Betfair betting exchange – Betfair premium charge explained – Part two


so a little while ago I did the first
part of what I felt would be at least two or three parts to do with the
Betfair premium charge and so as promised I’m doing the follow-up to that
to discuss how it affected me and how it could or could not affect you so that’s
what I’d like to discuss in this video if you’re interested in learning to
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so when betting exchanges were born it was revolutionary you could basically
place a bet on an exchange and then somebody would come along and take that
bet if you won you would pay a bit of commission and if you lost you would pay
no Commission at all and basically to summarize very neatly without any
extrapolation as any if further detail is the word I’m looking for
you would basically pay a five percent charge on a winning bet so if you won
100 pounds you’d pay five pound of that to the exchange now I have explained to
the exchange model before but I shall paraphrase it now imagine a big pot big
circle on one side you have the winners on one side you have the losers and then
the exchange makes its money by basically taking a commission from the
winners and that’s how the exchange model operated for eight years and then
in 2008 Betfair introduced a thing called the
premium charge and the idea was if you were a consistent winner and you met a
certain range of criteria then they would charge you a certain amount per
week on the amount of profit that you made if you hadn’t reached that amount
in Commission they would just top it up to that level and that charge would be
taken once a week there was a huge outrage when this charge was implemented
and I obviously had to pay that charge the day that it was implemented
was nothing that I could to do about it but there was a general after that
initial burst of outrage there was initial sort of settling down and people
felt that in fact probably maybe they should be paying a little bit more and
therefore things began to settle however in 2011
Betfair then introduced a higher rate and premium charge which was very
specifically targeted to a narrower subset of customers but that’s caused a
significant amount of outrage but the big question really is is it something
that you should be worried about and you know how does it affect me
that’s why I wanted to do this video to try and describe why I think the charge
was put in place and how it affected me and others because one of the
interesting things is since I recorded that first video markets and matchbook
have introduced a similar charge so I think one of the initial take outs that
you should have is that it’s obviously a structural issue with the way that
exchanges were set up if you go to a financial market you know the New York
Stock Exchange doesn’t go to a Warren Buffett and say hey Warren you made some
great pics there can I have some of your money but fundamentally that is
effectively what the premium charge does people who are profitable it takes some
of that potential profit and then it that disappears into the system
somewhere the positioning of the charge was that some people were winning very
consistently others were losing fairly quickly and they needed the money to be
able to keep that flow of people through the ecosystem they needed to increase
their marketing spend to be able to maintain the ecosystem of the exchange
the fact that other exchanges have followed suit sort of implies that that
may actually be a valid thing to say but I give you my thoughts on that in a
second and why I think if the charge exists but for me obviously in 2011 it
was a bit of a shock to go on as soon as the charge came into place I went on the
absolute top right and that was a bit of a shock so I did go through this spell
in 2011 when the high rate charges came in debating about what I should do and
you know one of the things that I’d was start using more aggressively a lot
of other exchanges I started doing that in 2008 but really ramped it up in 2011
my activity on other exchanges now is substantial that never would have
happened if there was no premium charge in place so there is you know a direct
result of that chart being implemented allowed me to grow stuff elsewhere and
that’s business that I wouldn’t give up now and there’s and it’s not coming back
I think the unusual thing about that is I remember going to the other exchanges
when the higher rate came in that was my first reaction was I’ve got to start
doing business elsewhere and I went to the other exchanges said look I’m gonna
do what I do and if you want to come back and review it in three months six
months whenever then we can sit down and discuss what you think of my activity
and whether you think I’m adding or subtracting from the liquidity in the
exchange or you know if I’m doing anything weird and the fact is my
trading style is predominantly to offer stuff to the market I’m waiting for
people to take my positions that’s typically what I tend to do within the
market so I’ve always felt that I’m a net liquidity generator and when I went
to do these other exchanges and said you know have a look and see what I’m up to
do you have any problem with that they sort of said well we can’t see why
anybody would have any issue with it and I think that’s one of the flaws of the
premium charge is that it knocked out a lot of people in the market that were
doing just fine they were contributors to the Ocasek ecosystem and it just
knocked them clean out now for me if you look at the scale of what I do there was
a case for sort of saying well you know I could stop but I used to do fee no
would you rather have to a little bit less of something than absolutely
nothing at all and I think that’s part of the gamble that Betfair and others
have played is that some of these people are dependent upon the system that is in
