Can we still trust Betfair?

...Should we trust Betfair? Or indeed, any betting exchange?

Trust is such a powerful concept, a search on wikipedia says that a "trusted party is presumed to seek to fulfill policies, ethical codes, law and their previous promises."  The degree to which we trust is a measure of honesty and competence, and the degree to which we forgive broken trust is reliant on whether trust failed due to an issue of competence or honesty, the later being rather harder to forgive.

This is going to be a lengthy entry.  But I owe it to you, it's been a while.  This entry is not going to talk about tennis, or my performance, which has been fairly unspectacular but steady (the bank roll is up a further 29% on the year).  I'm going to post about an issue doing the rounds right now, and that is whether the recent actions of Betfair (the leading betting exchange) have caused us to lose trust in them.  Do we believe they have our best interests at heart, further to this, should we?  Why did many of us blindly trust them for years, were we naive?

Some of you noticed I made a post (and withdrew it) a few weeks ago about the recent bet matching controversy at Betfair.  It was a strong entry, I was pleased with it, but I took it down, people wanted to know why.  Sometimes it is better to hold your cards closer to your chest, to withhold judgement for as long as possible... I decided to give Betfair a few days to sort things out, given what I had been hearing, there was a good chance things would change, and outdate the post.  In fact they did change not long after that..

Without going into too much detail for those that don't know, Betfair changed the way they matched bets 'in running' for a while.  They did this secretly, and they did so in a way which made them around 15-20% extra profit.  Profit, being the critical element here, (previously Betfair made no profit at all from the bet matching process) when you match bets and profit from it, you are in fact trading on the exchange.  A concept that Betfair clearly didn't grasp.

The term 'exchange' no longer applies in this case, because you are in fact dealing with the exchange themselves.  This method of profiting from the bet matching process was only open to Betfair, because it was done using it's own platform software and technology.  ie. it was automatic and without choice, part of the site.  If you used Betfair during this period, you would have been vulnerable to this occuring, there was no way around it.

If an 'exchange' profits from the process of matching bets (buy and sells) then it is insider trading.

How on Earth did Betfair think they could do this?  Well, probably quite easily I'm guessing.  In the betting exchange market, Befair are by far the biggest, and for good reason - the liquidity exists there.  As a punter and trader, you go where there are people to bet against, where competition and liquidity offers up sizable bets at good odds.  Everyone feels the same way, and so you end up with an exchange that has the vast majority of the action.  Indeed, this is the ideal scenario for people looking to use 'exchanges' of any sort.  You welcome the liquidity.

This puts this particular exchange in a position of extreme responsibility.  It effectively declares them the custodians of our marketplace, this is a great deal of trust to place in one company.  Particularly a 'betting' company.

Betfair is a registered bookmaker.  Without rehashing the issues of their license and whether this is really right or not, whether they like it or not they are also an 'exchange', running an exchange brings a higher level of responsibility that is perhaps not best bestowed upon a 'betting' company, but a 'financial' one.  Not just any financial one either, an 'exchange'.

You see, as a business, having the vast majority of customers turns them from not just any company, into a monopoly.  Monopolies have massive power over the market, indeed they control it, the customers are at their control - more so when this issue of liquidity is involved.  Rival products cannot  gain any share of the userbase without taking them away from liquidity.  Who wants to populate an exchange with no liquidity?  No one!  The customers hurt themselves here, but are beyond blame.  It's chicken and egg stuff.

Monopolies have little competition by definition.  Competition is good for customers, they get fair deals, they have choice and they can vote with their custom.  They don't have to put up with the decisions made by a monopoly.

Why would a 'financial' company be better?  FSA (Financial Services Authority) Regulation.

No one expects Betfair or any other betting exchange company not to do it's best to make profits.  They are a business afterall.  But an 'exchange' has responsibilities to it's users, which restrict some of the ways in which it could make profit.  There are ethical and moral (and legal) issues that come into play.

You would never for example see the London Stock Exchange trading on it's own platform, let alone profiting from the way it's software worked.  Such actions would have severe consequences for those involved.

