The internet revolutionised the betting market. At the forefront of the revolution were the betting exchanges, a disruptive innovation, that utilised trading systems to disrupt the traditional bookmaker/punter relationship through the facilitation of direct person to person betting. The radical technological architecture introduced by the betting exchanges threatened to render obsolete the business models of incumbent firms and represented a significant challenge to their long-term profitability.

From the outset, betting exchanges became mired in controversy. They came under heavy criticism from the incumbent operators, sports body regulators and industry associations, and, at times, even their own customers. Ralph Topping, the then CEO of traditional bookmaker William Hill, famously told an industry magazine in 2009 that Betfair was a massive secret society where illegal gambling is taking place.

Betfair, the world's leading betting exchange, sought and failed to leverage its betting exchange model on to the global stage. The company became mired in regulation in Europe, had its progress checked in the Australian betting market, eventually selling its 50% stake in its joint-venture to its business partner and it found progress in the US betting market to be painstakingly slow.

In a somewhat ironic twist, Betfair, the company that had at its launch called for the death of the traditional bookmaking industry, had by June of 2015 moved to incorporate a traditional fixed odds betting model in to its portfolio, having had to accept that there were significant holes in the stand alone betting exchange business model. Then, on 8 September 2015, traditional bookmaker Paddy Power announced that it had reached an agreement with Betfair Group PLC on the terms of a recommended all-share merger between the two companies. This outcome very much went against the notion that disruptive technologies always lead to the demise of incumbents, such as Christensen had found in the disk-drive industry.

The ability to back and lay, in conjunction with low transaction and information costs, conspired to attract a heavier concentration of better informed, more financially focused bettors into the betting exchange space. These more informed bettors typically seek out opportunities to identify misperceptions of probability, so as to benefit by removing or mitigating it, their presence in the betting market thus contributing towards,for example, the erosion of the favourite-longshot bias. Moreover, the forced removal of the once dominant risk averse bookmakers from the betting market, or at least the erosion of their monopoly position, served to contribute to the development of near perfect 100% books on many sporting events.

Transparent markets - Transparency equals fair betting markets, because it ensures that all players in the market are provided with the same market information. In its purest form, a betting exchange, which covers horse racing, presents a system, where all private information about a horses chance is incorporated in the price; in addition to information pertaining to Jockey; track, trip, form etc....Punters are able to learn of each others information by observing prices, and they are, for the first time, able to change their actions according to the prices that they see (they can play or lay, and bet in-running). There will be instances, for example, where the price of one horse drifts badly before the start of a race, whilst that of another contracts; punters may decide to lay the first horse, because they have concluded that the change of price of the second, contains important adverse information about the chances of the first. Transparency also facilitates arbitrage across the betting market, thus ensuring that different prices do not obtain on different markets. Late money on the betting exchanges is found to be the most accurate prediction of true outcome probabilities and the greater the late odds movement in an entrant, the higher its probability of winning. Betting exchanges, with their dynamic live markets, reveal this information to the betting public; whereas in the case of parimutuel/Tote operators, last-minute changes in odds are not signalled to outsiders.

Longshot Bias - Research into betting exchanges supports the notion that the longshot bias is positively related to the transaction costs faced by bettors in acquiring information concerning the true probabilities of runners in a horse race/sporting event. Markets that are characterised by lower transactions and information costs, have a tendency to be more informative, and punters trading those markets are provided with a more realistic assessment as to the chance of longshots. Accordingly, the favourite longshot bias is typically diminished, if not eroded - a situation that pertains in the horse racing betting markets that are available on Betfair, for, example.

Low cost structure - The low cost structure of the trading system, ensures that transaction costs for traders are kept to a minimum. This ensures that the prices available on the betting exchanges are significantly better value,and more informative, than those on offer from the traditional bookmakers. (often upto 20% more competitive).

Our analysis of outright betting on the 2006 World Cup, for example, revealed that Betfair's book on the top twelve teams in the betting market was betting to an over-round of 100.92 against an average over-round of 112 elsewhere.

Breadth of bets - Punters are able to indulge in a veritable melange of betting transactions; in simple terms they can play or lay, and bet in running on all events, however, the more sophisticated may hedge, arb; cut in running; etc....... much more appealing, when compared with the rigidity of the traditional fixed odds betting menu; The exchange interface, with its limit order book, di?erent odds and the options to back (i.e., betting on a certain outcome) or lay (i.e., bet ting against a certain outcome)

Perception - Punters do not traditionally like bookmakers and in the betting exchange model they are presented with a system that purports to be betting without the bookies.

Betfair is the dominant global betting exchange. In the financial year ending April 2012, the company had 852,000 active customers. It said that customer funds held off balance sheet in separate ring fenced accounts amounted to 288.3m, whilst it ended the period with a cash balance of 135.4m.

The bigger Betfair got, the harder it was for its competitors to keep pace with it: the network effect. The Betfair exchange boasts a high degree of liquidity, across a wide range of sports betting markets, alongside a professional customer service operation and a fully integrated telephone and internet betting service. It would be difficult, if not impossible for any start up to be able to scale up to match the services that Betfair provides, without incurring significant costs.

