Wednesday, November 17, 2004

Betting Exchanges :: A Tale of Two Websites

As Betfair.com publish their annual report for the first time, the betting industry is still reeling from the announcement that competing exchange Sporting Options has been placed in administration and are currently undergoing an investigation about missing customer money

The 2 stories put the betting exchange industry once again under the microscope at different ends of the spectrum.

The giant of the industry, Betfair.com have just announced record profits of £13 million, doubling their turnover to £66 million. As a privately held company, they were under no obligation to publish their annual reports and in doing so have sparked rumours of a potential floatation. However, Betfair deny this and claim they made this move in order to prove to some sceptical betting industry comments that they pay their way, like other normal bookies. Betfair have paid out almost £4 million in the year ending April 30th to British Horseracing under the same levy system that all other bookies adhere too.

At the other extreme, fledgling betting exchange operator, Sporting Options, have closed and a police investigation is under way. Sporting Options surprised the industry by their rapid growth and liquidity.

In betting exchanges, the key to success is liquidity - that is, how much money is being matched in each event.

When the auditors went in to review Sporting Options books, they expected to find £3.5 million in customer accounts, but instead only found £100,000. It appears that Sporting Options were using customer's money in order to artificially boost their liquidity and concerns are building that may force bookmakers to 'ringfence' customer money or pay in large bonds to insure the cash

This has put existing operators on the backfoot, keen to defend their industry and reassure customers their money is safe. Betfair point out they already ringfence their customer accounts in trust using the Bank of Scotland, whilst Betdaq have a $10 million bond established.

As for Sporting Options customers, plans are afoot to ensure they will not lose out. In order not to sully their industry's reputation, both Betfair and Betdaq have announced they would be willing to cover punters losses. Betfair have announced they will honour accounts up to £1000 and for any accounts above this, will honour 20% of the amount and offer lower commission rates to rake back the money.

The betting exchange model is fairly new, but its dramatic growth in the last couple of years has astonished the betting industry. However, liquidity and volume is key. A successful exchange needs upwards of 10,000 customers actively backing or laying bets - some speculate they need 50,000 customers almost immediately. Its not illegal to put in private money to increase the liquidity, but without volume, its difficult to succeed and with Betfair almost owning the market -and Betdaq following close behind, its going to be hard to stop the market becoming a duopoly in the UK

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