Betfair has many times the transactions of the London Stock Exchange per day.  Something which amazed me when I learnt of it.  They have hundreds of thousands of registered users, matched volumes on the biggest tennis matches are well into 10s of £millions, you can imagine what horse racing is like.  All of these transactions have to take place in a fair way, speedily and transparently between customers.

Is this the sort of thing best suited to a betting company?  A business with a very strong desire to grow, and to continue growing.  Can you imagine the potential conflict of interest at play here.  With so many people making deals on their platform, millions of transactions per day, this must seem like a goldmine to some at Betfair.

Indeed, given they make the rules, they own the technology and platform software, the temptation must be huge.  Further to this, they are regulated as a betting company, to a large degree this gives them a massive freedom to run their product as they see fit, including the ability to change the rules, the way bets are matched or the degree to which they seem like a bookmaker and not an exchange.

Lets throw in the size of the company and the amount it's grown.   Betfair is now in all likelihood  a 1000 person plus company.  All of these people to be managed well, to tow the company line... and all of those bonuses to pay.  It's unlikely most of the company know what is going on elsewhere at HQ, there's hierarchy and politics at play, agendas form and the company comes under the influence of various departments and the way they view the direction of the company. 

The attitudes of employees is now quite random and unpredictable, given the nature and size of the company.  Employee attitudes are going to be very different to that of a 'user'.  They are concerned with internal issues, politics, climbing the company ladder and getting their bonus.  Does fairness and 'exchange' ethics, play an important part for them, perhaps not.  How many people go to work thinking about such lofty ideals?  Yet the question of fairness is not one that is thoroughly regulated.  Regulated to a sufficient degree where it becomes unquestionable, and a matter of legality, rather than company direction and temptation.

Many of these employees will be privy to the sorts of knowledge about customer accounts that might best be protected.  Many know for example how much some of their users are making, and it's rather a lot more than their pay packet.  Money talks, and it does strange things to people..

Which brings us back to the original question.  Can we trust them?  And, should we?  In my opinion, no and no.

2 or more years ago I would have unquestionably trusted them.  Why though?  They have a great product, it's innovative, I enjoy using it and yes I can make a living.  I was naive enough to think this was enough.  They also acted differently, the company was smaller, guided by different people with no evidence that they wanted to run anything other than a fair 'exchange' between punters.  In hindsight, this was not particularly clever from myself..

Why would a company regulated as a bookmaker, wanting to grow rapidly, never think about the goldmine on it's doorsteps.  Especially when a point is reached where it becomes harder for them to continue to grow as fast.

This applies not only to Betfair but all betting exchanges.  I began by saying 'trust' is a strong word, but lacking trust in someone does not incriminate them, it just means we must keep a close eye and remain healthy skeptics given the lack of proper regulation in this area.

I also said the ideal is to have all the money in one place.  That is common sense, but the responsibility placed upon the people running that company is huge, and it's not one we should simply give to a business without strict rules to ensure absolutely no potential for conflict of interests in the future.

Comments

[Andy]

Strong stuff but sensible and realistic. I used to think that i would have more faith in Betfair if they were a public quoted company, thinking about it though they would be even more profit driven then so im not so sure, just feel they'd be more open to scrutiny that way. Maybe this part of the industry now needs to come under some seperate sort of regulation and monitoring so we can all have faith in it's integrity. Th crux if the matter here i think is as you rightly point out, Betfair are a licensed to be bookmakers.

[NICK BRYANT]

Well summed up M. I agree with everything you say. Personally I would like to see the FSA regulate Betfair.

[Ato Chiffre]

I just picked up on your piece via midasoracle.org. In the light of the poker heist (where the issue was one of was players' money being ringfenced?); the bet matching fiasco (sleight of hand); the grand national debacle (saving face) and now this, Betfair should not fool itself that it has not suffered reputational damage. However, two factors will ensure that it will not lose sleep; it enjoys monopoly status; a weak regulator. However, in the end of the day any exchange is about its traders and it is they alone (collectively) that can change things. Good piece - keep up the fight!

[Nick]

First of all good to see your back, for a moment there I thought you'd gone the way of most other gambling blogs and hit a black swan (I see Fooled by Randomness on your Amazon list) but then again I was pretty sure you hadn't - having read your post since last year, you talk as much sense as anybody on betting.

