Ambitions for an American Betting Exchange

14 October 2004

"One way the North American industry could compete would be to … uh, compete."

So wrote Chris Scherf, executive vice president of the Thoroughbred Racing Associations (TRA) in a submission to the Thoroughbred Times. The article came a little over a week after Scherf proposed to attendees of the TRA's International Simulcast Conference that race tracks in North America should carefully consider creating their own betting exchange.

". . . If the technology to permit exchange betting existed when pari-mutuel betting was instituted in this country, it may have become the format of choice.
- Chris Scherf
Thoroughbred Racing Associations

Scherf recognizes that betting exchanges pose a threat to the pari-mutuel racing industry in North America because they offer a more attractive product to bettors, but he discourages tracks from accepting that preventing exchanges from entering the North American market is the most viable solution. Doing so, he argues, hardly seems practical.

With today's legal and political climate in North America, ambitious operators based off-shore should not have much trouble penetrating the market once they make the decision to do so, and even if the U.S. government were to outlaw certain Internet activities, enforcing a ban is much easier said than done.

Scherf also demonstrated at the simulcast conference the massive damage betting exchanges could exert on the racing industry. Not only would the industry suffer from a loss of punters to the exchanges, but according to Scherf, if rival exchanges were to target the United States, they would likely only return to racing a portion of the 2 to 5 percent they earn on betting commissions--if they were to return anything at all.

Scherf says that at this point in time, the only discussion among members of the pari-mutuel racing industry is talk about how horrible it would be if the exchanges were to invade North America, and few are proactively preparing for the inevitable onslaught. He suggests that rather than taking the Australian industry's approach and fighting it, perhaps North American tracks should invent their own betting exchange to compete.

Betting exchanges, he explained, are not as radical a concept as they may seem. "It is still just betting between players, rather than against the house, just as pari-mutuel wagering is," he wrote.

He added, "Exchange betting is a better, more efficient iteration of the pari-mutuel system of having bettors wager among themselves instead of against the house. In fact, if the technology to permit exchange betting existed when pari-mutuel betting was instituted in this country, it may have become the format of choice."

Scherf provided a good argument for the benefits of betting exchanges, but he later stressed in an interview with that that the exchange model comes with its own problems. "There is merit," he said, "but they are also fraught with problems, There is no getting around that. I didn't mean to downplay those either. There are huge problems with betting exchanges."

Among those problems is the potential effect of betting exchanges on the integrity of racing by permitting bettors to lay horses to lose. But Scherf also pointed out how Betfair's database records give the British Jockey Club an effective tool to discover and investigate suspicious betting.

If the North American exchange is to become a reality, all tracks will have to agree to it. But according to Scherf, "We're nowhere near that critical mass at this point. The aim of the whole speech was just to get people to think about it because I figure we have maybe a year of opportunity and then the window may be closed."

A betting exchange owned by American tracks would also require a legislative change in every state, as most of them have laws that specifically permit pari-mutuel racing only.

Scherf has been approached by a few betting exchange operators, although his vision for U.S. person-to-person betting is different from what exists in places where betting exchanges are licensed to operate.

"I think I made it pretty clear that I'm not interested in anything except one exchange in this country that is controlled by the industry," he said. "Otherwise you just lead yourself to your own ruin"

Meanwhile Edward Wray, co-founder of Betfair, used Scherf's statements at the simulcast conference to his company's advantage in its struggle to become licensed in Australia.

"It's encouraging to see the United States taking an enlightened approach to exchanges," Wray stated in a company press release. "This, together with developments in South Africa (where Betfair recently signed a memorandum of understanding) and comments from seasoned observers in Australia and elsewhere, suggests that the international racing world is recognizing the benefits exchanges can bring."

He added, "Betfair has made it very clear that it wishes to pay appropriate product fees as it expands overseas."

Scherf pointed out that when the Thoroughbred Racing Associations began producing the simulcast conference 11 years ago, simulcasting constituted only 20 percent of the pari-mutuel business in the United States. It's now responsible for more than 85 percent.

Bradley Vallerius

Articles by Bradley P. Vallerius, JD manages For the Bettor Good, a comprehensive resource for information related to Internet gaming policy in the U.S. federal and state governments. For the Bettor Good provides official government documents, jurisdiction updates, policy analysis, and many other helpful research materials. Bradley has been researching and writing about the business and law of internet gaming since 2003. His work has covered all aspects of the industry, including technology, finance, advertising, taxation, poker, betting exchanges, and laws and regulations around the world.

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