The robustness of the Betfair business model was demonstrated by the fact that since its formation, the company continued to increase revenue growth month by month, despite facing severe competition from other betting exchanges, many offering zero commission rates (Mansion betting exchange which opened in September 2004, offering zero commission, shut its doors in October 2007). When Betfair introduced a premium charge on some of its super users in September 2008, the anticipated flight of liquidity to other exchanges simply did not materialise.

There is also the simple fact that a new trader is more likely to see his order matched on the Betfair exchange, than on any other betting exchange, because of the high number of users already trading on it. Accordingly, there is also an inducement for all traders to send their trades to the Betfair betting exchange at the same time, in the knowledge that they will all stand a better chance of having them matched.

Global Betting Exchange of Dublin, the Dublin based betting exchange company, that was once funded by the Irish financier Dermot Desmond and the company behind the more well known Betdaq exchange, was hailed as being Betfair's chief rival, but consistently failed to challenge Betfair's dominant market position. The acquisition of the company by the traditional bookmaker Ladbrokes did nothing to improve Betdaq's position relative to Betfair.

A large number of other companies have sought to break into the betting exchange sector,but have been forced to exit with their tails between their legs. In recent times, we have seen a number of new entrants seemingly try to enter the space backed by cryptocurrencies; Augur, Gnosis and Bitcoin Hivemind.

In 2010 SpreadFair became one of the biggest casualties of the sector. Visitors to the company's website were met with the following message;

Dear Cantor Spreadfair Customer. Cantor Index Limited has taken the decision to close Spreadfair, its online betting exchange, to focus on its financial spread betting and CFD business. Effective from 4 pm, 1st December 2008, Cantor Spreadfair will cease to accept new customers and will take no further opening wagers. Any funds that you have on deposit with us remain totally secure and any funds not required to support open bets will be refunded to you immediately. If you have any questions, please contact our customer services team on ...

Another betting exchange, European Betting Exchange plc (Betbull)reported a net loss of 560,000 Euros for the first half of 2007, with net gaming revenue decreasing to 6.7 million from 7.0 million. For the first quarter ended March 31, 2007, the company reported a loss after tax of 94,924 Euros on net gaming revenue of 3.9m Euros compared with a loss after tax of 851,624 Euros on net gaming revenue of 3.3m Euros during the previous year.

In February 2009 Betbull announced that it had taken the decision to cease trading on it's exchange betting platforms www.betbull.com and www.betbull.de with effect from 28th February 2009. Commenting on the announcement, Simon Bold the director of Betbull Holding SE was quoted as saying;

We no longer see exchange betting as part of our core business, we therefore prefer to focus our attention on the retail sector, where we are achieving sustained growth and healthy margins in Germany and beginning to roll out units in Madrid under the winners licence awarded last September. We strongly believe in the durability of the retail model and see great potential for growth in the European markets. Online sportsbook will still be available to our retail clients via the existing Primebet website.

In March 2015 the WBX betting exchange finally threw in the towel. A note from the company's CEO, Malcolm Gray said:

I have always taken a long view with WBX and believed that we’d become a genuine alternative to Betfair on the strengths of our great platform and commitment to putting every exchange player back in control. Unfortunately the business strategy is no longer viable due to the rising costs of regulatory compliance and levies in the United Kingdom, along with the increasingly prohibitive stance of various betting jurisdictions. Though I am of course disappointed that WBX is closing, I am proud of my team and the fairness in which the exchange has operated for almost 10 years. Please rest assured that WBX will continue to service its Members and affiliates in the same spirit during the wind-down period.

Other casualties in the betting exchange space to date include; Abex88; Backandlay; Betbug; Betbull Exchange; Betx, matchedbets; iwageru; ggbet exchange; bluevex; ubetanything; spomaxx; swapbets; Betbutler; Betxc; Fairoptions; HubDub; Levelbet; Playp2p; mybetyourbet; bet-ex; bettingsociety, SpreadFair; SportingOptions; Betmart; Mansion betting exchange; Livebetting.Com, Tradesports Parbet betting exchange, and in March 2015 WBX.

Alternatives to Betfair still in operation as of March 2017 include; Betdaq, Matchbook, and Smarkets.

From their inception, betting exchanges aroused controversy. Betfair's initial competitive advantage centred around the fact that the company offered the punter value alongside a product architecture that was more easily accesible, more transparent and more versatile than anything that had gone been seen before in the betting industry space. That the Betfair business model threatened the dominant market position of the traditional bookmakers such as Ladbrokes and William Hill soon became evident.

With regard to the treat posed to industry incumbents by the betting exchange model, Sean Boyce of traditional bookmaker Ladbrokes was quoted as saying;

We agree that betting at the current overrounds per runner is not sustainable either off-course or on-course, and we are concerned about the continuing downward trend of overrounds since the emergence of betting exchanges.

On January 29, 2003, David Harding, then the CEO of William Hill was quoted as saying;

If you track the over-round per runner over the past twelve months, you can track it from the point where Betfair and Flutter merged (December 2001). Since then, there has been a steady decline in the theoretical overround per runner. ..........Some racecourse markets now return overrounds of only 1.2 to 1.3 per cent per runner. That is not sustainable. I cannot have a price mechanism for 50% of my business being desecrated.

On 12 February 2003, the CEO of Jupiters, one of Australia's largest betting companies said as regards the threat posed by betting exchanges;

European betting exchanges are taking some of our high value clients away . . . which is having a major impact on the business.