place and therefore they have to pay their way however that’s not applicable
to a very very large number of people and when the high rate premium charge
came in there are some people that were much much smaller than I that were
customers of my business and it just knocked
because there was no question or any doubt that was worth investing any more
time doing what they were doing but the main reason for that is not the charge
itself it’s just that the fact of the charge was retrospective and the issue
that I had when the high rape charge came in in 2011 was it was based upon my
entire account history to that date 11 years worth of history there is no way I
can change my behavior or unwind that criteria it was just impossible and
other people fell into that trap that were much smaller than me and therefore
you know there wasn’t a great deal more that they could really do in that whole
mix so I think that was the big issue with the charge was that it was
retrospective and that knocked out quite a few people but the other issue that it
created as well as the people that were underneath the radar that were perhaps
heading up to they had the opportunity to change their activity and therefore
avoid it one way or another but people who’ve been in the market for a long
period of time were simply unable to do that so if you look and read between the
lines that’s why the premium charge was probably implemented because if you look
at the distribution of customers it doesn’t follow a normal distribution
maybe the numbers do but not the amounts and when you look at the amounts of
money that’s won and lost in the market what you’ll find is that there’s a big
peak in the middle and then on either side of that you get winners and losers
and then it tails away when you get to large numbers but at the very end of
each tale it starts to curve up again so you know you have people that probably
have information advantage technical advantage knowledge advantage to an
extent there are lots of people that sit on that right far end so for example a
large center code that employs a hundred people doing something very unusual
probably sits right on that far end and that’s predominantly what the premium
charge was targeted at simply because they generated in excess of profit
consistently it meant that necessarily they were taking a lot of money out of
the system or this is how it’s positioned they’re taking a lot of money
out of the system that wasn’t being reinvested and put back into the system
they weren’t really contributing to the exchange so you know I I’ve made it my
task many years not to just understand the
market but also the participants and the business models that sit behind the
markets because that allows you to out anticipate stuff that could happen in
the future or allow you to progress in certain directions so by stunning
coincidence I actually met one of the guys that was involved in the creation
of the charge in the first place it was totally outside of the day-to-day
betting exchange business it was just an amazing coincidence but that happened so
I began to get a better understanding of the structure of it the number of people
affected and why it was implemented but you know I’ve constantly as you know dig
around all of the time anyway just to find out what information I can and to
see where people sit on that scale but the fact is at the higher rate end of
the premium charge very few people actually get captured by that for a
number of reasons the problem that I had is by implementing an arbitrary charge
it actually captured probably a lot of people that really shouldn’t have been
courted to that charge and also as I’ve mentioned just before it was a
retrospective so it gave you no opportunity to correct your behavior now
the the higher rate charge affects such a small number of people that I always
felt it would have been sensible for exchanges that go on to implement
something like that to talk to them individually because the high rate
charge was a bit of a PR disaster and continues to be a PR disaster to this
day for everybody that implements it but nobody really has explained it in enough
depth to be able to specify why it’s in place but also if you think about it the
the base of the charge is on on three key determinants the amount of money
that you’ve won the number of markets that you’ve traded and also the amount
of commission that you’ve paid now if you’ve watched the other video you’ll
know that depending upon your strike rate and the type of activity that you
do you may not actually qualify for that third criteria the amount of commission
paid as a percentage of net profit that may not actually be something that you
ever fall into that trap because your style of what you do whether it’s
betting or trading may not lead you into into that path so if you overcome that
hurdle then you need to overcome the number of markets traded and then the
lifetime profit as well and there are other stuff it’s thrown into the mix I’m
not going to go into that into great debt so say you’ve got a one in a
thousand chance of entering one of those criterion one
in a hundred and one in a thousand and the other you can see that you know a
thousand to the power of three is a very large number so if you multiply that
into a user base of four million users you’re always going to get a very tiny
number that that get affected so I think that the way that the charge was
implemented was to target that narrow strip of customers but they enough to be
knew they were going to throw the baby out with the bathwater and capture a few
others that they didn’t intend but the problem that they were trying to solve
was more or less solved by having those key hurdles those key barriers to being
falling into that particular trap of having to play as much higher rate
charges now the lower rate charge is obviously still in place and that
