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A recent article in the prestigious academic journal Science (May 16, 2008, Vol 320, p. 877-8) once again makes the case for regulated prediction markets, more commonly known as “betting exchanges” to online gamblers. The authors make the case that such markets are useful in forecasting future events with less error than traditional measures such as polling. This argument is hard to ignore, with the authors including 21 top economists from such esteemed institutions as Yale, Stanford, Berkeley, and the University of Pennsylvania. Notable among the authors is Justin Wolfers from the Wharton School of business at UPenn, an economist who has gained notoriety in gambling circles due to his work on such topics as NBA referee bias (highlighted in a May 2008 article from MajorWager: http://www.majorwager.com/index.cfm?page=27&show_column=660).

The concept behind using prediction markets as a decision-making tool is simple. “Shares” are made available on an open market, and the participants use their capital (and the promise of profits) to make predictions on future events, which is incorporated into the share price. In general, information tends to be widely dispersed, and a market allows wide-ranging opinions to be gathered and consolidated into a market-wide prediction. In other words, an infinite amount of opinions can be aggregated, and an open market with potential for profit provides an incentive for individuals to make their opinions publicly known.

Prediction markets always get more than their fair share of press near the end of the 4-year U.S. Presidential election cycle. The Iowa Electronics Market, housed at the University of Iowa, is perhaps the most well-known. The authors of the Science paper show that, in the week immediately preceding the Presidential elections from 1988 through 2000, the Iowa Electronic Markets erred by an average of only 1.5 percentage points from the actual vote results, while the traditional Gallup poll was off by 2.1%. Numerous other studies have shown the superiority of markets compared to other forecasting tools.

Of course, there have been some dust-ups regarding prediction markets in the past, most notably the “terrorist strike market”, unveiled a little too close to 9/11 to be palatable to the general public. The official name was the “Policy Analysis Market“, and it was established by the Pentagon to act as a prediction market for Middle East political events. It was quickly scuttled after heated comments from U.S. Senators, calling it “grotesque” and “stupid”, due to the perception of using catastrophic events such as assassinations as profit-making tools. Regardless of its political correctness (and the misinformed opinions of a few politicians), such a prediction market still holds value as a glimpse into the collective mindset of everyone with an understanding of political currents in the region. Utilizing such a prediction market as a component of foreign policy decisions may have ultimately spared the U.S. much grief in Iraq.

In recent years, prediction markets have grown beyond academic and government roles. Dublin-based InTrade is rapidly growing and provides many more options than the Iowa Electronic Markets. Others such as MatchBook have focused more on sporting contests, but provide coverage of other events as demand calls. Of course, those outside the U.S. have access to the largest betting exchange of them all, the massive European markets of BetFair. The success of these exchanges speaks to the public interest and feasibility of prediction markets.

One factor holding back the growth of online prediction markets is their close association with the quasi-legal world of sports betting and internet casinos. InTrade has been fairly proactive in this regard, spinning off from Tradesports to clean up its corporate slate, but it is still knee-deep in the legal sludge surrounding offshore “gambling”. All have to deal with the legal and financial hurdles of operating offshore.

The authors of the Science paper propose that clarification of internet gambling laws is needed to exploit the benefits of prediction markets within the United States. Clearly, the Unlawful Internet Gambling Enforcement Act (UIGEA) of 2006 is one such mechanism restricting the widespread use of prediction markets. Another is the Commodity Futures Trading Commission (CFTC), the regulatory agency which oversees futures markets in the U.S. The CFTC has provided a “no-action letter” to the Iowa Electronic Markets, an assurance that they will not seek any enforcement action against the exchange. However, this protection is not absolute and may not trump state and federal law if challenged. The Science authors propose a number of legal reforms which will allow prediction markets to begin to gain acceptance within the U.S. financial regulatory structure.

By no means does the Science article condone large-scale public markets, at least not initially. They take a (typically academic) conservative approach, recommending new legal framework to allow for the establishment of small markets with limited scope so as to evaluate the promise and use of prediction markets. But baby steps are going to be a necessity in the growth and acceptance of regulated public markets.

