Betfair Premium charge – How it’s calculated and how some people avoid it on betting exchanges


so every now and again on my videos I
get some comments and saying please Peter please do a video on the premium
charge and I you know have said that I will do one so I sat down this week to
do one but I realized it’s such a wide-ranging in a motive topic that it
was going to take you know more than one video to do it took several takes quite
a few hours and realized that I completely failed in terms of doing a
decent video so I decided what I’m going to do is break it down into digestible
chunks that you can fully understand for those people that don’t understand what
the premium charge is it’s a charge that’s levied on elite traders and I use
those words very carefully because lots of people have reacted
negatively to premium charge but it actually affects very few people and
there are a lot of people out there that try and talk about it confidently that
don’t even pay it and certainly do not pay the high rate of premium charge from
my own experience I would was one of the first payers of premium charge when it
was first introduced in 2008 and in July 2011 when it was significantly revised I
went right on the top right so I know a lot about it but I’ve also made it an
objective of mine to fully understand the reasons behind it and several
coincidences have occurred that have allowed me to get a really deep
understanding of why it’s in place and also how many people it affects and how
so you know that’s what I’m gonna discuss in this video is not some of the
more detail and history or the emotive side of it or my direct opinion on it
what I’m going to present to you first of all is just a summary of the reasons
why people say that this exists and it’s because of a structural issue in terms
of the way that the exchanges work when exchanges were first created they were
designed to be better places for gamblers to work but when people started
trading on exchanges like myself it created a structural imbalance in
terms of the way that the market works that’s how exchanges would like it
positioned you know you’ll understand and see on the section that I’m gonna do
after this little bit to camera and where that comes from
but we’re going to leave the discussion about whether it’s valid and so on for
another video but it’s interesting to see that other exchanges
matchbook have modified their terms and additions to allow a charge like this to
be in place because there is a structural issue and beyond what you see
on this video which we’ll discuss in another video but if you don’t pay at
the moment it’s only applies to a small section of the ecosystem within the
exchange I’m not going to be an apologist for it because it you know I
obviously pay significant sums from it but like I said we’ll leave that for the
next video and in this video we’re just going to focus on why trading is just so
much better than gambling primarily because of the amount of Commission that
you pay but it also explains why the premium charge is in place please
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trial so the best way to look at premium charge is to look at a traditional
gambler and to look at a trader but also let’s examine you know now and again you
hear about special deals that are being put out there let’s examine the true
structure of what those special deals are because they’re not actually any
different from paying the premium charge anyhow but if I show you this
spreadsheet this will give you guidance in terms of what you’re looking at and
why the charge exists how it’s balanced and what that looks like if you hear the
term special deal because you know all of the videos that I’ve seen don’t
really explain it very well there’s no depth of structure or depth to it but
obviously if you’re paying it then you sort of want to understand all of that
and that’s where this spreadsheet has come from so first of all if we are
gonna set these two breaks exactly the same here so we’ve got the base rate
Commission our base rate varies but again you know it’s important that we
simplify things otherwise it becomes impossible to understand so I’m not
gonna talk specifics here and there are specifics and variations within the
calculations but I’m not going to go into that
we’re just gonna have a plain vanilla look to how all of this works but if we
look at the base race Commission the base rate is what you pay when you
actively bet or trade in a market on an exchange and on the left-hand column we
have the gambler and on the right-hand column we have the trader and they’re
basically I’ll explain what each one of these things are we’ve traded eight
markets in total or with bet on any markets now the gambler is gonna win or
lose large amounts of money that is the difference between gambling trading you
you put a hundred down you want to win a hundred back or but you could lose a
hundred when you’re trading you put a hundred down but you could win ten or
you could lose ten and as if you’ve got no discipline and then you could win ten
and then lose 100 but in all intents and purposes when you’re trading you’re
gonna win a percentage of your bank you know end up positive a bit or negative a
bit using the same stake as a gambler but the gambler takes outright risk so
you can see here the gambler wins 110 pound on the first market that they
actively have a bet on then they lose 100 on the next then they win 110 and
they lose 100 when I’m content lose 100 110 lose 100 so overall in all of these
eight markets that they’ve been active on they won four hundred and forty pound
but they lost four hundred leaving them with a net profit of 40 pounds so if we
look over here the trader has also made forty pound but of course they’re
working in a different manner to the way that you would do when you’re doing
traditional gambling trading is gambling it’s just doing it a different way
but if you look here you can see that we’re saying that rather than winning
110 and then losing a hundred were saying that when they win they win two
and fifty because they’re trading the price movement they’re gambling on the
price movement they’re not gambling on the outright result so you can see here
that when they win they win much less but generally their strike rate will be
higher so I’ve put the strike rates down here you can see for the gambler it’s
50/50 they’re winning and they’re losing in roughly equal rates but they’re
winning slightly more than they’re losing that’s where they’re making their
profit a traders strike rate will be much higher that is inevitable because
they again I’m not going to explain in great depth maybe I should do a video on
that but strike rate for a trader should always
be quite high and or higher than 5050 so here I’ve set the strike rate 80% and
you can see here that four times out of five
they’ve won 12 pound 50 but that last trade goes through and they mess it up
and they lose 10 pound so we’ve got four lots of twelve pound 50 making fifty
pound and when they lose they lose a tenner and this is pretty much what