In a speech entitled 'The Impact of Betting Exchanges on Horseracing', Peter Savill, then a leading player in the horse racing industry, claimed that the growth of betting exchanges had served to put the future of the entire horse racing industry in jeopardy. To hammer home his point, Savill noted that racing received 14 million from every one billion bet in betting shops, and seven million from every one billion bet on credit or through the internet, the sport received only one million from every one billion matched on the betting exchanges;

their impact on racing's finances has been ignored by the Levy Board, and the charging mechanism by which revenues are raised by both the Levy Board and Government is fickle to say the least.

In evidence given to the Joint Committee on the Draft Gambling Bill, the BHB stated that their data licence to bookmakers was based on gross profits, because a stable relationship had always existed between turnover and gross margin, prior to the arrival of the betting exchanges. The betting exchanges, they argued, because they have directly led to a lowering of bookmakers gross margins, have upset the funding model;

The gross profit model is unusual in charging for a product, the purpose of BHB's data licence. It is inappropriate where the relationship between turnover and gross margin dramatically alters, as is the case with a business which seeks to operate on low margins. It confers an unfair advantage on the low cost operator and creates an unwelcome market distortion. A supplier does not price his product lower simply because his customer is a low cost operator. In the case of low cost airlines, the example chosen by Mr Davies in his evidence, Ryanair does not get a pricing advantage on fuel over BA simply because it has adopted a low cost model.

The annual report of the Levy Board, the body that returns money to racing from off-course betting, was published in July 2004. It revealed that the Levy yield for 2003-04 had reached 100m for the first time. The figure represented a year-on-year increase of 25.5m, or 34%. This was the second year in which the Levy has been based on bookmakers' gross profits.

The Betting Exchange Task Force Report, made to the Australian Racing Ministers Conference in 2004, stated that the two most significant issues associated with betting exchanges are the enhanced levels of risk (both real and perceived) to the integrity of the Australian racing product, and the likelihood of substantially diminished commercial returns to the racing industry and to State, Territory and Commonwealth governments.

The Joint Committee on the Draft Gambling Bill received evidence from the Asian Racing Federation, stating that it is the view of our Executive Council that betting exchanges are incompatible with the best interests of racing and should be prohibited from operating on our sport.

In July 2004, the Australian Federal Government, as part of its review of the legislation dealing with interactive gambling services, the Interactive Gambling Act 2001, announced that it had decided against regulating betting exchanges in Australia; The report found no compelling evidence to suggest that betting exchanges were likely to contribute to an increase in the level of problem gambling.

In August 2004 the South Australian Racing Minister Michael Wright, who was seeking to have betting exchanges outlawed, announced that the International Federation of Horse Racing Authorities Chairman Mr Louis Romanet had agreed to form a strategic alliance with him in pursuit of his campaign. Both parties agreed that betting exchanges, in that they allow punters to bet on horses that lose, seriously undermined the integrity of horse racing;

I am delighted to have the support of such a prestigious organisation supporting our push to have betting exchanges banned......The International Federation of Horse Racing Authorities shares my concerns about the very damaging effects this type of gambling could have on racing in Australia and overseas.

During the Annual General Meeting of the International Federation of Horseracing Authorities IFHA held in Paris on 4 October 2004, horse racing authorities of 50 countries agreed on the basic principles to be respected concerning the provision of cross-border betting services. These measures formed the cornerstone of an Action Plan to combat all types of unauthorised betting on horse races.

During the meeting, France-Galop's director-general Louis Romanet expressed his deep dislike of the betting exchange concept;

Betting exchanges encourage the professional punter to cheat small punters, and they are a definite threat to integrity. We will do everything we can to stop them coming into France. We prefer to get nothing from them byway of payment to keep them out.

And, in its annual report for the financial year ending March 31 2004, the National Gambling Board (NGB) of South Africa warned against betting exchanges, which it said had become a major threat to the stability of the industry, with more and more South African punters depositing money in the United Kingdom and betting via these exchanges.

On Thursday, 14 October 2004 the Australian Jockeys' Association issued a statement saying that they support of the Australian Racing Board's campaign to oppose betting exchanges from operating in Australia. AJA chairman Paul Innes said his National Executive unanimously supports the ARB's view that online betting exchanges threaten the integrity and commercial future of the Australian racing industry. He said that public confidence in horse racing had been built over many years and depended entirely on every horse racing on its merits. It was his contention, that betting exchanges, in that they threw open the opportunity to make a profit from a horse losing created the perfect recipe for malpractice, such as race fixing;

Betting exchanges therefore have the potential to damage public confidence in racing, which is a great concern to the Jockeys' Association and the entire industry.

He went on to say that Members of the Jockeys' Association were opposed to betting exchanges as they basically threatened the sustainability of the entire horse racing industry, and that, accordingly, no operator in Australia should be issued with a licence to operate a betting exchange

They piggyback on the efforts of the jockeys, trainers and owners who stage race meetings, but are not prepared to pay anything by way of fair remuneration. Betfair has a very strange idea of what is fair - their investors get rich on the back of our members being cheated of their wages.

