Betting exchanges are an alternative to the traditional bookmaker in that they pit two bettors against one another with their money on the line. For example, if one sports bettor wants to risk $110 betting on the New England Patriots to cover 7.5 points against the Buffalo Bills while another bettor wants to risk $110 on the Bills to cover against the Patriots then the Betting Exchange will pit those two against one another rather than taking the bets themselves. While the Betting Exchange appears to be the better value it’s important to understand how they work and the types of hidden costs that you need to be aware of before jumping in to the mix. Here is a look at the hidden costs of Betting Exchanges.
Efficiency vs. Liquidity
The studies suggest that the peer-to-peer exchange models result in nearly perfectly efficient markets as the implied probability of an event matches the odds offered with a negligible variance. This means that if you followed a consistent betting system with a 50% probability such as a coin toss then you should be even in the long run. The potential for making a profit arises from factoring in the advantage of handicapping skills or privileged knowledge. This is definitely true for certain markets but it’s important to remember that open markets are often less efficient as the number of bettors and level of available amounts to bet is too low to correctly balance the market. This means that the Betting Exchanges will punish extremely early bettors depending on who they are supporting.
The Hidden Costs
The benefit of the Betting Exchange could disappear when you include the commission charged on your winnings. Irrespective to the issue of marketing efficiency, the benefit of the exchange disappears when you include the commission exchanges charge on your winnings up to 5%. This only affects your winnings so it makes the odds appear better than they actually are with the tax coming afterwards once you have won a certain amount. Assuming that an average commission rate on Betting Exchanges is 5%, your average bettor must win at least 51.3% of their bets to achieve long-term profitability. There is no competition for low commission sportsbooks where the average commission is only around 2%, which translates to a 50.5% target for long-term profitability.
While the Betting Exchanges do an excellent job of making it appear as though their sites offer the best value the reality is that there are hidden costs that negate the perceived value and they usually aren’t noticed until it is too late. The head-to-head exchange would be better than a two-percent commission charged by sportsbooks. However, when you factor in that the Betting Exchanges are charging 5% to use their service then you now have a greater cost than you would have had if you simply used the sportsbook. The numbers will be different depending on which site that you use but you need to make sure you understand the potential hidden costs of Betting Exchanges and avoid paying more than you should when it comes to commission amounts.