gambling and trading looks like this is a pretty good approximation but you can
see they’re both ended up with a net profit of 40 pound overall but this is
why a trading is is such a great way of participating in gambling markets
because the amount of Commission that you pay on your overall trade is based
upon your net profits not based upon your stake plus the return which is what
happens when you’re gambling it’s on the amount of profit that you make in that
particular market at that moment in time that’s why trading has been so brilliant
because you only pay if you profit whereas in gambling you’re paying
open-ended risk basically so they’ve both made 40 pounds in very different
ways they’re both realistic simulations of how either style works but you can
basically see that they’ve ended up with a profit of 40 pound so let’s look at
the Commission that was charged we’re using a base rate of 5% here and you can
see that the Commission has added up to 22 pounds so 5% of 110 pound is 5.50
that occurred four times subtitling at 22 pound
so after Commission that forty pound turns into eighteen pound a profit the
gambler has lost most of their profit in Commission that goes to the house
effectively it goes to the betting exchange however if we look over here
when you’re actively trading we made forty pound as well over this period and
we have also paid five percent commission but can you see that just
adds up to two pound 50 so we retain most of the profit within the market
trading is much more efficient and then it’s a much better way of squeezing a
profit out of a market higher strike rate lower Commission so we’ve already
examined strike rates here and we already know what the net profit is it’s
40 pound on each but this is where everything begins to diverge because the
Commission that was paid by the person that was
gambling is effectively fifty five percent of their total return can you
see more than half of the amount of money that they made through being able
to make decent selections when trading has ended up in the pockets of the
exchange however when you’re actively trading obviously your commission is
much lower so you can see here that we’ve ended up with a commission of six
point two to five percent we’ve only paid to pound fifty on for Japan so can
you see there’s a massive mismatch here this is why from a betting the sports
book a trading perspective gamblers are welcomed with open arms because
generally speaking they tends to lose money or pay very very high rates of
commission in respect of their total return if you look at traders the amount
of commission that they paid is quite small in comparison to the amount that’s
generated by your traditional gambler so the premium charge was introduced to
basically balance that out and you can see here if we top up the premium charge
on the trading side of things to 40% then there would be an additional charge
of 13 pound 50 on top of the amount of commission that has been paid already
now if we look if we modify this and change the rates to 20 percent then you
can see that they’re still even if you’re paying premium charge at 20
percent there’s still a massive gap between that and the person and that is
actively gambling and that’s a structural gap that occurs within the
markets when you look at it in retrospect when the exchanges were
created probably they didn’t expect people to actively trade people like me
and others around at that particular moment in time started trading because
we realized there’s an opportunity there but if they would have figured out
exactly how everything would develop from there they may have put a slightly
different charging structure in place straight away because the difference
between paying a commission on a bet and the amount of money that you could
possibly yarn through betting is vastly different from the amount that you would
make through trading so when we were looking at the spreadsheet a second ago
one of the things that I did was I mentioned but didn’t
about special deals so you know there has been some discussion around people
getting special deals but whether a deal is special and all depends upon what
your strike rate is basically you know if you win and lose a lot relatively
frequently then your overall commission that you pay as I think I’ve shown you
already is going to be quite high in comparison to the amount of profits that
you make so you could sort of say you know profits are taking money out of the
system commissioners putting it in so you know if you if you have a lower
strike rate then basically the more Commission that you pay and the more and
the less you take out the system that’s sort of you know how I’m trying to
summarize I hope that makes sense but let’s look at special deals so let’s say
that you’re paying Commission charge Commission charge you’re paying premium
charge and you’re paying it at a fair old whack so you know let’s say that
you’re on a 40% Commission rate the band and Sonia from Betfair comes along and
says well okay I’ll tell you what we’ll do we’re going to fix your Commission at
7% so you know you can have 7% on every single correct trade correct bet that
you put through the market but we’ll drop the charge the premium charge
completely you only pay a higher level of base rate in Commission so if we put
7% in instead of 5% and we assume that the strike rate remains the same for the
gambler stroke trader that is taking advantage of this particular deal can
you see that the amount of commission that they’re paying against them at a
profit that they make absolutely skyrockets so we’re foot if they were at
5% the standard base rate you can see them paying 55% if we drop them to 4%
they’re paying 44% but if we bump them up to 6% can you see there something
you’re paying an absolute fortune so it’s not really applicable to the person
on the right because their Commission rate is going to be so low already that
they’re going to have to be topped up by premium charge but if somebody has a
high rate of commission that they’re paying already fixing it adding at a
deal of say six percent instead of paying premium
charge of 40 percent sounds like an absolutely fantastic deal but it’s not
so you know if I was ever offered a fixed-rate deal
saying that I would probably take it because the way that my account is
structured is sort of makes sense that I would would take that deal but if
somebody was on a lower strike right it’s all-around strike rate strike rate
is low then a fixed-rate deal is bad but if your strike rate is high then a
fixed-rate deal is excellent but the likelihood is and all of the evidence
that I’ve seen so far suggests that it’s only people on lowest records that will
get a special deal for this exact reason so if you don’t understand what the
premium charge is or some of the discussion around it don’t worry about
that because I will cover a separate video specifically on that this video
really is for people who have some sort of an understanding but want to
understand why it’s in place but yeah watch out and I’ll do another video for
you