Following the news in November 2005 that the Tasmanian government planned to introduce laws into its parliament to license Betfair, the Chairman of the Australian Racing Board, Andrew Ramsden was quoted as saying;

For the Australian Racing Board this issue is squarely about the integrity of racing - our capacity to run the sport in a way that the public has confidence in its integrity. It is an unshakeable fact that the presence of betting exchanges undermines this. The easy facility to make money out of horses losing is an undeniable temptation to cheat.

The British Horseracing Board chairman, Mr Martin Broughton was also no fan of exchanges, which he claimed did not pay their fair share to racing. Announcing a reduction in prize money of 13.4 per cent for 2007, he said;

The real cause of lower margins is betting exchanges, and no progress has been made in seeking from them a fairer share for racing.

The Japanese Horse Racing Authorities also revealed themselves to be strongly against betting exchange;

Our position on betting exchanges has been and remains, quite clear. We strongly believe that it destroys the integrity of our sports and will ruin thoroughbred racing. Japanese racing is televised in Australia from time to time but they are not intended to be used for the purpose of betting exchanges. Therefore, we respectfully request that Betfair Pty Ltd refrain from using our race events for betting exchanges. I trust you understand our position and I thank you for your cooperation.

A media release published by the New Zealand Thoroughbred Racing association headed No to Betting Exchanges in New Zealand stated that;

I have seen the independent economic analysis on the implications of exchanges for racing and anyone who thinks that betting exchanges would be a good thing for the New Zealand industry should think again.

A media release dated 22 August 2006 from the chairman of the Australian Racing Board, Mr Andrew Ramsden stated;

So far as betting exchanges are concerned I reiterate my total opposition to this destructive form of wagering. The integrity issue that is at stake here is clear - allowing unlicensed persons to lay horses is a guaranteed recipe for undermining public confidence in racing. Mere access to the so-called "audit trails" of betting exchanges is no compensation for this attack on racing's integrity, and anyone who believes otherwise is deluding themselves. I believe that the best policy response is the path the WA government is taking, which is to take decisive action and explicitly prohibit betting exchange wagering.

In October 2007 Betfair had its application to publish Western Australian race fields information rejected The decision, taken by Racing and Gaming Minister Ljiljanna Ravlich, was is in line with new legislation that prohibits the operation of betting exchanges in Western Australia, due to the threat they pose to the integrity of racing in the State;

The State Government?s legislation is not specifically about Betfair, but about betting exchanges generally whereby punters can back a runner to lose," Ms Ravlich said; "The integrity of the racing industries has to be protected at all costs....After serious consideration of these matters, I am of the view that it is not in the public interest to approve the application by Betfair.

Following the arrest of three jockeys and a trainer, as part of a police investigation into the corruption of horse racing in the UK the Association of British Bookmakers (ABB) issued the following statement;

The ability of betting exchange customers to act as unlicensed bookmakers without revealing their identities to punters is the equivalent of the sport sitting on a smouldering powder keg. For the betting exchanges to say that cases of alleged corruption would not be identified but for the excellence of their audit trails is akin to a householder leaving his doors and windows wide open and then claiming credit for reporting a burglary.

In November 2007 Tabcorp chief executive Elmer Funke Kupper allegedly wrote to the NSW and Victorian premiers seeking a ban on betting exchanges. In a five-page letter to Victorian premier John Brumby he is said to have recommended that the state government legislate a ban on betting exchanges. In the letter to Mr Brumby, Mr Funke-Kupper allegedly called on the premier to introduce basic reforms that put competition over the internet and phone on a level playing field. He is said to have proposed the introduction of a fee of 1.5 per cent to 2 per cent of turnover on all corporate bookmakers and betting exchanges that publish Victorian race fields.

In what was one of the more bizarre outbursts against the betting exchanges, Ralph Topping of William Hill told an industry magazine in 2009;

I call Betfair the choirboys of the betting industry...look at us we're so innocent...actually the exchanges are the biggest Masonic lodge there is. They're a massive secret society where illegal gambling is taking place.

In repsonse to the news of 21 Septmber 2010 that Betfair was to seek a listing on the London Stock Exchange, Paul Roy, Chairman of the British Horseracing Authority, said:

There remain a number of fundamental questions around the business of exchange betting. We are confident that these will be resolved as part of the wider issue of the relationship between racing and betting. The new Government has signalled its policy commitment to ensuring a value transfer form betting to Racing as it sets policy to catch up with changes in technology and the way people bet.

We would entirely agree that Betfair has been disruptive and fundamentally changed the sports betting market. Whether intended or not, it has certainly disrupted British Racings finances, and has created severe consequences. It has indeed, for its customers, eliminated the need for a traditional bookmaker, and markets itself as cutting out the middle man. At the same time Betfair has argued it should be treated as a traditional bookmaker for the purposes of its contribution to our sport. Betfair cannot have it both ways.

Our response to the Levy Board consultation states that it seems certain that some customers of Betfair and other exchanges that carry on the business of receiving or negotiating bets, and that should therefore be paying Levy. This is entirely consistent with Betfair processing more transactions per day last year than all European stock exchanges combined, with some of their clients making many thousands of transactions and data requests on a daily basis.

Any international racing jurisdiction considering permitting Betfair to operate in their territory has to give very careful consideration to the impact on their sport, and learn from the British experience. In fact, we understand that they are offering far better terms to other Racing authorities, and we call on Betfair to now engage with us constructively and end the uncertainty.