captures more people because those hurdles are much lower so I would
imagine that there are quite a few players of the lower rate charged and
the fact that the entry criteria has not changed for a long period of time means
that more and more people will get dragged into that every year the passes
because of physical drag if you don’t know what fiscal drag is google it and
find out so yeah it was targeted a very narrow subset and lots of people
complain about the premium charge but in fact not as many people as you think
actually pet and in fact the higher rate premium charged a very very tiny number
of people pay that but nonetheless it sounds good if you say that you are a
higher rate premium charge pair now I am a higher rate premium charge payer but
that was because I fell into that trap that’s a gap between you know not being
a syndicate but being a very successful individual trader and meeting all of
those criteria and because I’ve been around for so long it was inevitable
that I’d end up getting caught up in that mix but if you’re at the stage
where you’re at a beginning your trading crew and you’re worried about it
the big advantage that you have that I don’t have is that it’s not going to be
retrospective for you so if you modify your behavior you know that the lifetime
profit calculation that is part of the premium charge is going to still be in
place so you know if you are successful enough you would definitely hit that
hurdle number of markets traded depending upon what you’re doing you may
or may not hit that hurdle but the biggie is the amount of commission that
you’re likely to pay so if you’re below that level or you think that you’re
heading towards that level where a higher rate charge will kick in then you
can modify your behavior to mitigate the effects of that but that’s is going to
take a bit of effort as well but my advice to you is if you are successful
and you think that you’re heading in that direction then there are loads of
people on the forum and myself as well that in the higher rate premium charge
area and therefore it’s easy for you to contact us and get some advice on what
you need to do there are already quite a few threads on the forum that discuss
that process and how you can modify your behavior to make sure that you don’t get
caught in that trap but for people like me who will hire at premium premium
charge players on day one there was nothing I could do to avoid to that trap
so that was particularly disappointing for me but part of my response to that
was to go and trade elsewhere and shift my business around and modify the mix of
what I do and you know I think that’s a shame ready because it would have been
better when a charge was implemented to just wipe the slate clean and say from
this point onwards this is what we’re going to do because then at least it
gives you a chance to modify your behavior to meet the exchanges
commercial objectives as well as your own and I think that would have been a
much more sensible way of implementing it should you be particularly worried
about paying it well you’ll probably end up paying the lower rates version of it
if you’re moderately successful but the high rate charge is sort of something
that’s out of reach for most people simply because of all of the hurdles
that are required to do it and it’s been specifically targeted a very narrow
subset of customers however you know there are loads of stories of people who
have been caught buyer who probably shouldn’t have been caught by but also
you imagine you you create something that’s absolutely amazing it works
really well for two years you make a lot of money and then suddenly it stops
making money and you start going into reverse you don’t get a rebate I think
that’s a bit of a flaw with the overall process of the system as well I know
people have been caught into that trap but my message to you really is that
it’s a nice problem to have if you’re at that level with what you’re doing then
you can start to worry about that particular situation at that particular
time and like I said visit the forum and chat to
other people have been affected and you’ll get some pretty good quality
advice in terms of what you should or shouldn’t be doing and whether you will
or won’t qualify for it but there’s a lot of chatter about premium charge a
lot of people do not pay the higher rate premium charge it’s seen as a badge of
honor despite the fact that you know it’s it’s
it’s a badge that’s worn by a very few number of people lots of people pay the
lower rate charge but nonetheless I think that it’s something that you
probably shouldn’t be worried about unless if you start to become really
really profitable and if you fall into that mix then you can seek some more
advice from there but the big advantage that you’ve got is if you’re below the
level and you’re working towards it at least you have some of the chance to
mitigate it so yeah do I enjoy paying it no I’ve paid paid it every week for the
last 52 weeks probably much more I’m just looking at it from a yearly
perspective as we’re heading towards the end of the year I’ve contributed
significantly to barefaced coffers but I don’t really see anything in response to
that I’m not treated as a better customer for doing so so it’s not
something that I enjoy doing I’ve changed a lot of the things that I do
since it was implemented but obviously I still do it but that’s part of the fact
that because of my size and what I do there’s still an opportunity for me
there even if the cost of doing it is that much higher but yeah hopefully that
sort of rounded off this discussion for you giving you a bit more insight into
why the charges in place but also hopefully reassured you
they probably you won’t reach that level and if you do then you’re doing really
well so you would have my full support and congratulations for having that
problem but anyhow that is a full discussion on the premium charge you

