Most of the time, when people think about placing a bet, they think about visiting their local bookies or going online to their preferred sportsbook. Yet there are also those people who engage in sports betting via exchanges as well. These sites allow you to place bets against other players, peer-to-peer, rather than against the actual bookmaker, presenting an altogether different experience. Today, these two types of sports betting options co-exist in a friendly way, with sportsbooks often utilising the figures from exchanges to determine their own prices.
Yet this is not how it always was. With the arrival of betting exchanges, bookmakers were initially enraged over the alternative competition. They even set out to try and ruin the exchange industry before it had really got its feet in the door, with one or two moves towards taxing and so on being made. Here, we’re going to look at the past relationship between bookmakers and betting exchanges, and how they managed to patch things up.
It doesn’t take long for a person, a business, a brand, or anything else to take action when they believe something or someone is encroaching on their turf. Money and power will be greatly threatened in these circumstances, and this is precisely what happened for bookmakers when exchanges first began operating. And to really discover more about this, we need to travel back to the dawn of the new millennium, which is when things were going quite well for bookies in the United Kingdom.
Bookmakers Experience Three Years of Bliss
In March of 2001, Gordon Brown made the announcement that betting tax would be abolished. Back then, a 6.75% duty was taken from bookies by the government and passed on to the punters in the shops as a 9% tax. With the decision taken by the then Chancellor, bettors were able to have their gambling fun tax-free. Instead, Brown said that bookmakers themselves would be charged a 15% tax on their gross profits, with the changes coming into effect in January of the following year.
Thanks to the introduction of that law, bettors gained the privilege of being able to wager on their favourite sports without having to hand money directly over to the government (although people are still taxed indirectly through a point of consumption tax on operators). That marked a first since April 1968, when legal sports betting had only been around for a few years. Brown took this decision as a way of stemming the amount of betting turnover that was taking place on the offshore market, which was already providing tax-free gambling.
Naturally, the UK’s bookmakers were elated at the news. The William Hill chairman at the time John Brown said that it would be a law that is “great for everybody”, highlighting employees in his own company as well as the sports that William Hill offered betting on.
Victor Chandler had made the move to Gibraltar in 1999, making it an offshore betting company in the process, and it was this that had pushed the government to make changes. Through this move, Chandler’s customers only had to pay a service charge of 3%, which was much lower than those brands operating under the previous laws of 9% in the UK.
And it seems as though Brown’s betting tax abolishment paid its dividends, too. According to data from 2005, the switch to tax-free betting meant that the three biggest firms in the country – William Hill, Coral and Ladbrokes – opted to return their operations from offshore tax havens to the United Kingdom. This helped to create new jobs in the country and saw betting stakes quadruple, with the value of bets almost doubling to £53 billion.
Yet exchanges were waiting in the wings, preparing to seize their moment and gather a big head of steam to propel themselves into the limelight.
Betting Exchanges Aren’t Simply Operations for Nerds
Not too long before Gordon Brown altered the betting tax laws, Betfair had launched its online betting exchange. This came about on June 9, 2000, when the company officially introduced people to it, and things kicked off with the Oaks at the Epsom Derby meeting. Therefore, horse racing became the very first sport to be traded on the Betfair betting exchange. Despite this being something quite new and intriguing, it actually went by without being noticed very much. In essence, 36 customers experienced the exchange on its first day. But bookies didn’t really have any idea of what they had missed, and instead went on to label the exchange as something “for nerds” to get involved in.
But Betfair’s exchange saw various other smaller companies start their own up, and this is when they all began to gain traction in the sports betting world. No longer was it bound to be some sort of mini competitor to bookmakers. Instead, it would build itself up to be what could be deemed as the standard-bearer for a wonderful and entertaining new way of betting. Yet that was not something that bookmakers were simply going to settle for; now the exchanges were encroaching on their territory.