Clearly, there are negative aspects to financial markets, and regulation certainly has its place. Bear Sterns, Enron, the S&L scandal of the 80s, and the current housing bubble all caused tremendous loss of wealth resulting from missteps in the financial markets. The current oil crisis is due at least in part to speculation, leading to the introduction of no less than 9 separate bills in the U.S. Congress seeking tougher regulation over the trading of commodities. However, the existence of problems in the financial markets does not necessitate their dissolution. Likewise, prediction markets are sure to encounter bumps in the road, but their utility should far outweigh the risks.

Should prediction markets be legalized in the U.S.? Almost certainly. They would have benefit across numerous industries, from business decisions to political policies to financial forecasting. Unfortunately, this would require building an unlikely bridge over the Puritanical moral moat placed around gambling in the U.S. But there is no inherent difference in betting on who will win in an election than what the price of oil will be in 6 months, or what the S&P 500 will close at on a particular date. Distancing prediction markets from “illegal” gambling, and instead likening them to regulated financial markets, will be a necessary first step towards broader acceptance.

The academic groundwork on prediction markets has already been laid, and offshore exchanges have begun to turn these concepts into functioning businesses. As these markets grow and begin incorporating more diverse opinions, we can expect their success rate at predicting the future to only grow. To restrict such a promising tool simply due to its perception that it is a gambling outlet is silly indeed.

6-25-08
Jay Graziani
MajorWager.com
graziani@majorwager.com

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[This article is cross-posted from Major Wager.]

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FOREMAN: I’ve got something I want you to take a look at. Look at this. It could be the price of a stock or a mutual fund. It isn’t. It’s the odds that a particular candidate, the red here is Hillary Clinton, who will become president of the United States. It’s called the predictive market. And while supporters say it’s no different than any other type of investment, for example, hog bellies or pork futures, or crude oil, it sure looks like gambling.

Economics Professor Koleman Strumpf is on the faculty at the University of Kansas School of Business to talk about it now. And in Las Vegas, another scholar in the art of predicting future events, Johnny Avello, the director of the Sports Book at Wynn, Las Vegas.

Let me start with you, professor. How well does this work? When people start betting online as to who’s going to win, does it work?

KOLEMAN STRUMPF, UNIVERSITY OF KANSAS: Yes, the markets have a really tremendous track record dating back at least on the online markets to 1988. And actually earlier, there were impromptu markets that existed outside of Wall Street in the early 20th century.

These things have been around for at least 100 years or probably more. 150 years. And with maybe only one or two exceptions that I can think of, they’ve done a just totally dead on job at forecasting.

[FOREMAN]: Long before polling existed, then you’re saying we had betting. And there were betting lines in newspapers. And if you want to know who’s winning the presidential race, that’s what you looked at?

STRUMPF: That’s exactly right. So in 1904, “The New York Times” reported on the front page what was going on at the Wall Street betting markets since there was no Gallup Poll that existed at that time.

FOREMAN: Johnny, why do you think that this is generally so successful compared to polling?

JOHN AVELLO, DIR. OF RACE & SPORTS, WYNN HOTEL: Well, first of all, you are taking actual bets. And you know, each person that puts their money up is a good indication of, you know, which way they like it.

When you’re doing polling, you know, that’s kind of an ambiguous way of finding out who the winner is because you’re getting a fraction of the people who you’re actually finding out who they like. So I like to call it money versus unpredictability.

FOREMAN: You’re saying the difference is that in a poll, somebody may say something that they believe in generally, or they think that the pollster wants to hear. But when they put money down, they’re going to really bet on what they think is going to happen?

AVELLO: It’s the real thing.

FOREMAN: It’s sort of interesting when you look at these different types of polls. There’s the In Trade system, which is out of Dublin, Ireland that’s sort of interesting. In Trade allows people to bet actual money and large amounts of it on all sorts of outcomes all around the world.

