BetFair Removes The Middle Man

I was getting through some of my old Cigar Aficionado magazines this afternoon and ran across an interesting article about a company named Betfair.com

Betfair removes bookies from the gambling equation. Started by a couple of guys - one a former JPMorgan derivatives trader in the United Kingdom - the company serves as an electronic exchange where individuals can (anonymously) offer bets to other gamblers in the network. The structure allows for all sorts of arbitrage and hedging opportunities for the more experienced, patient, and sophisticated "gambler".

The whole article is good. The following is a summary from the middle of the piece:

"That project has grown into Betfair, a revolutionary system that has taken gambling by storm in the United Kingdom. It is a peer-to-peer betting service, which works online and allows bettors to wager with one another rather than with a bookmaker. This takes the middleman—the bookie—out of the equation. Lines are set by the gamblers, with people logging on to Betfair's easy-to-navigate site and offering odds or point spreads, hoping for takers. Let's say, for instance, that the Dallas Cowboys are playing the New York Giants and you think the Cowboys should be favored by four. You post that you are willing to give those points. If somebody else on the site wants to make the bet, they will be matched against you and the wager is made. This happens with split-second timing, and, of course, it's anonymous; you don't know with whom you're betting. Everybody has funds, in the system, to back their wagers, and transactions are reconciled immediately after the game is completed.

The incentive to offer more attractive deals to the other gamblers—let's say, giving five or six points instead of four—is that you will get your bet taken quicker. This makes for a more efficient market, as gamblers, rather than bookies, who have ulterior motives (like balancing their books), refine the numbers. As used by straight-ahead bettors, who simply want to place wagers, Betfair allows for the negotiation of more favorable odds and lower commission costs (2 to 5 percent per bet) than those charged by bookies.

For sophisticated players, it becomes considerably more interesting. "There are those who use Betfair for trading their positions," says Black, explaining that he has devised the system to function just like an equities market. "If you back a horse that is 10-1 and lay it [bet against it] at 8-1, you can't lose"—you have essentially bought low and sold high, a strategy known as middling. "If the horse wins, you make the difference between the two wagers.

And you can position yourself so that no matter what happens, you make money: you back it for 50 quid and lay it for 55 quid. That way, if you lose, you win five pounds. If you win, you walk away with 60 pounds. That's what we call a green book." But, as with the stock market, there is a potential downside: 'The danger is that you can get into a position and not be able to get out of it because the price keeps going further and further down.'"