The answer to this question is unequivocally YES and only in rare or extenuating circumstances are odds in betting exchanges priced less than with a bookmaker.
The reason is simple: If the ‘back’ price for an event with a bookmaker is higher than the ‘lay’ price in a betting exchange the opportunity of an arbitrage transaction becomes possible.
This simply means that by ‘backing’ the outcome with the bookmaker and immediately placing a counter bet in the betting exchange (a ‘lay’ bet), risk-free profit can be generated from the event no matter what the outcome.
Since there are now many software applications which automatically monitor price fluctuations in the markets and immediately react (and much faster than a mere mortal can type the word Betfair or Betdaq into their browser window), prices in betting exchanges are ‘by definition’ higher than at bookmakers.
Only in fringe markets and/or those with low liquidity (i.e. not frequented by bots), does it sometimes occur that a bookmaker temporarily offers a better price than in a betting exchange. However, in these cases arbitrage is rarely viable because of the difficulty in getting a lay bet matched in a stagnant market.
How are prices set at betting exchanges?
Prices on the betting exchanges always ‘follow’ the prices of the bookmakers. There is no other way purely because arbitrage opportunities would immediately open up should anyone be foolish enough to offer a bet at a lower price than the best bookmaker’s offer.
Compiling odds works as follows:
Large bookmakers have their own analysts departments; smaller bookmakers use the services of odds compiling bureaux. There are hundreds of mathematicians and statisticians employed to calculate bookmakers odds. The calculations are performed using statistical and mathematical methods such as those described in this blog and especially Soccerwidow’s Fundamentals of Sports Betting.
Depending on the popularity of a match and the expected demand for bets that it will create, bookmakers publish their odds in plenty of time before the game. Smaller leagues have a lead time of approximately one week or so; bets on more prominent matches are often published a whole month in advance and sometimes even earlier.
Betfair opens up its markets around a week before kick-off and if you have time to check the virgin markets, you will find them completely empty, without any back or lay-offers. As a rule, betting exchange markets ‘wake up’ about 2 days before kick-off. Before this time, professional market traders are busy with other things.
The first people to offer bets on the betting exchanges are the ‘Arbers’. The odds they offer for backing outcomes are generally far below the bookmaker prices. Lay odds are also extremely excessive. In ‘Betfair speak’, at this stage there are many ‘ticks’ between the back and lay prices.
Only about 24 hours before kick-off do back and lay prices close-up to each other. The situation is often then just the one necessary ‘tick’ between the back and lay prices. This does not necessarily mean that any bets have been matched, but more that the market has ‘settled’.
Serious price fluctuations are not expected until 2-3 hours before kick-off and hit their peak activity in the hour before the start when team news is made public. The ‘bookmakers margin’ (overround) evaporates and the odds in the betting exchanges are now likely to be considerably higher than the odds of the best bookmakers.
Are Betfair’s prices ‘fair’?
The prices on betting exchanges do not necessarily reflect the true probabilities (= expected outcomes). They are certainly ‘fair’ in relation to the prices in the market, but inevitably do not represent the true zero odds. They are often close, but not always.
The reason for this is that bookmakers set their prices taking into account the expected demand and odds at betting exchanges follow bookmaker prices (as explained above).
For example, bookmakers have the habit of under-pricing emotionally favoured or heavily supported teams, whilst underdogs are often offered at odds which are far too high. However, beware! This example is a very, very rough rule of thumb. Ultimately, it is always necessary to recalculate all odds yourself.
At betting exchanges you will find higher odds almost without exception. The overround is no longer part of the equation, and betting exchange odds cannot be lower than bookmaker odds due to arbitrage.
Betting odds at betting exchanges do not necessarily represent ‘true’ probabilities (= expectations) because prices at betting exchanges follow bookmaker odds, which in turn are ‘profit-optimised’ in their favour.
We hope you now understand the pricing mechanism in the market a little better and it would be great if you would leave a comment.