The Iowa markets is one the people have talked about a lot. Set up by a university there. Basically the Iowa markets allow people to bet in limited amounts of money. About $500. And it’s used simply to see how well this works for educational purposes mainly.

Professor, when we talk about these, though, why did polling ever become popular if betting works so well in telling how we would win?

STRUMPF: Well, I think a kind of — much like today, the newspapers, the media was always uncomfortable reporting these markets. There sort of was dubious legal status and maybe some moral issues with it.

Polling for whatever reason seems to have been morally acceptable to the media. And I think as a result when Gallup came around in the late 1930s, the betting markets kind of fell by the wayside. They never of course disappeared, but I think it was sort of a moral issue, the same kind of moral issues that I think arise today in thinking about gambling.

FOREMAN: So let me ask you this, Johnny. Why do you think it’s been so difficult this year, though? Because as far as we can tell, the betting lines have not done any better than the pollsters this year in predicting this election. It has been all over the map. And the betting has been all over the map.

AVELLO: Well, one thing to remember, Tom, is that when the book maker’s putting up a line, what they’re trying to accomplish is divided action. So they’re not trying to pick the winner because let’s take for instance if the book maker put up Hillary Clinton at one to two, and she was bet from to three to win the Democratic nomination. You know, and Obama won. People would say, wow, the book maker really got killed on that.

FOREMAN: The book maker’s not trying to predict it, but obviously, the gamblers are, the people who are betting on these things. And they haven’t done well this time, not compared to past elections. Why do you think that is? Why is this so hard to sort out?

AVELLO: Because they’re not always right. No one’s right at 100 percent of the time. I would say best case. You know, I know that history has shown that the bettor has done well on this. But to be perfectly honest with you, I think if you do 60 percent, you’ve done a great job of picking the winner.

FOREMAN: And Koleman, do you think there’s anything unique that’s making it harder for the betting markets to be as accurate as they had been in the past?

STRUMPF: Well, it’s obviously a close market and opinions are changing rapidly. I just want to kind of maybe extend a little on what Johnny just said in terms of thinking about what these markets mean.

The markets give us a probability of an event occurring. So even if, for example, Obama is a 80 percent favorite in the upcoming Wisconsin primary, which he is, that still means on the flip side that there’s a 20 percent chance that he’s not going to win. So the markets, again as Johnny had said, don’t – they – by sort of definition can’t predict an upset. An upset is a surprise which people hadn’t anticipated. So sometimes there are these quick shifts of opinion, which I — to the best of my knowledge, there’s no way to forecast that in advance.

FOREMAN: And this campaign has been just filled with them. Johnny, one last thing here. Any sense of where the smart money is going these days?

AVELLO: Well, let’s say that there’s been a shift. I believe the smart money was on Hillary Clinton early, and has shifted to Obama. But surprises do happen. And all you need to do is look at the Superbowl to find that out.

FOREMAN: Johnny, thanks so much. Koleman, as well. We appreciate you being here. And speaking of gambling, Madame Tussaud’s Wax Museum here in Washington is hedging its bet. And that kicks off our political side show.

Credit: Scientific American magazine – Abstract

Via Mat Fogarty of Xpree (an innovative firm providing software for enterprise prediction markets)

Ask me by e-mail to get a copy of the PDF file.

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The problem with the bold statement in the last sentence of the SciAm excerpt above is that Justin Wolfers’ articles in the Wall Street Journal (covering the political prediction markets) have been totally unimpressive (to me, at least) and compare palely with the “musings of the most seasoned pundits” (which I find “biased” but much more insightful).

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The New York Times:

[...] Long before political prediction markets sprouted on the Internet, election bets — whether the stakes were money or embarrassing public spectacles — were a ubiquitous part of the American political scene. The practice, which began informally with petty stakes in pool halls in the late 19th century, was by 1900 a multimillion-dollar trade on Wall Street.

