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Costs, biases and betting markets: new evidence


  • Michael A. Smith
  • David Paton
  • Leighton Vaughan-Williams


In recent years, person-to-person wagering on Internet ‘betting exchanges’ (sometimes known as ‘matched betting’) has become an increasingly important medium for betting on horse racing, sports and special events. Established gambling operators have argued that betting exchanges should not be allowed on the grounds that they represent unfair competition. In this paper, we argue that, in fact, betting exchanges have brought about reductions in traditional market biases and significant efficiency gains by lowering transaction costs for consumers. As such, the growth of exchange betting should be viewed as a welcome and innovatory phenomenon whereby allocative efficiency in the gambling market is improved. We test this hypothesis using data on UK horse racing from betting exchanges and from traditional betting media. We find a monotonic negative relationship between transaction costs and market efficiency. Further, in contrast to traditional betting media, we find that betting exchanges exhibit both weak and strong form market efficiency.

Suggested Citation

  • Michael A. Smith & David Paton & Leighton Vaughan-Williams, 2004. "Costs, biases and betting markets: new evidence," Working Papers 2004/5, Nottingham Trent University, Nottingham Business School, Economics Division.
  • Handle: RePEc:nbs:wpaper:2004/5

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    References listed on IDEAS

    1. David Paton & Leighton Vaughan Williams, 1998. "Do betting costs explain betting biases?," Applied Economics Letters, Taylor & Francis Journals, vol. 5(5), pages 333-335.
    2. Raymond D. Sauer, 1998. "The Economics of Wagering Markets," Journal of Economic Literature, American Economic Association, vol. 36(4), pages 2021-2064, December.
    3. Hyun Song Shin, 2008. "Prices Of State Contingent Claims With Insider Traders, And The Favourite-Longshot Bias," World Scientific Book Chapters,in: Efficiency Of Racetrack Betting Markets, chapter 34, pages 343-352 World Scientific Publishing Co. Pte. Ltd..
    4. Williams, Leighton Vaughan & Paton, David, 1997. "Why Is There a Favourite-Longshot Bias in British Racetrack Betting Markets?," Economic Journal, Royal Economic Society, vol. 107(440), pages 150-158, January.
    5. Law, David & Peel, David A, 2002. "Insider Trading, Herding Behaviour and Market Plungers in the British Horse-Race Betting Market," Economica, London School of Economics and Political Science, vol. 69(274), pages 327-338, May.
    6. Terrell, Dek & Farmer, Amy, 1996. "Optimal Betting and Efficiency in Parimutuel Betting Markets with Information Costs," Economic Journal, Royal Economic Society, vol. 106(437), pages 846-868, July.
    7. Vaughan Williams, Leighton, 1999. "Information Efficiency in Betting Markets: A Survey," Bulletin of Economic Research, Wiley Blackwell, vol. 51(1), pages 1-30, January.
    8. Shin, Hyun Song, 1991. "Optimal Betting Odds against Insider Traders," Economic Journal, Royal Economic Society, vol. 101(408), pages 1179-1185, September.
    9. Shin, Hyun Song, 1993. "Measuring the Incidence of Insider Trading in a Market for State-Contingent Claims," Economic Journal, Royal Economic Society, vol. 103(420), pages 1141-1153, September.
    10. David Paton & Leighton Vaughan Williams, 2005. "Forecasting outcomes in spread betting markets: can bettors use 'quarbs' to beat the book?," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 24(2), pages 139-154.
    11. Michael Cain & David Law & David Peel, 2003. "The Favourite-Longshot Bias, Bookmaker Margins and Insider Trading in a Variety of Betting Markets," Bulletin of Economic Research, Wiley Blackwell, vol. 55(3), pages 263-273, July.
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    Cited by:

    1. Maschke Mario & Schmidt Ulrich, 2011. "Das Wettmonopol in Deutschland: Status quo und Reformansätze," Zeitschrift für Wirtschaftspolitik, De Gruyter, vol. 60(1), pages 110-124, April.

    More about this item


    matched betting; betting exchanges; market efficiency; favourite-longshot bias.;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading


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    1. Wikipedia:Articles for deletion/Log/2010 February 21 in Wikipedia English ne '')
    2. Wikipedia:Articles for deletion/Matched betting in Wikipedia English ne '')


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