On the question of allowing betting exchanges to operate in California, trainer John Sadler, representing California Thoroughbred Trainers, told Bloodhorse;

We think this would be just terrible for us....A lot of people are going to be accused (of race fixing) even if theyre not guilty. Were terrified of this. I spoke to trainer John Gosden, and he told me that it makes good people cheat and is the worst thing that ever happened to English racing. This is going to be the first time you can bet to lose, and we don?t think its a good idea.

In July 2012 the Cypriot Parliament introduced gaming legislation outlawing online casinos, online poker and betting echanges; designed to facilitate the receipt or acceptance of bets between players.

Industry regulation achieves public interest objectives, that might not otherwise be achieved. In the case of betting exchanges, matters such as fairness, transparency, integrity, privacy and general market stability fall under the radar of the regulators.

A policy paper issued by the Department of Culture Media and Sport (DCMS) in April 2003, revealed, for the first time, that the UK Government was prepared to embrace the concept of betting exchanges.

The paper stated that betting exchanges would be bound by the general conditions of an ordinary betting licence, but, that they would also be subjected to specific duties:

A: They would not be able to initiate bets in any way on the exchange - in that they merely construct a controlled market; and are not a party to the bet.

B: They may not permit their customers to identify themselves to each other, either through personal contact or otherwise.

C:They must display and disseminate their betting rules.

D: They must consent to having their play and payment systems checked by someone authorised by the Gambling Commission.

E: They must at all time seperate money belonging to punters and their own operating resources.

F: On matters of public policy, the exchanges will be subjected to the same level of regulation as any other gambling product operating through the internet.

The paper also stated, that persuant to the steps which would be taken to achieve the Government's regulatory objectives, there would be no need for individual layers on the betting exchanges to be licensed;.

the Government believes it quite unnecessary to license betting exchange customers. That would constitute superfluous over-regulation.

Two activities which directly threaten the integrity of any exchange based betting market, are insider trading (Jockeys, Stable Lads, Owners etc, laying their own horses) and price manipulation (giving a false impression of market activity or price movement).

In October 2003 the UK government announced that the Gambling Commission would have the power to freeze bets on the betting exchanges that it believed to be unfair, and to void them if it transpired that they were. In February 2004, the DCMS extended the provision beyond bets that were not settled immediately.

The issue of taxing layers on the betting exchanges, raised its head in March 2004, when the Chancellor of the Exchequer Gordon Brown, as part of his budget speech referred to a review of the tax treatment of betting exchanges and their clients.

The Joint Committee on the Draft Gambling Bill when making their deliberations in April 2004 stated;

We believe that the best way of achieving a balance between these points is to ensure that those using the exchanges to lay bets professionally are identified, regulated, made subject to the appropriate levy arrangements, and have their status checked.

It was the Committe's contention that persons using the exchanges to lay professionally (non-recreational users), should be identified and dealt with appropriately;

non-recreational users should be identified through their betting patterns, with due regard given to the amount laid as well as the frequency of laying;

they should be registered with the Gambling Commission and any registered layer that is found cheating, or in breach of sporting codes, should have their registration cancelled and be prohibited from using a UK-based betting exchange for a set period of time;

certain employees should be ineligible to be registered, such as employees of betting exchanges etc;

betting exchange operators should be made responsible, as part of their license conditions for the operation of a system of registration of Non-Recreational Layers and the transmission of information to the Gambling Commission about such users.

non-recreational layers should be required to pay levies to particular sports over and above the commission they pay to the exchange.

On June 14, the UK Government made its response to the First Report of the Joint Committee on the Draft Gambling Bill; Session 2003-2004. On the subject of betting exchanges, they rejected the proposals put forward by the Joint Committee on the Draft Gambling Bill that layers on the betting exchanges should be required to register for integrity purposes, levy payments and, perhaps, additional taxation. However, the Government has said that those that use the exchanges to conduct betting operations in the course of business would be required to obtain an operating licence;

We do not propose to adopt the Committee's proposal that non-recreational users of exchanges should be registered with the Gambling Commission. People who are betting in the course of a business require an operating licence from the Commission for their activities. As explained above, we do not believe there is then a further category of user who can be identified clearly who needs separate regulation.

The UK's Gambling Bill was printed on 18th October 2004; and contained no mention of the further regulation of individual clients of betting exchanges, or any attempt to tax non-recreational layers.

On the issue of licensing betting exchanges, sports minister Dick Caborn MP said in the Commons standing committee on the gambling bill (3 November 2004);

Under the bill, there will be specific licensing for betting exchanges, with unique licence conditions. It is our policy that those conditions should include mandatory registration of all customers, information sharing agreements - the sporting regulator thinks that the question of integrity is at the centre of things, as I think has been amply demonstrated this morning and ring-fencing of customer accounts. Anyone laying a horse or a dog on a betting exchange in the course of business will require a betting operation licence. That will ensure that people cannot use betting exchanges for commercial purposes, as a back-door way of avoiding the need for a licence.

