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What Is a Betting Exchange?

What Is a Betting Exchange? article feature image

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A betting exchange is marketplace that allows bettors to wager against each other at lower fees than those offered by a traditional sportsbook.

Two customers agree on the odds and stake for a given game, and bet against one another.

I may offer a $50 bet on Packers -3 against the Cowboys, and another user on the exchange can accept my offer and bet Cowboys +3.

Betting exchanges have low overhead because they don't need expansive oddsmaking teams, so they charge a small fee on each bet — much less than the 5-10% a traditional sportsbook takes.

You won't be betting NFL point spreads at -110 at an exchange; you can effectively get them closer to -101 or even money.

Some exchanges also promise a more user-friendly experience by using simple percentages and not American odds.

And exchanges excite high-stakes, professional bettors because they won't be limited. The exchange doesn't care how good a bettor is — it makes money by taking a cut of transactions, not beating its customers.

Why Were There No Betting Exchanges in the United States?

Prophet and Sporttrade launched in New Jersey at the start of the 2022 NFL season and hope to quickly expand to other states next year. It's a very differentiated product from DraftKings or FanDuel, and they hope the lower vig will bring in customers without as much traditional marketing.

But the barrier to entry for an exchange in the U.S. has always been liquidity. Exchange operators are limited to running separate exchanges in each individual state, thanks to the Federal Wire Act of 1961, which does not allow the transmission of gambling info across state lines.

Anyone wagering on a New Jersey betting exchange could only bet against other people in New Jersey, and that's an issue because the pool of users and money would be too small. Even if an exchange operates in New Jersey andPennsylvania, those customers could not bet against each other.

That means there wouldn't be enough money in the pot to make an exchange work — or that's the perceived challenge. New exchanges will likely have to use their own cash to pump liquidity into the markets so users' bets will get matched.

Mark Miscavage, an executive at London-based betting exchange Smarkets, told that the Wire Act is the biggest hurdle to creating an exchange in the U.S. because it limits the size and liquidity of the betting pools.

"The biggest hurdle for us would be able to pool liquidity, in this case, between all the states," he said. "I don’t know that there is one state that’s quite big enough to provide the liquidity and volume needed to run an effective exchange just for one state."

The Elephant in the Room

The elephant in the room is that several U.S. sports betting exchanges already exist (and operate in most states), but they operate in a very grey legal area.

They say because they're not sportsbooks, they can operate in any state.

  • Bro Throw: An app that connects bettors and makes them pay each other through a third-party service like Venmo.
  • Bet Openly: Big on TikTok, Bet Openly is a peer-to-peer exchange that says it's operating as Uber did in its early days when taxi companies tried to shut it out.
  • Bettor Edge: Another peer-to-peer exchange that operates in 45 states.

Will the Exchanges Work?

Prophet and Sporttrade will be two of the first to really try, and we'll learn a lot about the viability as it enters New Jersey and looks to expand quickly in 2023.

It's likely that exchanges become popular among more hardcore, price-sensitive bettors for liquid markets like NFL point spreads, while traditional books will win by dominating props, futures and liquid markets among bettors who don't care about price.

Smarkets is entering the U.S. market with a traditional sports betting product. And the parent company of Betfair — the largest exchange in the world — owns FanDuel.

But there are two massive hurdles: The Wire Act, and existing casino lobbies who don't want to see it happen because they'll lose customers for their traditional sportsbooks.

The creation of a sustainable, successful betting exchange would likely require getting past the casino lobbies to overturn The Wire Act, which seems unlikely in the near term.

Pros of Betting Exchanges

  • Lower fees. Because you're betting peer-to-peer, there are no sportsbooks to take their large cuts. You'll be paying a few cents per dollar as the winning bettor instead of 10 cents. Exchanges are very customer-friendly.
  • Everything is a two-way market. Traditional sportsbooks will often offer only one side of a bet. When you want to bet on the Chiefs to win the Super Bowl at +700 at an exchange, there has to be someone on the other side to take -700. That gives you the option to take "yes" or "no" of pretty much every bet type.
  • You can't be banned or limited(at least not by the operator). If you're a professional bettor who has been limited at every traditional sportsbook, you might have more luck at an exchange. You just need to find someone to take the other side of your action. The operator itself won't limit you, because it isn't affected by your success. Safeguards for manipulation are another worry for betting exchanges.

Cons of Betting Exchanges

  • You won't always get your bets matched on smaller sports. On a popular, liquid betting exchange, you can always find someone to take the other side of a $100 NFL point spread bet. But if you're trying to bet obscure sports or bet types, your bet may not always get matched.
  • Lack of bonuses. Betting exchanges don't offer the same free-money or free-bet promotions that traditional sportsbooks do.

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