By August of 2002, action was being taken. Chris Bell, who served as the chief executive of Ladbrokes at the time, not only proceeded to acknowledge that exchanges were the competitor, but outrightly challenged their authenticity in the UK market. Speaking to the Racing Post at the time, he said: “The layer who goes on a betting exchange to take £100,000 out of a certain horse should be required to have a betting permit”.
He also went on to say that he believes at least one race every single day in Britain was fixed. And while some called his words on that situation questionable, considering he was pretty much informing customers of Ladbrokes and other sportsbooks that they were being ripped off, it actually revealed something else – that exchanges were posing a threat to sportsbooks. With that in mind, it was time for the bookies to go on the attack.
Some of the larger bookies actually got their heads together and tried to stop the exchanges from growing any bigger. Their outlook was to persuade the government to incorporate plans into the Gambling Act, which eventually came about in 2005. Those plans would see the exchanges require a licence and to be taxed in the same way. A gambling bill had been promised time and time again within the industry, although nothing had been produced by 2004 of any significance. Now, the bookies needed it more than ever to tackle their competition, with the exchanges swiftly rising in prominence.
Bookmakers also had some strong allies as well. At one time, a strong pro-bookmaker lobby had battled it out against other MPs, who took the side of the racing authorities. And with the funding of racing being quite dependent upon the bookmakers’ revenue, the two had pretty much joined forces.
Despite exchanges having fewer resources and less political clout though, it was clear that the sportsbooks were feeling threatened by the competition. Otherwise, why would Bell take such extreme action?
Betting Exchanges Labelled As Good For The Industry
Betting exchanges stuck to their guns, proclaiming that they offered new ways of excitement and enjoyment for gambling fans to get involved in. And not only that, but new revenue streams for sports bodies were being generated as a result of their existence. Yet bookies had another reason to dislike the exchanges – because they removed the need for the bookmakers and their often highly inflated profit margins. Bookies always want to be the ones on the winning side of things, and this is often why their margins are priced accordingly.
And even before there were calls to tax betting exchanges and require them to be licensed, bookies wanted them outlawed altogether. Of course, this was due to the fact that their profit margins were being squeezed, thanks to the presence of exchanges. Meetings were held numerous times to figure out how to proceed forward with accepting or denying the presence of betting exchanges at racecourses, but nothing came to light in the end. That was when the sportsbooks opted to try and force the government into licensing and taxing them.
The argument then came from sportsbooks that exchanges were bad for sport, and that they also encourage corruption within the scene. Yet as it stands, the very opposite of that is true. Exchanges serve as good thing for battling corruption, because every transaction, bet and phone call is traceable. Details of any activity which indicates insider trading can be supplied to authorities due to a Memorandum of Understanding (MoU). Exchanges wanted to be 100% transparent with their services and form healthy relationships with regulatory bodies, like the FA or the Jockey Club, and so on. Exchanges also pay part of their profits to help fund various sports.
Of course, sportsbooks must have noticed that their campaigns against exchanges were failing at some point. And this led them to have a certain rethink. They would need to come up with a way of working alongside exchanges, rather than against them, if they were both going to be able to share the industry. Fortunately, they did. Exchanges give people the chance to see where public opinion rests on various things. Because they require back and lay bets, sportsbooks can see who people believe the favourites and underdogs are in all competitions available. And that is key information to see where markets will move.
Bookmakers being able to recognise which teams or players the public thinks are in these zones gives them the chance to sort out their own odds for markets. It’s like a public opinion poll without actually being one.
Betting companies also now use exchanges themselves to lay off their own liabilities. When you bet on an exchange you may even be taking a bet from a bookmaker that is laying their exposure on there. This could happen if a bookie takes too many bets on one outcome, giving them an unbalanced book. Bookmakers always want a balanced book, that way they can ensure a profit whatever the outcome is, so they use exchanges to help them achieve that. Therefore, the exchange is now an integral part of bookmaking, setting prices and offsetting liability and can only be seen as a good thing for the industry.