When appearing before the All Party Parliamentary Group Betting and Gaming in Decmeber 2004 Greg Nichols and Tristram Ricketts of the British Horse Racing Board were asked to comment on the Joint Scrutiny Committees recommendation that a distinction be made between recreational and non-recreational layers on betting exchanges. Ricketts responded;

I think we have gone beyond that now, to be honest. The BHB is about to engage in commercial discussions with the betting exchanges because we do not have any firm, long term commercial agreements in place with them yet. In the period since the Joint Scrutiny Committee reported, there has been a recognition that perhaps that was not the most practical way forward. We do not want at this stage to say what those discussions might contain but we are not looking at this stage to go down the recreational/non-recreational route.

Betfair's Annual Report for the year to April 30 2010, contained the following statement, which some took as ammounting to a veiled threat that should the regulatory environment turn nasty, the company would be prepared to up sticks and to move lock stock and two smoking barrels to Dublin;

In July 2010, Betfair announced that it was to open an office in Dublin, including the opening of a new data centre and the relocation of the Betfair Group?s telephone betting and trading teams. This will provide strategic benefits for the Betfair Group by combining some existing technology and operational resources into a single location, which should deliver long-term improved performance and reduced costs. Betfairs Dublin base will provide the Betfair Group with additional flexibility as the regulatory environment evolves, should the need arise.

On 08 March 2011 Betfair announced that it was to move its betting exchange offshore to Gibraltar. Regarding the move and the move of its data centre to Dublin Betfair said;

The Company expects a positive EBITDA impact from the restructuring resulting from gross profits tax savings, partially offset by higher operational costs arising from running both new and existing data centres in parallel. These additional operational costs will reduce as our portfolio of data centres is consolidated during FY12.

Betfair said that it expected no material financial impact in the financial year of 2011 and a net EBITDA benefit of approximately 10m in FY12.

In May 2002 Betfair became the first betting exchange company to agree financial arrangements with both the British Horseracing Board, for a pre-race data licence, and the Horserace Betting Levy Board, over its contribution to British racing from betting activities taking place on it site.

On 1st November 2002, the 42nd Levy Agreement covering the year commencing 1st April 2003, was agreed between the Levy Board and the Bookmakers' Committee (the latter being a consultative body that is dominated by representatives of the Big Three). On the question of betting exchanges, it ruled that;

(A) 10% levy will be payable by betting exchanges on the British horseracing gross profits achieved by individual successful layers, on an annual basis. There will be no aggregation between individual layers, and losses on backs cannot be offset. Layers' gross profits will be assessed before deduction of commission charges.

On February 5 2003 Sporting Options announced that they had applied for a judicial review of the 42nd Levy Scheme on the grounds that it is wholly unfair and the process by which it was determined is totally unsatisfactory. In April 2003, Sporting Options was granted the right in the High Court to a judicial review of the 42nd Levy Scheme.

It was announced in in the 2003 Budget that the way in which betting exchanges were to be taxed was to be changed, so that operators would pay 15% gross profits tax on the basis of their commission.

In the week beginning March 03, 2003, the Department for Culture, Media and Sport (DCMS) circulated a letter asking for comments on a proposed reconstitution of the Bookmakers' Committee. One of the options put forward in the letter, was the proposed representation of betting exchanges on the committee.

Pursuant to the publication of this letter, Sporting Options, in August 2003, won a Judicial Review case, which had challenged the manner in which the 42nd Levy scheme had been cobbled together. The judge in the case concluded; For all these reasons I conclude that the manner in which the Levy Board reached its decision on 31 October was manifestly unfair.

In july 2003, the Secretary of State, in exercise of the powers conferred upon her by section 26(1) of the Betting, Gaming and Lotteries Act 1963 [1], and after consultation with such bodies as appear to her to be representative of the interests of bookmakers generally, passed new Regulations (cited as the Horserace Betting Levy (Bookmakers' Committee) Regulations 2003 and coming into force on 28th July 2003), which gave the betting exchnages a representative on the Bookmakers Committee.

The Bookmakers' Committee now consisted of thirteen members of whom; two shall be appointed by Coral Racing Ltd; two shall be appointed by Ladbroke Racing Ltd; two shall be appointed by William Hill Organisation Ltd; two shall be appointed by the National Association of Bookmakers Ltd from amongst persons nominated for the purpose by associations for the time being affiliated to the National Association of Bookmakers Ltd; four shall be appointed by the Association of British Bookmakers Ltd to represent the interests of the members of that body; and one shall be appointed by the Sporting Exchange Ltd.

The annual report of the Levy Board, the body that returns money to racing from off-course betting, was published in July 2004. It revealed that the Levy yield for 2003-04 had reached 100m for the first time. The figure represents a year-on-year increase of 25.5m, or 34%. This was the second year in which the Levy has been based on bookmakers' gross profits.

In a report published in January 2005 the National Audit Office said that Customs had underestimated (and failed to understand) the popularity of new forms of gambling, such as internet betting exchanges, adding that these new services posed new risks to [tax] revenue. It was also said that; The duty returns for betting exchanges do not include commission rates and therefore do not reflect the relationship between commission rate and turnover. Customs were in October 2004 working with the industry to devise an appropriate return.

In his Pre-Budget Report Speech to the House of Commons on 5 December 2005, the Chancellor Gordon Brown announced that current taxation regimes were working well and would stay in place. This represented a considerable victory for Betfair in its long fought battle against the Big Three bookmakers; William Hill, Coral and Ladbrokes.

The Government is committed to a modern and fair gambling tax system, consistent with wider tax principles and with supporting social and economic objectives.

