Betting exchanges are like any other exchanges: Places where objects can be bought and sold, contracts made. You don’t bet against the exchange, like betting against a bookmaker, you bet against other users of the exchange.
The terminology may sometimes be a bit different, but the basic principles are just as at financial exchanges. And as financial exchanges have proven to be efficient mechanisms for trading shares, options, and other kinds of securities, so have the betting exchanges proven successful in the world of online betting.
When you log on to a betting exchange, you’ll see a set of odds and volumes. They represent betting offers put up by other members of the exchange. Here’s a typical situation, representing the market for Brazil to win the World Cup:
Backing An Outcome
You can back Brazil to win at odds 4.80 and at most with EUR 1,000. This means that other exchange members are offering odds 4.80 to you, each with some amount, totaling EUR 1,000.
If you want to bet for Brazil, 4.80 is thus the best price you can get at the moment. If you bet EUR 200 at these odds, your bet will immediately be matched, and you’re on! You can place a betting offer at higher odds, for instance stating that you want to bet EUR 200 at odds 4.90. That offer will then stay at the exchange until, possibly, someone takes you up on it.
When the EUR 200 bet at 4.80 was matched, the EUR 200 was locked at your account. If Brazil go on to become World champions, then you’ll get them back plus receive the profit of your bet. EUR 200 x (4.80 – 1) = EUR 760. If not, you’ve lost the bet and the EUR 200 is paid to the counterparty at the exchange.
The exchange is not counterparty to your bet. They don’t care if you win or lose. What they provide is an efficient and anonymous mechanism for entering and matching betting offers and a mechanism to ensure, that you get paid. When you enter a bet with someone, their potential loss from the bet will be taken from their account at the exchange and held by the exchange until the bet is settled in order to guarantee that they can pay winnings to you.
You’ll see that there are offers for you to back Brazil both at 4.80 and at 4.70. Assume that you want to bet a total of EUR 2,000 for Brazil. You can then place EUR 1,000 at 4.80 and EUR 1,000 at 4.70. In total, you placed EUR 2,000 and got average odds of 4.75.
Sometimes, the volume at the best price is quite low. For this reason it’s good to know what the 2nd and 3rd best prices are. If you place your mouse pointer in the odds tables on an exchange prices the best three prices will appear on your screen.
Laying An Outcome
When your back bet of EUR 200 at 4.80 for Brazil to win was matched, one or more people took the countering position. While you backed Brazil, they layed Brazil to win. They were betting against Brazil to win.
You can do the same, betting against an outcome to happen. This is something you typically cannot do at bookmaker sites and one of the main advantages of betting exchanges.
When you’re backing an outcome, you want the odds in the bet to be as high as possible. Conversely, if you’re laying, then you prefer to offer as low odds as possible to the guy who backs. So, in the situation above, the best possibility for you right now is to lay Brazil at odds 5.00. You could even offer lower odds, but your offer would initially be unmatched.
Assume that you lay EUR 50 at odds 5.00. If Brazil loses, you get to keep the money of the backer and thus have a net win of EUR 50. If Brazil wins, you have to pay him his net win of EUR 50 x (5.00 – 1) = EUR 200.
So, your risk is EUR 200 and if you win, your net profit is EUR 50. In fact, when you’re laying Brazil to win at odds 5.00, it is exactly identical to backing Brazil not to win at odds 1.25 = (200 + 50)/200).
Probability and Value
Here is how we, based on the odds of a bookmaker, calculate the probabilities behind the posted odds. The calculations are done for an event with three outcomes, like a football match ending with either 1 (home win), X (draw), or 2 (visitors win), but can be used quite generally. The only condition is that the outcomes, for which odds are given, are mutually exclusive and jointly cover all possible outcomes of the event.
The calculations above show how to obtain the probabilities intrinsic in the odds of the bookmaker. The bookmaker’s probabilities may of course not be correct estimates. When you judge the probabilities to be different, is when you have a good opportunity to make money on a bet.
STEP 1 – CALCULATING THE BOOKMAKER’S PROFIT INDICATOR
First we calculate what could be termed as the bookmaker’s profit indicator. It shows how much the bookmaker receives in stakes whenever he makes a payment of €1. If odds is the (European) odds for a home win, the payout from a €1 bet, then 1/odds is the bookmakers price for a payout of €1 in case of a victory for the home team. The price for paying out €1 irrespective of the outcome of the outcome of the game (where you play all three outcomes) is thus:
|A table containing the initial odds for calculation.|
In this case the profit indicator shows that the bookmaker receives a stake of €1.181 for every €1 paid out.
STEP 2– CALCULATING THE BOOKMAKER’S PAYOUT SHARE
If the bookmaker receives the bets in the right proportions, then the payout share (as part of total stakes for that match) for the customers will be:
Payout share=100%×1Profit indicator
From the payout share, you’ll have the profit share for the bookmaker as 100% – payout share.
STEP 3 – CALCULATING THE PROBABILITY FOR EACH OUTCOME
For the final step, multiply the bookmaker’s price for each of the three outcomes by the payout share. This removes the part of the price, which is the bookmaker’s profit, and leaves only the pure probability element of the price.
The probabilities are thus calculated like this:
Probability[1 – Brazil]=0.7142×84.67%=60.47%
Probability[X – Draw]=0.2667×84.67%=22.58%
Probability[2 – England]=0.2×84.67%=16.93%
Sum is rounded to 100%.