In the 1916 contest between Woodrow Wilson and Charles Evans Hughes, about $160 million (in current dollars) was wagered on Wall Street’s outdoor “curb exchange.” By contrast, the 2004 election saw less than $25 million in contracts change hands over the outcome on the Dublin-based InTrade.com market, the largest and most active for-profit market for odds on current American elections. [...]

“Until the 1920s, New York would have been the center of gambling in the United States, what Las Vegas is today,” said Paul Rhode, a professor of economic history at the University of North Carolina, Chapel Hill. Technically, gambling on the result of an election was — and is — illegal, but the laws were not widely enforced, and newspapers routinely reported the names of prominent bettors and the Wall Street firms that held the stakes. [...]

With the rise of polling in the 1930s and a decline in public approval of political gambling, election betting fell out of favor. The expansion of horse-track betting in 1939, giving people another arena in which to place their bets, also weakened interest in the markets.

Reporters, too, could get political forecasts from increasingly reputable polling agencies. While The New York Herald Tribune still reported on the betting as late as 1940, the odds were relegated to an occasional small paragraph on the financial page, and neither bettors nor stakeholders were named.

The online prediction markets that cropped up around 2000 were less a dot-com revolution than a road back to the earlier form of election coverage.

“In a few years, we may regard the second half of the 20th century as the aberration in which the press used polls rather than markets to track political races,” Justin Wolfers, a business professor at the University of Pennsylvania’s Wharton School, wrote in an e-mail message. “And in the 21st century, we may return to the habits of the early 20th century, reporting on political races through the lens of prediction markets rather than polls.”

I don’t believe that the political prediction markets will ever supplant the polls —since the political prediction markets need the polls, and not the other way around. By nature, the prediction markets are secondary forecasting tools, which feed on the primary, advanced indicators. Political strategists and political analysts know that. They know that the prediction markets lag reality. They want a direct probing into the voters’ sentiment. They don’t give the first fig about InTrade and BetFair’s prediction markets.

“The bookie’s odds will be influenced by his appetite for risk, the action he’s got on his side and his own bias,” said John Delaney, chief executive officer of Dublin-based Intrade.com, the world’s largest prediction market. “If I were to ask you where you would find the expected value of IBM, would you ask a broker or go to the stock exchange? The aggregation of information that happens on an exchange typically provides better information than if you had several buyers and just one seller.”

Excellent.

I have been inundated with complaints from InTrade traders, since Christmas. Here’s the problem. InTrade traders tell me that the expiration dates for the Bloomberg and Gore announcement contracts have been extended —at InTrade’s whim. The contract statements, I’m told, said they would expire on December 22, 2007. At this time, InTrade did not settle the bets and the expiry date was changed to read November 2008.

You might think that this is benign. It is not. A bet that they will not announce by November 2008 is a very different bet —especially for Bloomberg.

The expiration date is an important variable for any derivative contract. Regulated futures exchanges (CBOT, Merc, LIFFE, EUREX, etc.) generally never make changes for contracts with open interest —and certainly never after a contract has expired. And when these exchanges change any specification of a contract, they make an announcement —which has not been the case for InTrade (other than answering a trader’s complaint by e-mail).

Once again, we see that InTrade-TradeSports is not a prediction exchange governed by integrity —an essential ingredient to gain traders’ respect and trust (as BetFair-TradeFair knows), and thus a requirement for the growth of the prediction market industry.

Once again, you won’t read this kind of story in the Wall Street Journal or on Caveat Bettor —but exclusively on Midas Oracle, because we are the only publication that event derivative traders trust to defend their rights.

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Here’s InTrade’s side of the story:

Thanks for your enquiry [sic]. These dates were set as a guide when the contracts were first opened some months ago and will be updated. The candidates in questions till have time to launch a campaign so the contracts will remain open.

Please let us know if we can help you further.

Kind regards,

Carl Wolfenden
Exchange Manager
Intrade Exchange Operations

The expiry date stated on a contract is not a “guide”. Both parties should abide by it. Carl Wolfenden’s answer is absurd. This guy has no place working for an exchange. He should be flip-flopping burgers in Dublin’s main street, instead.