Budget 2006 announced that the Government would review gambling taxation in light of the Gambling Bill. This review has benefited from substantial input from stakeholders.

The Government has considered taxation arrangements within the wider context of changes to regulation, technology and gambling markets. It has concluded that the current taxation arrangements for gambling are generally working well at present and that maintaining stability in the overall structure of taxation is desirable in a period of transition. In these circumstances, the Government has therefore decided to maintain the current regimes which are working well for betting, betting exchanges, lottery and bingo, and to retain the system of amusement machine licence duty (AMLD), rather than move to a gross profits tax.

In November 2005 the Tasmanian government announced a deal to licence Betfair in the state. The deal saw Tasmania receive AU$5 million up front with Betfair pay Tasmania about $40 million per year.

In August 2006 Betfair agreed to pay 10 per cent of its gross profit on Irish horseracing directly to Horse Racing Ireland (HRI); guaranteeing revenues to HRI in excess of 1 million (700,000) a year, for the first three years. The 10 per cent specifically relates to gross profit on all Irish racing trade, not just that from Irish residents.

In November 2007, the British Horseracing Authority put a case to the Department of Culture, Media and Sport for a greater contribution from the betting industry in the 47th levy. With horse racing seeking a levy of somwhere between 135million and 153million for 2008-09, the BHA's document called for the government to settle the levy on the basis of 15% of gross win on British horseracing. It also called for betting exchanges to contribute to the levy on a new and equitable basis. This would involve the imposition of a 1.25% Levy on net profits of punters on betting exchanges, raising the possibility that Betfair would be forced to increase its commission charges.

In response to the Levy Board July 2010 announcement of a consultation on betting exchange customers, Betfair's Legal Director, Martin Cruddace said at the time;

We're very surprised by the Levy Board's announcement. This issue of whether betting exchange customers are acting as bookmakers has been the subject of debate since Betfair started. After a thorough, independent review of this very issue throughout 2004 and 2005, which took into account full representation from all stakeholders and other Government departments, the Treasury came to the conclusion that the treatment of betting exchanges and their customers was fair. Since then, there has not been one scrap of evidence produced by anyone to suggest the situation has changed.

We are extremely interested to see if the Levy Board is able to run a fair and impartial consultation process bearing in mind that several of their directors have publicly stated positions that would seem to prejudge any outcome. We are also surprised that any consultation that singles out the customers of one class of operator could be considered fair or lawful where no such distinction is made in any part of the relevant legislation.

Today.s announcement by the Levy Board, together with the statement from Nic Coward of the BHA, illustrates exactly why we have redirected our voluntary levy payment. We have not withdrawn this money from British Racing; we have withdrawn our donation to the Levy Board and BHA. We want to make sure that it is spent to deliver real benefits to the sport rather than being diluted by middlemen and the accompanying costs that cover their salaries, pensions contributions and the substantial legal bills incurred in a sustained and discriminatory attack on our business. We will be announcing some of the first investments we.re making shortly.

In its consultation paper published in July 2010 the Horse Racing Levy Board pinpointed the fultility of its own project, before it had even properly begun;

First, there is a difficulty with a necessary premise: that there are customers of a betting exchange who are carrying on a business (section 27(2)(a)). That is ultimately a question of fact which would need to be demonstrated and in truth cannot be. Leaving aside that fatal initial objection, the following further points arise....

On 4 July 2012 Betfair announced that it had agreed a five-year, 40 million deal with British Horse Racing, comprising the British Horseracing Authority (BHA), the Racecourse Association and the Horsemens Group. The agreement replaced Betfairs current annual voluntary Horserace Betting Levy payments, and took effect from the 51st Levy Scheme covering 2012-13.

Under the terms of the deal, Betfair agreed to pay British Racing 10.75% of all revenues on the sport from its UK customers; with a guarantee of minimum payments. British Racing made commitments linked with these minimum payments to ensure a minimum number of fixtures per year. It was also said that Betfairs betting data would be used to help construct a fixture list that would optimise British Racings attractiveness as a betting product for punters, the racing industry and betting operators.

On 20 July 2012, a Judicial Review ruled in favour of Betfair, in the case of the William Hill Organization Limited versus The Horserace Betting Levy Board. The Court ruled for Betfair as supported by the Levy Board, and confirmed the outcome of the board's own extensive consultation, undertaken in 2010-2011, that had found that customers of betting exchanges were not liable to pay the Horserace betting Levy.

Martin Cruddace, Chief Legal and Regulatory Officer at Betfair at the time, said:

We welcome the High Court ruling which has vindicated the position of Betfair. It is now neither sustainable nor rational to argue that Betfair customers should be liable to pay the Levy any more than should customers of any other betting operator. It is ironic that William Hill's online business pays not a penny in Levy itself, despite making tens of millions of pounds in profits annually from British Racing. Yet still, it chose to argue that an undefined class of exchange customers should be required to pay Levy. The savings made by William Hill through Levy avoidance may help fund poorly advised legal challenges such as this one, but I would suggest that their resources would be better spent working with British Racing to reach a commercial agreement in a similar vein to the one Betfair recently signed with the sport.

The question of integrity lies at the heart of much of controversy that has surrounded betting exchanges.

