What is trading?

A betting exchange lets you make a judgement on the outcome of an event. If you think a particular outcome will happen, you can back it. If you do not think a particular outcome will happen, you can lay it. As an alternative to predicting an event outcome, you can also make a judgement on the direction of the movement of the odds associated with an event. If you correctly predict this movement, you make a profit regardless of the event result. Predicting the direction of price movements is known as trading.

Trading is where you back or lay an outcome in anticipation of a change in the odds that will allow a further bet to guarantee a profit. For example, at the start of the season, a punter backs Liverpool to win the Premiership at odds of 15.0 with a stake of £100. As the season progresses, Liverpool’s form is such that the odds shorten to 4.0. The punter now lays Liverpool at these odds to win £150, thereby guaranteeing a profit regardless of the outcome of the Premiership. If Liverpool win the league, the payout is £900 (profit from back bet minus liability from lay bet: £1500 – £600). If Liverpool fail to win the league, the payout is £50 (profit from lay bet minus back bet stake, £150 – £100). The former, more profitable, outcome is more favourable, but the punter will not lose money either way. A combination of bets that guarantees a profit is known as a green book.

Because the goal is to lock in a profit, traders concentrate on price movements during an event rather than the final result. If they correctly predict the direction in which prices move, they can effectively place a no-risk bet by backing and laying at different prices at either end of the price range. Backing and laying at different liabilities enables the trader to make a profit from the difference between the two.

When bets result in a green book (all possible outcomes showing a profit), the liability associated with the bets is zero. This means a betting exchange does not need to allocate funds to cover the various event outcomes, freeing up money (prior to bet settlement) for bets on other markets.