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The volume on the Gore contract suggests that traders did assume it was expiring on December 22, 2007:

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BLOOMBERG.08.INDEPENDENT

This contract will settle (expire) at 100 ($10.00) if Michael Bloomberg (Mayor of New York) announces his intention to run for President of the United States in 2008 as an Independent candidate.

The contract will settle (expire) at 0 ($0.00) if Michael Bloomberg does not make such an announcement.

Expiry will be based on official and public announcements made by Michael Bloomberg and as reported in three independent and reliable media sources.

Due to the nature of this contract please also see Contract Rule 1.7 Unforeseen Circumstances.

The Exchange reserves the right to invoke Contract Rule 1.8 (Time Protection) if deemed appropriate.

Any changes to the result after the contract has expired will not be taken into account – Exchange Rule 1.4

Please contact the exchange by emailing help@intrade.com if you have any questions regarding this contract before you place a trade.

Important:
Please contact the Exchange if you have any query or uncertainty (including how it may be settled) about this Contract, the Rule above or the Contract Rules before you trade.

GORE.RUNNING.2008

A contract will settle (expire) at 100 ($10.00) if the individual named in the contract formally announces their intention to run for President of the United States in 2008.

The contract will settle (expire) at 0 ($0.00) if this person does not make such an announcement.

Expiry will be based on official and public announcements made by individual and as reported in three independent and reliable media sources.

Whether the individual announces as a candidate from their party, another party or as an [independent] will not affect expiry.

Due to the nature of this contract please also see Contract Rule 1.7 Unforeseen Circumstances.

The Exchange reserves the right to invoke Contract Rule 1.8 (Time Protection) if deemed appropriate.

Any changes to the result after the contract has expired will not be taken into account – Exchange Rule 1.4

Please contact the exchange by emailing help@intrade.com if you have any questions regarding this contract before you place a trade.

Important:
Please contact the Exchange if you have any query or uncertainty (including how it may be settled) about this Contract, the Rule above or the Contract Rules before you trade.

[...] Long before political prediction markets sprouted on the Internet, election bets — whether the stakes were money or embarrassing public spectacles — were a ubiquitous part of the American political scene. The practice, which began informally with petty stakes in pool halls in the late 19th century, was by 1900 a multimillion-dollar trade on Wall Street.

In the 1916 contest between Woodrow Wilson and Charles Evans Hughes, about $160 million (in current dollars) was wagered on Wall Street’s outdoor “curb exchange.” By contrast, the 2004 election saw less than $25 million in contracts change hands over the outcome on the Dublin-based InTrade.com market, the largest and most active for-profit market for odds on current American elections. [...]

“Until the 1920s, New York would have been the center of gambling in the United States, what Las Vegas is today,” said Paul Rhode, a professor of economic history at the University of North Carolina, Chapel Hill. Technically, gambling on the result of an election was — and is — illegal, but the laws were not widely enforced, and newspapers routinely reported the names of prominent bettors and the Wall Street firms that held the stakes. [...]

With the rise of polling in the 1930s and a decline in public approval of political gambling, election betting fell out of favor. The expansion of horse-track betting in 1939, giving people another arena in which to place their bets, also weakened interest in the markets.

Reporters, too, could get political forecasts from increasingly reputable polling agencies. While The New York Herald Tribune still reported on the betting as late as 1940, the odds were relegated to an occasional small paragraph on the financial page, and neither bettors nor stakeholders were named.

The online prediction markets that cropped up around 2000 were less a dot-com revolution than a road back to the earlier form of election coverage.

“In a few years, we may regard the second half of the 20th century as the aberration in which the press used polls rather than markets to track political races,” Justin Wolfers, a business professor at the University of Pennsylvania’s Wharton School, wrote in an e-mail message. “And in the 21st century, we may return to the habits of the early 20th century, reporting on political races through the lens of prediction markets rather than polls.”

