What to Make of Exchange Betting?

What to Make of Exchange Betting?

Betfair, the London-based online wagering juggernaut that purchased TVG earlier this year, is making further inroads into North American racing. Breeders' Cup and several U.S racetracks recently entered into simulcast agreements with Betfair which will allow Betfair's 2.5 million customers worldwide to place exchange bet wagers and common-pooled pari-mutuel wagers on the Breeders' Cup and other U.S. races. For the privilege, Betfair will pay an undisclosed percentage of handle. This is a development that merits close observation not only because of the potential for significant new revenue for horse racing in the U.S., but also because it will tell us a lot about how well traditional pari-mutuel wagering can co-exist with exchange betting.

Exchange betting is an innovative and popular form of wagering originating in England. A betting exchange uses the Internet and technology to match bettors at fixed odds, similar to what occurs when you buy or sell a stock. Wikipedia has a fairly good explanation of exchange betting in case you want to learn more.

Exchanges like Betfair are compensated by charging a commission on winning wagers only. The commission is 2%-5% of the winning wager which is a small fraction of the commission traditionally received by pari-mutuels. The low commission -- coupled with the opportunity to wager almost without limit so long as someone takes the opposite side of the wager (unlike traditional bookmakers who set limits on the amount bet) – is why exchange betting has decimated traditional on-course bookmakers in England and Ireland. Pari-mutuel wagering, however, has one giant advantage over exchange betting: the ability to offer exotic wagers like trifectas, superfectas, Pick-4s and Pick-6s with potentially huge payoffs.

There are also some potentially damaging ramifications attached to exchange betting. One of the most commonly heard objections deals with the integrity concerns that come into play when bettors can bet on a horse to lose – concerns that Betfair says it has addressed through its extensive integrity monitoring system. But there are economic concerns as well. We have already learned the hard way that our current pricing system is vulnerable to off-site and off-shore entities that pay too little for our product and thus can lure the very best customers away from our facilities where the industry receives the highest share of commission revenue.

Given the many European runners heading for Santa Anita, exchange betting on the Breeders' Cup is likely to be very popular across the pond. And those same bettors will also be eager to bet into our exotic pari-mutuel pools for these races. But we need to be dispassionate about the conclusions we reach concerning exchange betting in the long term.

Ultimately, we have to decide whether to support or resist efforts to legalize exchange betting among U.S. players. Is it the logical next step for racing in this country? Or would cannibalization of existing pari-mutuel wagering -- coupled with razor thin commission revenues -- cause us to move backward as an industry by diminishing revenues for the purses, operating expenses, marketing initiatives and capital improvements needed for the industry to stay competitive?

Takeout does need to be lowered, but the interests of all parties have to be carefully balanced so that no one partner is forced to shoulder more than his or her share. We need to explore exchange betting options for U.S. racing - but with extreme caution and careful planning. Our future may depend upon it.