In June 2003, Betfair and the now defunct Sporting Options signed a Memorandum of Understanding with the Jockey Club, alllowing it access to betting information on horse races which are the subject of concern, including the personal details of those punters betting on such races.

When announcing the signing of the Memorandum, the Jockey Club, a private body that regulates horse racing, stated that it would only request such information whenever it had;

reasonable grounds to suspect a breach of the Rules of Racing or a threat to the integrity of racing. Any request for information would be authorised by the Jockey Club''s Security and Investigations Committee, which includes independent representation and expertise in criminal law. Betting Exchanges will also be encouraged to draw to the Jockey Club's attention matters which give them cause for concern regarding the sport's integrity.

Users of both betting exchanges were asked to accept an agreement, which would see them surrender their legally enshrined right to privacy in the event of an investigation by the Jockey Club; which is, under law, a private body with no statutory mandate. Should they refuse to do so, they will not be allowed to trade on the respective exchanges.

Mark Davies, a spokesperson for Betfair, described the agreement as important initiative for his company and for the integrity of the sport of horse racing;

This helps build a safer, fairer and more accessible betting market, and it gives the Jockey Club a tool in the fight against corruption that is unprecedented,..The exchange industry has taken a bigger step in rooting out corruption in sport in its first three years than the whole of the rest of the bookmaking industry has in its entire history.

Following on from the signing of the MOU there were a number of high profile cases involving the identification of irregular betting patterns on the betting exchanges.

In March 2004, Miles Rodgers, who ran the Platinum Racing club, was warned off for two years after investigations into his laying of two Platinum horses, Uhoomagoo and Million Percent. Darren Mercer, a leading owner faced the Jockey Club panel in May 2004 over bets laid on his horse Joss Naylor before it was scratched from the Welsh Grand National; whilst four individuals, including the trainer Alan Berry, were accused of running a horse they knew to be lame in order to make a profit on the betting exchanges.

On the 3rd July 2006 City of London Police announced that eleven people had been charged with offences relating to allegations of fixing the outcome of horse races between 1 Dec 2002 and 2 September 2004, and money laundering. The Police had spent more than two years probing over 80 horse races in the investigation named Operation Crypton.

Miles Rodgers, aged 37, of Silkstone, South Yorks; Kieren Fallon, 41, from Eire, Darren Williams, 27, of Leyburn, North Yorks, Fergal Lynch, 28, of Boroughbridge, York, Philip Sherkle, 39, from Tamworth, Staffs, Alan Berry, 43, of Lancaster, Steven O'Sullivan, 35, of Preston, Lancs, and Shaun Lynch, 36, of Minskip, North Yorks, were all charged with Conspiracy to Defraud Betfair Customers.

Paul Scotney, Director of Security, at the Jockey Club left most observers in no doubt as to how beneficial the betting exchanges were to him;

I use the information from the exchanges almost on a daily basis and the audit trail they provide us at the moment is excellent. It makes my job a whole lot easier because of that. We do not have that situation with traditional bookmakers.

In 2007 Fallon and five other men including Fergal Lynch and Darren Williams were acquitted by the jury on the direction of trial judge Mr Justice Forbes,who said; There is simply no case to answer. None of the strands of evidence individually or collectively amount to a case to answer. The evidence presented by the prosecution when properly analysed has demonstrated that Kieren Fallon was not a party to a conspiracy to defraud.

Also in 2007 Betfair suspended payments following a tennis match between Martin Arguello and Nikolay Davydenko; Betfair has suspended settlement of the match-odds market on this afternoon's second-round match of the ATP Orange Prokom Open in Poland between Martin Arguello and Nikolay Davydenko, pending consultation with relevant regulatory authorities. This represented the first time that Betfair had suspended payouts in an event after the conclusion of the event. Neither Arg?ello nor Davydenko were formally charged with any offence by the ATP.

In June 2010, the professional punter Harry Findlay, who had been one of Betfair's most vocal supporters, had a six-month disqualification imposed on him by the British Horseracing Authority yesterday for twice laying one of his own horses in two separate races. The BHA accepted that Findlay had no corrupt motive when he laid the horse at Exeter on Oct 21 2008 and at Chepstow on Oct 10 last year. His win bets significantly outweighed his 'lay' bets.

Although Findlay subsequently had his six-month ban from horse racing reduced to a 4,500 fine on appeal, he did not let matters rest there. Indeed, he went on to claim that investigators from the BHA's security department gave me permission to lay any other horses in the yards that I've got, adding: Betfair have done nowhere near enough to stand by me. They know that I'm whiter than white, they know that I'm cleaner than clean and all they're worried about is going and selling their shares. That's why I'm a wreck, it's a miracle I'm still alive.

In 2011 five jockeys and two owners were charged with serious breaches of the rules of racing,in relation to horses that were laid to lose on the betting exchanges. Jockeys Paul Doe and Greg Fairley were banned from racing for 12 years for not riding a horse to its merits. Kirsty Milczarek was banned for two years (later overturned on appeal), whilst Jimmy Quinn received a six-month sentence. Owners Maurice "Fred" Sines and James Crickmore were banned for 14 years for betting on their own horse to lose. Five others - Nick Gold, Peter Gold, Shaun Harris, David Kendrick and Liam Vasey - were also found guilty of corrupt or fraudulent practice.