What is a betting exchange?

To place bets on a bet exchange has become quite popular, due to the fact that you bet against other punters, not against a bookmaker. YOU can choose to be either a bookmaker (offering odds on an event for others to bet on), or to bet as an ordinary punter (you place bets on an event where others have offered the odds). In order to do this effectively, you need a place to gather all punters and "bookmakers" in one marketplace, the bet exchange. This works just like a stock exchange (a meeting place for traders). Actually the bet exchange works very much the same way. The bet exchange websites have software which will keep all the "lays" and "backs" in order.
The common terminology is "lay" and "back" (or, to make it easier: "sell" and "back"). If you decide to act like a bookmaker, you will "lay" an offer out on the bet exchange for others to bet on. This is the way bookies normally do it. They "lay" bets out on their websites, for others to bet on (or "back").

As you would expect, the bet exchange website will charge a certain percentage in retur for their service. This percentage can vary, but a well known, and excellent bet exchange like Betfair charges only 5% on the winning amount (winners must pay 5% off their winnings). This is ofcourse considerably lower than the bookmakers, who operate with a 10-20% profitmargin.

A bet exchange, something for you?

DO NOT BET BEFORE YOU UNDERSTAND THE GAME.
Make sure you have read and understood the rules before you start acting as your own bookmaker. A betting exchange, like Betfair, is a company who do not accept bets themselves, but they do instead offer the facilities for other punters to place bets with eachother. If you fancy a shot on being a bookmaker, then you should definitivly give this concept a try.
A betting exchange will remove the profit margin factor, which very often will favour the bookmaker. In a sports betting exchange you will generally get better odds, due to this fact.
But be ware that you may lose quite a bit of money if you act as a bookmaker, and that you therefore need to have some funds in your account to cover all your potential loss when making a "lay-order".
Another thing is that, even if you don't want to act as a bookmaker (don't want to "lay" bets), you can act as a normal punter, and bet on the offers other have "layed" ! And the best thing: you'll most likely get better odds on a bet exchange than with a bookmaker, because on bet exchanges, there is no profitmargin calculated in the odds presented.

Most betting exchanges operate to around a 101 per cent book on most high-profile events, which compares favourably to a typical 105-110 per cent overround when comparing the best prices on fixed-odds firms on most football matches.

The back/lay prices on a particular event are determined by punters themselves - players can attempt to place a bet at any price they wish so the equilibrium is effectively created by supply and demand.
Because commission is only charged on net profits on a single market, exchange players are able to hedge positions and benefit or suffer from swings in the market.
If a punter places a bet on Arsenal at 5/6 and the price moves into 4/5, he or she can lay off their bet, locking in profit, but if the price drifts to 9/10 to close off the book would involve accepting a loss.

Alternatively, if the punter changes his or her mind for whatever reason, he or she can manoeuvre the position on the market without being affected by the margins of standard bookies.

Most big events are extremely competitive - nearly £10 million was matched on Betfair's outright Premiership market last season for example, while live games regularly see over £1 million changing hands.
Exchanges tend to offer prices in the European decimal format.
Decimal odds incorporate the stake into the price, so evens becomes 2.0 (1/1 plus the single unit stake) and 2/1 becomes 3.0 etc.

Small example

To take a specific example, let's say we wish to oppose Tiger Woods in The Open and the exchange shows a current 'to back' price of 2.98 and a 'to lay' price of 3.0.
If we are willing to trade at those prices we would have to be prepared to lay at 3.0, or 2/1. This is effectively the same as backing 'the field' at 1/2, so to win £10 we would have to risk £20 by laying at 3.0.
If Woods wins, we lose £20; if he fails we pocket a tenner.
Of course we could ask to lay at a shorter price, say 2.96, in which case to win £10 we would only need to risk £19.60.
However, unless the price on Woods shifts downwards the price would not be matched and no bets would be placed.
Most exchanges bet in-running on most televised events so this gives us the opportunity to find value as the event is in progress.
In the above example if Woods bogeys the first two holes his price is likely to lengthen, perhaps to 3.6, in which case we can hedge our position by 'backing back' at this price. Backing Woods for another £10 at this price would net us £26 were he to win, so we are locking in profits.
It is imperative that inexperienced users double-check their stakes and liabilities before confirming their bets, and we definitely advise that small stakes are used at least until players are familiar with the concepts.
However once players have got used to playing the markets it is clear they can be very rewarding - indeed big players who have been capped by the bookmakers can bet with virtually unlimited stakes on the exchanges.