two entrepreneurs, Andrew Black and Edward Wray, launched a website called Betfair.
It was to mimic the stock market, but with one small difference; the commodities for sale weren’t copper, coffee or coal. They were betting odds – the same betting odds that had, so far up until then, been sold at inflated prices, and only obtainable in the confines of a bookmaker’s hallowed office.
This, it would come to be acknowledged, was revolutionary:
Suddenly, the average betting customer became both the punter and the bookmaker.
This meant that odds could be bought and sold, backed and laid, and the prices, just like on the world’s stock markets, were in constant flux. It also meant that the dreaded over-round was a thing of the past; the price that the odds were sold at should, theoretically, reflect their true market value – and should, theoretically, offer a better deal for those trading in them.
But how do you trade on Betfair?
The fundamentals of Betfair trading:
So how does Betfair, or any other trading platform for that matter, actually work?
Well, quite simply, they work exactly like a stock market does. And this isn’t just an analogy; Betfair really is a betting exchange; and the principles of the stock market hold true for those of Betfair too.
OK, yes, I know what you’re thinking at this point; so far, so vague. So, let’s make it clearer by walking through a real-world example of a Betfair trade.
The basics of backing and laying:
Just like at a traditional bookmaker, we can use Betfair to place a bet on the outcome of, let’s say, a football match. But the difference now is that we can both back the bet, and lay the bet (bet AGAINST an outcome).
So, as an example, we could either back or lay the outcome of a draw for a given football match, depending on whether we think the game will or won’t be drawn.
But this is where things just start to become interesting. As we mentioned earlier, the odds at which the draw outcome are offered are in flux; they change, both before the game has begun, and during. The price is volatile, not static.
And this volatility offers us an opportunity…
Because we can both back and lay an event, if the price at which we backed the draw lowers, we can then lay the draw and lock in a profit for ourselves regardless of the actual outcome of the match.
How does this work? Imagine if we backed the draw at odds of 3.0, with a stake of £10. This would give us a profit of £20 if the game ended a draw, or a loss of £10 if it did not.
Now, if the game was level at half time and if the odds were to change, say to around 2.0, we could lay the draw, this time with a stake of £15. This would give us a profit of £15 if the game ended a draw, or a loss (known as ‘liability’) of the same amount if it did not.
As you can see, regardless of whether the match finishes in a draw after this, we would come away with a profit of £5.
This is essentially the maxim of “buy low, sell high”, but the betting exchange version as opposed to the stock exchange.
Trading techniques and strategies:
The implications of being able to back and lay on the same event have profound effects.
Although there are far too many to mention here in one go, Betfair gives the astute trader a huge range of opportunities to make a profit on the various sporting (and non-sporting) markets available to them.
Three such opportunities are known as scalping, dutching, and laying-the-field. We’ll take a brief look at each one, and examine how you can use these techniques to your own advantage:
Scalping, or to give it its more formal name, “scalp trading”, is a strategy plucked straight from the financial markets of Wall Street and the London Stock Exchange.
This strategy, although seemingly simple, can be utilised in a number of complex ways, with the decision to favour one method over another depending on the characteristics of the specific market being traded.
The defining elements of a scalp trade are twofold:
The idea is to make a profit from small changes in the price of a market’s odds, and that the initial and exit trades are made in a relatively small timeframe.
The classic example is that of the “market maker”, a trade which profits from a single tick – or price change – in the market being traded.
A trader would do this by simultaneously backing the high side of a tick, say, at odds of 11.0, and laying at 10.5 (or below). The hope is that the odds will at some point move across this price region, with the outcome being that the trader “backs high and lays low”.
Market making isn’t the only way to benefit from scalping, and it isn’t always the wisest. But applied logically, it is a powerful tool to reap profits when the conditions are in your favour.
Usually defined as the practice of making a number of back bets on a given market, dutching is a sensible way to spread a given stake over a multitude of selections to hedge against the risk of a single, isolated bet on that market not coming in.
But for the trader, dutching can essentially be viewed as the art of bookmaking, inverted.
This means that you, as a trader, could potentially back every selection in a market, and still make a profit, assuming that you backed at prices that gave the book an under-round, rather than an over-round.
As an example, imagine a 4-horse horserace:
The theoretical price of each horse should be such that if you laid each horse with a certain differential stake, your winnings (and, indeed, losses) would come to zero, regardless of which horse won. Yet, if you were to back each horse at an average price above 4.0 (for a 4-horse horserace) you would win. E.g.:
Horse 1: backed at odds of 3.0 with a stake of £10
Horse 2: backed at odds of 9.0 with a stake of £4
Horse 3: backed at odds of 9.0 with a stake of £4
Horse 4: backed at odds of 9.0 with a stake of £4
These are stylised odds and stakes, but if you crunch the numbers, you will see that it doesn’t matter which horse wins, you will still come away with a profit.
As the name suggests, this strategy has you placing a lay bet on every selection in the market – usually a horse or greyhound race – with the hope that you can catch enough trades at the right prices to ensure that you make a profit, no matter what the outcome of the event.
The usual way in which this strategy is implemented is by placing orders across the market at odds below 2.0. This way, if a minimum of two selections are taken up, then a profit is guaranteed. If you are lucky enough to get more than two selections, then the profit rises, quite spectacularly.
On the face of it, this approach to trading appears to offer lucrative rewards with a very simple strategy. But be warned; the markets are more robust than we often give them credit, and laying-the-field isn’t a smooth road to success.
The experienced trader will tell you that a deep knowledge of racetracks and their peculiarities is the secret to unlocking the lay-the-field conundrum; as they say, fools rush in where angels fear to tread…
Exchange market trading is one of the most exciting and rewarding ways to spend your time betting – not to mention one of the most interesting and technically difficult to master.
The few techniques presented here are just the tip of the iceberg, and you should never stop learning in what is a constantly evolving and dynamic marketplace.
Enjoy your training, and until next time, good luck!