Justin Wolfers is right that a new form of journalism may emerge (I call it “prediction market journalism“). However, my view is that it will be a minor —most news media will still be reporting polls rather than prediction market odds.

Corporate and Operational Overview

Corporate Overview

Betfair is a registered bookmaker in the UK, where it operates an online betting exchange. Betfair also operates under licences in Australia, Austria and Malta and is seeking licences elsewhere within the European Union and further afield, notably in South Africa. Betfair welcomes regulation and is committed to paying the appropriate product fees in every market in which it operates.

Betfair’s main source of income is from bets placed on its exchange, from which – in line with other betting operators – it derives its money by paying out less in winnings than it takes in in losses. This core activity will continue to grow as Betfair gains access to new markets and more people turn to the internet as their preferred betting channel. Betfair is developing new revenue streams, such as providing price feeds from the exchange via its API (Application Programming Interface) to third parties, white label exchanges, and through the Betfair Mobile product.

Betfair Games, which operates Betfair Poker and Betfair Casino, as well as other exchange-enabled games, is hosted from Malta under a licence which was granted in May 2005. The Maltese licence enables Betfair to offer these products as well as the innovative P2P games, based on the betting exchange concept, to its customers.

Betfair has invested significantly in technology and employs over 200 engineers to produce one of the fastest and most resilient betting platforms available on the internet today. Betfair processes more than 5 million transactions a day and more than 300 bets a second. Supported by Oracle, Betfair processes 99.9 per cent of bets in less than one second. Betfair has more than 1,000,000 registered users and over 100,000 active monthly users.

Betfair employs over 1000 people in its offices in Hammersmith, west London, Stevenage, Dublin, Australia, Malta and Denmark. Since its launch in 2000, Betfair has won several prestigious awards, including in 2003 the Queen’s Award for Enterprise in the Innovation category from the Department of Trade and Industry and in 2004 Company of the Year at the Confederation of British Industry Growing Business Awards. Betfair became the first ever company to retain its title of ‘Company of the Year’ at the 2005 Growing Business Awards. In 2002 its founders Andrew Black and Edward Wray jointly won the Ernst and Young Emerging Entrepreneur of the Year award.

Operational and Product Overview

Operating Activities:

Betfair Ltd – A company incorporated and registered in England and Wales providing the sports betting exchange product.

Betfair Games Limited – A company incorporated and registered in Malta providing the Betfair Games product.

Betfair Poker Limited – A company incorporated and registered in Malta providing the Betfair Poker product.

Betfair Casino Limited – A company incorporated and registered in Malta providing the Betfair Casino product.

Betfair Australasia PTY Limited – A joint-venture company incorporated and registered in Australia operating under a licence issued by Tasmanian Gaming Commission providing the Australian Exchange.

Betfair Counterparty Services Limited – A company incorporated and registered in Malta providing the Betfair Multiples product.

TSE Development Ltd – A company incorporated and registered in England and Wales which exploits the intellectual property of The Sporting Exchange Limited (parent company of Betfair Limited and its subsidiaries).

Betfair pioneered the betting exchange concept. Based on the New York Stock Exchange, a betting exchange allows punters to bet at odds set by other punters rather than the bookmaker itself. Betfair’s bookmaking model results in odds which, according to one study, are on average more than 20 per cent better than the starting prices offered by conventional bookmakers. Bets are only accepted by the exchange if the full risk of each can be matched with a punter or set of punters with the opposite view. Any unmatched bets are voided, either by the punter or by the exchange at the start of an event. Betfair has no interest in the outcome of any event, as it makes its money from charging a small commission on net winnings.

Betfair has given punters greater control. They can now directly express a view that an event will happen or won’t happen. Betfair also offers genuine ‘in- running’ betting, including all horse races. Since prices tend to fluctuate during the course of an event, ‘in-play’ betting is a truly exciting development for punters, who are now able to “trade” their betting positions. Horse racing is the dominant product, followed by soccer. Golf, cricket and tennis are growth areas because of their international following and because they are well-suited to “in-play” betting.

