The Hidden Costs Of Betting Exchanges

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Betting exchanges are an alternative to the traditional bookmaker in that they pit two bettors against one another with their money on the line. For example, if one sports bettor wants to risk $110 betting on the New England Patriots to cover 7.5 points against the Buffalo Bills while another bettor wants to risk $110 on the Bills to cover against the Patriots, then the Betting Exchange will pit those two against one another. In lieu of the house taking the bets, the players are going up against each other. Usually, those companies market that their brand offers you savings.

While the Betting Exchange appears to be the better value, it’s important to understand how they work and the types of hidden costs that you need to be aware of. Some of those hidden costs on betting exchanges could take a nibble out of your betting units won.

Efficiency vs. Liquidity

The studies suggest that the peer-to-peer exchange models result in nearly perfectly efficient markets. That's because the implied probability of an event matches the odds offered with a negligible variance. This means that if you followed a consistent betting system with a 50% probability such as a coin toss, you should be even in the long run. The potential for making a profit arises from factoring in the advantage of handicapping skills or privileged knowledge. This is definitely true for certain markets but it’s important to remember that open markets are often less efficient as the number of bettors and level of available amounts to bet is too low to correctly balance the market. This means that the betting exchanges will punish extremely early bettors depending on who they are supporting.

Liquidity Part II: It's Usually A Problem

Sportsbooks never have a liquidity problem. Whatever you want to bet on, the house is willing to take the other side. Sportsbooks like BetOnline, Bookmaker and BetUs have huge limits. You can check the Bookmaker review to see how they open the line and take some of the biggest bets online.

When it comes to betting exchanges, though, the story is quite different. New betting exchanges always have a liquidity issue. You might want to bet $5,000 on an NFL game but there aren't enough bettors on the other side of that. That means you'll only be able to bet based on the liquidity available.

Even exchanges that aren't new have a problem with non-main lines. For example, BetUs offers a whole host of props on every game. BetOnline allows you to even create your own props. So what happens on an exchange? They typically won't even bother offering lines like quarterback passing yards over-unders or First Basket in the NBA. There just won't be enough money on the other side to take bets.

The best sportsbooks offer lines on just about everything these days. Betting exchanges are far more limited in their menus because they simply don't have enough players to be on the other side of every bet.

The Hidden Costs

The benefit of the Betting Exchange could disappear when you include the commission charged on your winnings. Irrespective to the issue of marketing efficiency, the benefit of the exchange disappears when you include the commission exchanges charge on your winnings up to 5%. This only affects your winnings, so it makes the odds appear better than they actually are. The tax only comes afterwards once you have won a certain amount. Assuming that an average commission rate on Betting Exchanges is 5%, your average bettor must win at least 51.3% of their bets to achieve long-term profitability. There is no competition for low commission sportsbooks where the average commission is only around 2%. That translates to a 50.5% target for long-term profitability.

Betting Exchanges Have Pros & Cons

While the Betting Exchanges do an excellent job of making it appear as though their sites offer the best value, the reality is that there are hidden costs that negate the perceived value. They usually aren’t noticed until it is too late. A head-to-head exchange would be better than a two-percent commission charged by sportsbooks. However, when you factor in that the Betting Exchanges are charging 5% to use their service, you now have a greater cost than you would have had if you simply used the sportsbook.

The numbers will be different depending on which site that you use but you need to make sure you understand the potential hidden costs of Betting Exchanges. Avoid paying more than you should when it comes to commission amounts.