Betfair, a peer-to-peer online betting service system, has removed the middleman from the equation and taken the United Kingdom by storm.
From the Print Edition:
Sharon Stone, July/Aug 2004
Gamblers love to talk about the better way. Everybody has an opinion on the better way to run sports betting, the better way for casinos to divvy out comps, the better way for poker tournaments to be organized. Often the ideas make sense. Invariably they favor players. But rarely do these brainstorms go beyond mere verbiage. That is part of what makes Andrew Black's innovation so exceptional.
Rumpled, bearish and intensely focused, Black is a London-based computer programmer and stock trader who's enjoyed stints as a professional gambler. Like a lot of pros, he was frustrated by the cost of dealing with bookmakers (in Britain, commissions, or the vigorish, can be as high as 20 percent) and the rigidity of the sports-betting system. Bookmakers offer odds or a line and you have to take it or leave it. There's no room to offer a different price the way you can in, say, an equities market. As a result, says Black, "It's almost impossible to make money betting on horses in the United Kingdom. If you wanted to bet four horses in a race, you couldn't because the margins were so bad"—in England, most horse betting is done with legal bookmakers rather than through the track's parimutuel system, and bookies build profits into the odds they offer. "It was a real mug's game. Even if you were 10 percent better than average, you would lose. The only way to win [with the bookies] is if you have access to very good information."
In the late 1990s, Black was living a couple of hours outside London and working as a programmer for GCHQ (Government Communications Headquarters), Britain's equivalent of the CIA. He had sworn off gambling full-time. His hours were reasonable—9 till 5:30—and his wife was in London most of the week, working as a lawyer. Black had lots of time on his hands and devoted a good chunk of it to thinking of the better way to wager. That was when he had what he calls his "eureka moment": create an exchange for sports bettors, through which they can buy and sell positions and establish prices based on the attractiveness of particular wagers.
After five days of round-the-clock code writing, he had a prototype software program. That was easy. However, finding financial partners proved more challenging. "I was a very poor salesman," admits Black. "I remember explaining it to one guy and telling him that it's a 100-million-pound idea. His eyes glazed over."
But when Black happened to bump into an acquaintance, J.P. Morgan derivatives specialist Edward Wray, at a cocktail party, the response was much different. "The product is very simple, and the risk of leaving Morgan, in 1999, to set up a betting exchange didn't appear huge; I figured that if it didn't work, I could always go back to derivatives," says the trim, clean-cut and buttoned-down Wray. "A year later [after the 2000 stock market decline], I realized that this wasn't the case. By then, though, I was so enthralled with this project that there would be no going back."
That project has grown into Betfair, a revolutionary system that has taken gambling by storm in the United Kingdom. It is a peer-to-peer betting service, which works online and allows bettors to wager with one another rather than with a bookmaker. This takes the middleman—the bookie—out of the equation. Lines are set by the gamblers, with people logging on to Betfair's easy-to-navigate site and offering odds or point spreads, hoping for takers. Let's say, for instance, that the Dallas Cowboys are playing the New York Giants and you think the Cowboys should be favored by four. You post that you are willing to give those points. If somebody else on the site wants to make the bet, they will be matched against you and the wager is made. This happens with split-second timing, and, of course, it's anonymous; you don't know with whom you're betting. Everybody has funds, in the system, to back their wagers, and transactions are reconciled immediately after the game is completed.
The incentive to offer more attractive deals to the other gamblers—let's say, giving five or six points instead of four—is that you will get your bet taken quicker. This makes for a more efficient market, as gamblers, rather than bookies, who have ulterior motives (like balancing their books), refine the numbers. As used by straight-ahead bettors, who simply want to place wagers, Betfair allows for the negotiation of more favorable odds and lower commission costs (2 to 5 percent per bet) than those charged by bookies.
For sophisticated players, it becomes considerably more interesting. "There are those who use Betfair for trading their positions," says Black, explaining that he has devised the system to function just like an equities market. "If you back a horse that is 10-1 and lay it [bet against it] at 8-1, you can't lose"—you have essentially bought low and sold high, a strategy known as middling. "If the horse wins, you make the difference between the two wagers. And you can position yourself so that no matter what happens, you make money: you back it for 50 quid and lay it for 55 quid. That way, if you lose, you win five pounds. If you win, you walk away with 60 pounds. That's what we call a green book." But, as with the stock market, there is a potential downside: "The danger is that you can get into a position and not be able to get out of it because the price keeps going further and further down."
Only 20 percent of Betfair's customers are drawn to this rarefied form of wagering, and it has attracted a coterie of mathematically inclined players who've left their jobs in the city for a run at professional gambling. Such is the case with John Tuohy, a former IT consultant who's gone from being a regular day-to-day punter, with a 9-to-5 job, to gambling full-time on Betfair. He's a jovial guy, sitting on a couch in the study of his luxe waterfront high-rise apartment, watching races on TV and casually punching wagers into his computer.
Tuohy does a lot of the middling that Black describes above, but he's also found a particular edge for himself in running betting, which is wagering on a race after the horses leave the starting gate. Unlike bookies in the United States, Betfair allows gamblers to wager on sporting events up until the final seconds of play, and it has created advantages for gamblers who can quickly process ever-fluctuating information. "I'm good at it because I've spent a lot of time in betting shops during my youth," Tuohy says, half seriously, as he locks in a couple of middles for an upcoming race. "One secret is that you watch the jockey instead of the horse." Minutes later, as a race goes off, Tuohy nimbly punches at the keyboard, laying out fresh odds, backing a winner, and taking action on losers long before they hit the homestretch.
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