Strategy

Our aim is simple: we want to be the unassailable choice of the punter by providing the best value, service and protection. We intend to achieve this through continued investment in our technology to ensure that our betting platform is the fastest and most resilient available on the internet; through staff training and through the adoption of best practice in relation to customer protection.

Betfair has a long-standing policy of not accepting US customers, funds or bets and in that regard ensures that it is able to detect and block unwanted usage. Betfair will only operate and market in countries in which it believes that it is legally able to do so.

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FAQs
Please find below some frequently asked questions about Betfair and betting exchanges.

Background Information

Q. What is Betfair?
A. Betfair is a registered bookmaker in the UK with additional licences in Australia, Austria and Malta. It operates a ‘betting exchange’ model which is a concept it pioneered.

Q. What is a Betting Exchange?
A. A betting exchange is a bookmaker that offsets all its risk through the use of sophisticated technology. This brings together two counterparties with directly opposing views and often results in better odds being available to all customers.

Q. When did it start?
A. Betfair launched in June 2000 and was the brainchild of Andrew Black, a former professional punter and derivatives pricing modeller. He partnered with Edward Wray a former JP Morgan Vice President and the company was formed. Andrew (known as ‘Bert’) still works at Betfair today, whilst Ed is non-executive Chairman.

Q. Who owns Betfair?
A. Betfair is a privately owned company with a range of shareholders.

Q. Have you won any awards?
A. Betfair is very proud to have won a number of awards. These include a Queen’s Award for Enterprise in the Innovations Category, an extremely prestigious business award in the UK. We are also the only company to have won the ‘Company of the Year’ award from the CBI twice, in 2004 and 2005.

Business Metrics

Q. How many customers do you have?
A. We have in excess of 1,000,000 registered customers with over 100,000 active in any given week.

Q. Where do your customers come from?
A. They come from over 140 different countries and on any one day over 50% of new registrations come from outside the UK where Betfair originated.

Q. What do your customers bet on?
A. Betfair offers a range of betting products. For sports betting there are over 50 different sports on the exchange covering events from 122 different countries. We regularly have football from 30 different countries and cover over 1000 horse races each week, added to this is a large range of other subjects such as reality TV and financial markets. Sports betting on betfair.com is complimented by an online poker site betfairpoker.com, an online casino with an innovative zero edge, and a set of unique Exchange Games offered by betfairgames.com.

Q. Where are you based?
A. Betfair HQ is situated in Hammersmith, London. We have a large call centre in Stevenage (about 40 miles north of London) and a Southern Hemisphere office currently being developed in Hobart, Tasmania. In addition to this we have a number of satellite offices around Europe including Malta, Denmark and Germany.

Q. How many staff do you have?
A. Currently 1000 around the world but expanding all the time.

Betfair’s Technology

Q. What technology platform do you use?
A. We use Oracle on Sun Solaris for our database servers. Our software is proprietary, custom software developed by us. Betex was launched in September 2003, it is a brand new n-tier J2EE based exchange platform and allows punters to place bets globally in 18 different languages.

Q. How good is your IT?
A. Betfair’s business is founded upon technology which has proven itself to be far ahead of the competition. We match over 5,000,000 bets a day which is 15 times as many as the London Stock Exchange (Betfair has the added burden of 24/7/365 operation and settlement is immediate). Oracle view Betfair as one of their top five most important customers in the world today which puts us alongside the likes of eBay and Google.

Q. What sort of volumes do you deal with?
A. At peak times Betfair matches over 5,000,000 transactions a day, serves over 3 billion page requests per week and 99.99% of our bets are handled sub-second. The technology required to do this is immense and requires significant investment and development time.

Tax Questions

Q. How do you make your money?
A. People betting on the exchange pay commission of between 2-5% from their net winnings on each betting market. Losing customers pay no commission. With our poker product customers pay a set fee (known as rake) in the same way as many other online poker sites.