16 comments

I've lost money in-play quite a few times trading on smarkets because the liquidity is so bad sometimes…Betfair is often a better option even with higher commission.

You may well include this in the separate video, but I think my biggest bugbear with the premium charge is that threshold limits have never moved. Eventually more people will hit those thresholds, and they will also be making theoretically less per year than those already on premium charge bands. Paying premium charge (even at just 20%) is very different when you're making tens of thousands per year than those making perhaps just a £1,000 of so. Generally though, I don't think it's something to worry about until you start paying – and even then you get something of a grace period.

Surprising to see how high % of net winnings random gamblers pay especially when 5% sounds so reasonable. The top premium charge rate of 60% for traders is still greedy though. If someone reaches it and makes a consistent £2000 per week, then are they paying over £60k in premium charge per year out of their £104k income? I'm sure the extra load they put on the network is nowhere near costing Betfair £60k to justify it. I'm sure this puts a lot of people off or makes them turn to other exchanges/markets/income streams. God help us if traders are ever taxed on top of PC

Hi Peter

Sorry if this is the wrong place to post this, but does this trade look familiar to you? 😀 <link removed>

Because it's the same trade from the intro of this premium charge video, the guy literally said "this is one of my best trades this year, contact me if you want to know more". For what nefarious purpose, I don't know, but he is claiming full credit for the trade and promises to make a lot more videos in the future. Just thought I'd bring it to your attention in case you want to report him for copyright infringement etc, or at least have a chuckle. Figured I'd report this here instead of on the forum, for less attention , but lmk if you want the link from my comment removed.

No mention of the fact that Zeljko Ranogajec admits that he dosen't pay any PC. Harry Findlay went public and said it was 1.5% commission and NO Premium Charge. Checkout Zeljko's offshore HQ here www.newfield.co.im. Premium Charge is being used to subsidise other "special" customers.

great for some, what special deal do you have Peter? I just gamble and they still take premium charge! they gave me 2% commission rate and i just gamble, end result more premium charge! I even tried to come up with a coin flipin strategy to pay more commission. (assume if a coin flip is going to be rigged it will be for the home team, ok a bit far fetched). If a book maker did this it would be in court and be illegal, place a bet at odds give in and they take a % of your winnings, because you won to much. FRAUD!!!!!!

Can you do a video on the business side of running a Exchange. What’s the business reason for a premium charge? Is it just monopolistic greed? Increased data load charges? It seems stupid thing to do when you can bet on smarkets now. There losing liquidity all the time.

So basically they introduced premium charge to combat traders paying less commission? Why not just charge premium charge for those using software? Leave flat rate for betters?

Hello Sir,

Can you explain to me what is meant with 250 markets? If I only bet on tennis (who's going to win), does that count as 1 market? And what about tournaments? Are different tennis tournaments considered different markets? Look forward to hearing from you.

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