On Betfair, rightly or wrongly for selfish reasons I wasn't that exercised by the match betting (il)logic but I completely appreciate that taking money out the system is underhand and could have repercussions for me. On your general point on whether we can trust them, I think we’ve all been a bit seduced into believing Betfair was the great white knights who’d save us from the evil bookmakers, I think it’s always been a business, like all businesses which balances the profit motive with not f*cking off it’s customers. But as you say the security of it’s monopoly has meant it can try these things on. But not wanting to sound like a sycophant I think they’ve been relatively restrained over the years given their position and it’s probably worth remembering they have climbed down on the skimming bot. As for if I believe they are acting ethical, if I’m honest I get a bit queasy when ethics and gambling get mentioned in the same sentence!

I’d be careful if what you wish might come true on regulation, a lot of what goes on on Betfair probably doesn’t bear much inspection, I think regulation would be detrimental to most punters especially those that make money. As for the Fundamentally Supine Authority, I’d trust them no more to recognise what could harm punters, with recognising that banks with loan books highly leveraged against temperamental financial markets will inevitably go bust. But then again I suppose we are yet to see if the Gambling Commision has any teeth (I’m not holding my breath…) Anyway if things got hot for them, Malta has always been their get out of jail card and most of us would follow them with our pants round our ankles.

I suppose the only real solution will be the market, traders (for want of a better word) will only move if the believe they will make more money elsewhere and elsewhere will only happen if a viable exchange is launched. Why there hasn’t been a proper rival I’m not sure, my guess is there isn’t as much money in the exchange model as most believed.

Apologies if my post has been too contrary, like I say I think you talk a lot of sense throughout your blog, but I thought I’d add my thoughts.

[Swingtrader Igor]

Good point....

[Selectabet]

Hi Matt, good to see you posting again.

I didn't realise Betfair wasn't regulated by the FSA. To my mind it's an investment platform more than a gambling platform. But wouldn't FSA regulation make it open to (Capital Gains?) Tax implications for the customer though? Not sure.

I'm not a Betfair user (I've been sticking that other evil of the bookmakers) but your comments would make me think twice.

The monopolisation of the market gives Betfair the ultimate power and is very dangerous but as long as there are people willing to bet and match bets there will always be Betfair - regardless of what tricks they get up to.

[boylesports free bet]

a very interesting article this. certainly raises a few points worth thinking about

[Matt]

Thanks everyone for the well thought out and lengthy responses, sorry I've been slow in replying, but this is the sort of pace punt.com is rolling along at, at the moment. I will eventually get back to everyone however, so here I am...

To "Nick" in particular, I don't mind at all anyone voicing contrary opinions, your comment was excellent and most probably spot on. You are right, it's dicey ground when gambling and ethics come face to face, particularly on an exchange where it seems pretty much anything goes in the fight to make a profit. I don't see that changing and perhaps that's all best left alone, but I do believe Betfair should do it's very best to be ethical in it's practices... it has a bookies license, but it's supposed to be the revolutionary transparent product. I think it's time we wised up to the fact that they are just another company like most others that will push their position for what it's worth, and that's a lot, being the monopoly they are.

Yeah sure the FSA like many regulators around might have issues of it's own, but I would trust them more to deal better with issues relating to exchange trading. They have the legal framework to work from with regards to insider trading for example (again I'm no expert in this field).. the gambling commission ? Well, I have little faith there, maybe I am not being fair, but are they really the best equipped regulators to deal with something that handles many times the number of transactions per day that the London Stock Exchange does (and all the complexities) ? I doubt it.

Your point about there maybe not being as much money in the exchange model is, IMO, spot on. Some have called it a niche market, I wouldn't go so far, but I would say it's a small margin business with limited growth. What do youdo when you've signed up everyone you can sign up ? You start milking them for what you can... really, Betdaq need to step it up and start innovating to get customers accross, it's getting to the point where there's enough disatisfaction around to make a decent impact. There's been two site outages in the last week or so at Betfair, everytime this happens, some more people will open Daq accounts, but more needs doing. I am hearing through the grapevine of some interesting developments to do with this..

Once again, thanks everyone for your comments, they're appreciated and added greatly to the post.