When is a betting exchange no longer a betting exchange?

It’s 18 years now since betting exchanges first launched and it’s fair to say that while we at Betdaq and some notable others have worked hard to challenge Betfair, their first-mover advantage delivered critical scale and a dominant market position that has largely been maintained to the present day. But after a few quiet years where exchanges seemed out of vogue, while everyone was chasing more attractive sportsbook and casino industry growth rates, there is a lot of attention coming back onto the exchange industry, and the business model appears to be evolving into something that can sustain more than just a couple of profitable operators.

The introduction of Betfair’s premium charge highlighted the undeniable truth that the smartest guys on the exchanges were winning big and paying a fraction of their winnings back to the exchanges by way of commission. The exchanges needed to compete with massive sportsbook marketing budgets to attract recreational players and keep the ecosystem moving, and someone had to fund this new player acquisition.

Most large players we’ve discussed this with get the logic of winners having to pay more to fund new player acquisition, but baulk at the 40-60% levels of premium charge set by Betfair. We work off a target number of 25% of winnings over time retained as revenue, and most customers reach this through the natural churn of wins and losses. It is also a number that seems to be acceptable to most large winning customers, but we also believe the optimal charging model is not simply about absolute winnings but the contribution the customer is making to overall exchange liquidity.

Another factor is that outside of the UK and Ireland the world has been slow to embrace and regulate for betting exchanges even where online sportsbooks and casinos are licensed. We know what we left on the table in a number of countries and it hurts that we can no longer compete for that business. Added to that, the pace of technological innovation has stalled and exchange platform technology is now relatively mature. Competition has focussed on reducing commission rates – we moved to a flat 2% rate in January this year – rather than product-driven differentiation.

Sowing seeds

A few large exchange customers have partnered at an equity level with some of the smaller exchanges in order to provide liquidity, which makes a lot of financial sense for both parties but it also represents a fundamental shift in the business model and where all sorts of difficult questions start to arise about how a betting exchange should conduct its business.

Questions like, how active should an operator be in trading on their own exchange and what information do their own traders, group companies and shareholders get to see about what the customers are doing? There is a justifiable need for an exchange to provide seed liquidity into markets to provide an acceptable product to customers. We do this at Betdaq to the minimum extent possible, as a loss-making exercise, and we’re involved in about 6% of Betdaq’s traded volume.

Other ‘betting exchanges’ are now making as much as two thirds of revenue from proprietary trading on their own exchange and one recently admitted publicly that they are involved in up to 40% of bets on their exchange. The conflict of interest is obvious but does it actually matter? Well, yes, if winning customers are not welcome because they are playing against the house.

Ultimately, customers now have more choice about where they do business and that’s a good thing. Exchanges should be more transparent, though, about the extent to which they participate in their own markets, the rules of engagement, and whether they provide a true peer to peer product or something else.

Betdaq MD Shane McLaughlin