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Revolutionary Bets

Betfair, a peer-to-peer online betting service system, has removed the middleman from the equation and taken the United Kingdom by storm.
Michael Kaplan
From the Print Edition:
Sharon Stone, July/Aug 2004

(continued from page 1)

This race nets him a bit of pocket money that, over the course of a week, can add up to something substantial. He notes that his best and worst Betfair days swing between wins and losses of £5,000 (about $8,850). "I probably made the same amount from Betfair as I did, the year before, from the IT work," says Tuohy. "Gamblers think this is boring, but it's better than spending a lot of time working in an office. It is very much like day trading." Tuohy lets this sink in for a moment before acknowledging that he bets 300 days per year and has his share of leaks, particularly a predilection for spread betting, in which the amounts of your profits and losses hinge on the number of points your team wins or loses by. "It's great fun but very volatile," says Tuohy. "When it hits, you can't drink your beer fast enough because you're making so much money. But it can go very badly the other way as well. I've burned my fingers on spread betting."

The degree to which one can burn more than their fingers at Betfair—where hundreds of wagers can be placed over the course of a single sporting event—is illustrated by the saga of Andrew Petrie. Petrie had been the director of a major U.K.-based pension fund, out of which he siphoned nearly $3 million over a six-month period to cover his Betfair wagers. Petrie's goal, before getting caught, was to become a layer of bets—that is, he would bet on horses to be defeated and take action from people aiming to pick winners. After his court hearing, Petrie told the Wolverhampton Express & Star, "I ended up a big loser. The horses kept on winning and I had to pay out. It just spiraled out of control and I carried on taking the money in the hope I would win enough to pay it all back." Of course, he didn't. When the situation came to light, Betfair returned around $350,000 (in commissions) to the fund, and Petrie received a six-and-a-half-year prison sentence.

As can be gleaned from Petrie's mess, the size and scope of Betfair is stunning. On a busy Saturday, 2 million bets are processed through its system, making Betfair busier than the London Stock Exchange and the largest of 15 similar betting services in England (the company claims to have a 90 percent market share). Its floor of offices, situated in an impressive glass and steel building overlooking the River Thames, is crowded with tech specialists and multilingual customer service people. But there's nary a line maker in sight, which illustrates the beauty of this operation: its customers do the hard work of setting lines and figuring odds, while absorbing all of the risk and volatility. Though bookies complain about Betfair—insisting that it unfairly takes away business, turns bet makers into bet takers, and hurts the integrity of racing by allowing bettors to wager on horses to lose—they also flock to it. "Bookies use us to hedge their positions," says co-founder Wray. "They also use us as an indication of where the market is. What we see here in the U.K. is that when the horse-race market used to open, bookmakers would not give early prices on the races. Our market opens the day before, an early price forms, and it's a pretty accurate early price. People use that as a benchmark."

An illustration of Betfair's ability to go where the bookies won't can be seen in a goofy bet that few serious gamblers would risk their money on. As is the custom, British sports books took action on the 2000 U.S. presidential election. That was all fine and good—until there was no immediate winner. At that point, says Wray, "Nobody had an idea of who would win, and the bookmakers stopped offering a price. We turned things right back on and let the public decide."

Ironically, despite a strong presence of National Football League and Major League Baseball action on Betfair (not to mention the odd election), Americans are barred from using the service. Unlike other online sites, Betfair won't take action from stateside gamblers. "We don't allow anyone with an American credit card to bet with us," says Wray, explaining that Betfair has sites specifically aimed at gamblers in Europe, Africa, Australia and Asia. "We will not stick [a middle finger] up at other jurisdictions and tell them that we don't believe in their laws. We want to eventually work with those jurisdictions." The attitude might be viewed as admirable by antigambling advocates, though there is a way around the restriction (which doesn't stop anyone from just visiting the site at www.betfair.com): simply use a credit card from an offshore bank, maybe a lending institution in Grand Cayman, and join Betfair's 200,000 or so registered non-American customers who create the liquidity that bettors and traders crave.

But U.S. lawmakers are not the only ones who might take exception to Betfair. At home in Great Britain, a parliamentary committee recently recommended that the government should look into registration of those who lay bets above a certain threshold. Naturally, Betfair and its biggest customers have balked at this. Whether it gets put into law and proves enforceable has yet to be seen. But even Andrew Black, who hates the prospect of legislation, acknowledges, "I think [Betfair] has created a new class of [professional] gambler in the U.K. I see evidence of it in our chat rooms, which are incredibly busy."

Representative of the new class is Glen Alcoe. Unlike John Tuohy, who had always been a run-of-the-mill punter, game to bet on just about anything, craving action more than winning, young Alcoe is a supersharp advantage player. He's become even sharper with the advent of Betfair. A nerdy-looking guy with a PhD in mathematics who put himself through college by using modeling software to successfully bet on horses, Alcoe is one of the more successful traders on Betfair, and, like a savvy stock investor, he makes his money by finding opportunities that other people overlook. "There are certain predictable ways that the market is expected to move," says Alcoe, who consults with Betfair, providing a customer's perspective on ways in which the site can be enhanced. "Some horses, you know they will be popular, and you can see their prices building up. They often take a long time to be corrected, and it's really a case of knowing when these forecast prices are wrong. The other interesting thing to do is arbitrage with bookmakers and the tote board. Due to short-term fluctuations, I've had opportunities to back all the runners in the same race with no chance of losing money."

Never mind that this is as sweet as it gets for a horseplayer, it also happens to be as tricky as outsmarting a fast-moving NASDAQ. Even as Alcoe casually tells me that none of his friends are especially surprised by his success as a bet trader—thus making it sound like a piece-of-cake proposition—I keep hearing the more measured words of caution from Andrew Black: "If somebody's smart and he works hard, he will win money on Betfair. However, there are a lot of very clever people out here, and it's not easy. But why should it be? This is survival of the fittest."

Michael Kaplan is Cigar Aficionado's gambling columnist.


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