BetFair Case Study – Betting Exchange – Prediction Markets

Nisan Gabbay:

Flutter was initially envisioned as an online betting community, where users could place bets against their friends and other members of the community. It could almost be thought of as the eBay for betting – users would list the types of bets they’d like to make and other users would choose whether to accept the bet. The concept was inspired by the use case of friends placing bets against one another via email.

Betfair on the other hand was built like a stock market exchange, where odds functioned as the share prices. Betfair was built on the concept that a bettor didn’t really care who was booking the bet, as long as they got the best deal possible. The concept of community didn’t have much value, but the concept of liquidity in any one betting market was paramount. This would enable players to trade in and out of positions on horses, much like trading in and out of positions on stocks. Betfair’s product brought about some profound innovations to the UK horse and sports betting markets, enabling people to “lay” or bet against horses for the first time, while also creating a new type of gambler that took advantage of market trading dynamics without actually having an opinion on the sporting event itself. [...]

In essence, Betfair needed to provide the platform to balance supply and demand the same way that a stock exchange does. As with any marketplace, Betfair needed to solve a chicken and egg problem.

They solved this problem by utilizing three strategies: limiting the number of markets in play at any one time, implementing a business model that encouraged volume betting, and marketing to high volume players. Betfair limited the number of events that could be wagered upon to ensure enough liquidity in that event. Betfair’s business model of charging a commission on net profit, rather than gross profit, enabled a new type of bettor – people looking for arbitrage opportunities. These bettors moved large volumes of bets to lock-in a very small profit regardless of the outcome on the race, providing liquidity to the market. Finally, Betfair offered a myriad of incentives and discounts to the heavy bettors responsible for moving large volumes. [...]

Betfair staged a mock “bookmaker” funeral procession through Russell Square in central London on Oaks Day, a major horseracing event in the UK. [...]

It is interesting that Flutter offered users 10 pounds free to wager on Flutter, and while this offer attracted users, it did not result in the desired behavior. Smarter bettors preyed on the new bettors, resulting in a poor experience. [...]

You can spot TradeSports’ two big marketing mistakes: transaction fees (instead of commissions on net winnings) and deposit bonus (50 bucks, if my memory is correct).

As for the concept of user-created event derivatives (a.k.a. event futures), note that BetFair never re-captured the Flutter idea after the two startups merged. BetFair is really listening to its traders’ suggestions, though.

Food for thought, indeed, mister Nisan Gabbay. Thanks for this great case study of the world’s #1 real-money prediction exchange (a.k.a. betting exchange). Appreciated. Many Americans and Europeans involved in the field of prediction markets will find this case study very interesting.

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