Q. How much tax do we pay?
A. In the UK we pay tax in exactly the same way as every other bookmaker; that is a gross profits tax at 15%.

Q. Why is gross profit taxation a good system?
A. It provides a level playing field for all types of bookmaking. Historically other systems of taxation have favoured the more traditional bookmakers who do not have the technology to offset their risk as efficiently as Betfair does. In the modern world where internet access is widespread it is easy for customers to move around to many different suppliers and find value for money.

If a system of taxation exists in any jurisdiction which prevents high volume/low margin bookmakers (such as Betfair) from competing then customers will simply choose to bet through the internet with an offshore provider or worse are pushed into the unlicensed, unregulated black market in search of value.

A gross profits tax allows all types of bookmakers to compete for custom on an even footing and ensures a well regulated and safe environment for all punters.

Integrity Issues

Q. What is a Memorandum of Understanding (MoU)?
A. This is the name we give to an information sharing agreement signed by Betfair and a sport governing body. It allows us to share certain information about betting patterns and customer behaviour for that particular sport. We currently have 25 such agreements with many international sporting bodies and aim to cover every betting market we offer in the future. Betfair has taken an industry-leading stance.

Q. How do you monitor betting?
A. We have a large integrity team of specialists who monitor the betting patterns across all the betting markets offered by Betfair. They use a combination of software tools and experience. As the details of every bet are recorded any market can be investigated, current or historic.

Street address of BetFair corporate office (BetFair headquarters):

BetFair
The Waterfront, Hammersmith Embankment
Winslow Road – (Chancellors Road)
London, England
W6 9HP, United Kingdom, European Union

The intuition for this law is that all sellers will flock to the highest prevailing price, and all buyers to the lowest current market price. In an efficient market the convergence on one price is instant.

On previous occasions we have seen how Betchronicle, a fixed odds bookmaking firm based in Dublin, Ireland, have been able to offer up prices on particular events, such that arbitrage opportunities exist, vis a vis the likes of Betfair. Moreover, we have noted how, contrary to the law of one price, these arbitrage opportunities pertain for periods of days.

The forthcoming Champions League Final between Liverpool and AC Milan presents us with another example of a situation where the law of one price fails to hold. Betchronicle are currently a best-priced 2.50 AC Milan to win the match in 90 mins; this compares with a price of 2.42 on Betfair (to back) and 2.44 (to lay).

• BetFair Play For Fun
• Only English Soccer

TradeSports – (The Netherlands Antilles)

• Play-Money TradeSports —
• PredictionX — Launched in February 2006.

InTrade – (Dublin, Ireland, E.U.)

• FT Predict — (play-money InTrade with the Financial Times)

HedgeStreet – (Delaware, U.S.A. & San Mateo, California, U.S.A.) — Open to U.S. residents only.

• HedgeStreet – Mock Trader — Free practice account to learn how to trade at HedgeStreet —

Iowa Electronic Markets – (IEM) – (Iowa City, Iowa, U.S.A.)

• Influenza Prediction Market – (a.k.a. Flu Prediction Market) – @ IEM — Commonly Asked Questions about the Influenza Prediction Markets — (play money with monetary bonus) — Influenza prediction markets + Avian influenza prediction markets

A sure fire way of backing a winner, but is the price being arbitraged away by thousands of small online punters wishing to lock in a profit?

The evidence suggests not…. Reasons: Perhaps a combination of ignorance and inertia; or might it simply be that the amount of money to be won in performing the arbitrage is an irrelevant sum to the big players, whilst the majority of small punters do not have the funds necessary to perfom the arbitrage.

Either way, you can back Woods at 2.75 with BetChronicle and currently lay him on Betfair at 2.58.

— This story was brought to you by bettingmarket.com, which, apart from on 1 April, provides a concise and objective analysis of the changes impacting upon the global betting industry, applying knowledge and experience from the fields of marketing, economics and law.