17 comments

I’m still confused?
So why did they implement it? Because syndicates were taking too much money out of the market??? That makes zero sense to me. They are providing liquidity. Most syndicates will simply increase stakes as they make more money. Greed drives capitalism. Rival syndicates will balance each other out in the end. Only justification I can see is increase data load meaning higher data charges. What am I missing?

Based on your video it seems Betfair introduced a premium charge because they were upset at only getting 5% off certain customers and just wanted more money for shareholders. I see no market reason for this. If I owned an exchange I want people to win I get paid on their winnings.

Peter will you please do a video on business side of the exchange. Also a video that explains each subset of the charge why it was introduced.

Premium Charge is outrageous. 60% – wow – unbelievable. Especially as when it was applied retrospectively. Unfortunately, I haven't earnt enough money to get near it. I think 30% would be the Maximum even then it would still be expensive. Betfair just doesn't want people, who have the ability too, to just snatching money out of the market. I believe that if they are going to apply 60% commission it should reset every 12 months and people should be allowed to earn £50k per year before that % kicks in.

Betfair just doesn't listen to anybody about anything. That's what happens when Businesses have a Monopoly.

I believe you are a Betfair Shareholder as well if I remember right. So the PC charge would add to Betfair's P&L which increases the share price so you do profit from it in a small way. There should be more than one top exchange by now anyway. What the fuck Betdaq do in their office's all day beats me.

The 60% higher rate is excessively greedy and surely counter productive to their business model. I've heard of people either moving on to other things or exchanges because of this. Not to mention the knock-on effect of putting off potential customers (traders) and less winners = less people interested in using their services.

At the 5% rate, take a trader netting £100k per year as an example; Betfair would be making around £5-10k annually from this person (depending on strike rate). That is a huge amount for any company to be making from one customer every year for providing a relatively simple service on a mass scale. At the current 60% PC rate Betfair would be taking £60k from that customer every year which is crazy just for using their platform.

I know they are business and they know that traders don't have many other places to go. Some sort of structure similar to the UK tax model where you have an allowance up to a certain amount which resets every year would be more reasonable. I would like to see the growth of exchanges and more competition between them but as you've also noticed this has been much slower than expected, probably down to the favourability for companies to keep the bookmaker model due to the larger house edge.

an option which some people might have and I accidentally fell into.

I started off arbing in 2003 and made large losses on betfair while
taking the same amount plus a little bit more of the bookmakers ,
but you know the story , the bookmakers accounts have all been
restricted or closed.
I now have a a betfair account with huge losses and and have found
a niche making small profits on 65% of races and about the same
losses per race on the other 35% of races.
anyway the point is if you have a losing account then you wont be
paying the premium charge until you have recouped all your loses
plus some profit….

Today(Jan 28th) is the last day we can use Betfair in India. Betfair has closed its operations in India from now. What to do.

Peter set up your own exchange mate – charge a flat 3% to all customers, link it only to Bet angel software and save us all.

Hi Peter,
In the video you said because of your passed trading style you couldn't avoid the premium charge, l am just starting out using Bet Angel (trading horse races pre race) . Is there anything l can do to stay under the top rate apart from just making £240,000 Profit and then quitting. When you mention number of markets traded is that each week or during the lifetime of the account.

Hey Peter , one shocking news. Betfair has closed accounts of indian cuStomers like me. I have been using betangel for like 3 years now and suddenly my 40% of yearly income has stopped. Very frustrating

Shades of the old British Government's answer to the stars of the 60's, who were really successful – tax them, tax them! Tax them enough and eventually, they'll say "F*ck this!" and go elsewhere/move abroad………

Started watching your videos and straight away never used betfair exchange due to their premium charge, I use Smarkets, betdaq and matchbook which are reasonable. Betfair has a lot of liquidity in the markets but so are other exchanges. Soon enough betfair will start to decline and most likely buy out other competitors and apply same premium charge. So Peter why not build an exchange with your knowledge you could even have a better model. Think about it.

What does, "number of markets," even mean? Is the Under 2.5 and Under 3.5 Goals Markets, considered two different markets or are is it considered one "Goals Market." Thanks.

Hi – good video. Are you still happy to share some wisdom with people who (think they) are approaching the higher rate premium charge? – If so I will reach out to you….

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