Betfair’s premium charge is bad for you (and bad for Betfair!)
28 October 2014 § 2 Comments
If you are a regular user of Betfair with a reasonable track record then you will know all about Betfair’s premium charge. The premium charge is described here. It means that the more you use Betfair, the higher percentage commission you pay.
This approach is bizarre. In 20 years working in financial markets I’ve never heard of any other exchange that charges larger or more profitable users a higher percentage fee. In fact, every other exchange that I am aware of uses the opposite basis for charging fees and provides volume discounts. The reason that most exchanges do this is simple: the main driver of profit for an exchange is the level of turnover, and a key driver of turnover is the liquidity available. Large traders provide this liquidity, so exchanges do what they can to encourage them. The exchanges with the best liquidity typically also have the smallest spreads between back and lay (or buy and sell), and these exchanges attract the most customers which becomes self-reinforcing. Because of network effects, the largest exchanges tend to dominate and the smallest exchanges disappear.
So it’s not surprising that Betfair has been a financial failure in Australia. The exchange has wide spreads and lacks liquidity in all but a few Australian markets and the premium charge discourages potential liquidity providers from playing more. Betfair apparently doesn’t understand what this shortage of liquidity providers means for its business. Betfair also seems to misunderstand that although they are the only exchange, they do have competition from traditional bookmakers. Its approach appears to be to punish the large, successful punters to the point that it is not worth them betting with Betfair and taking their liquidity elsewhere. Betfair got away with the same tactic in the UK because it is a far bigger market and the exchange built up a larger customer base before the premium charge was introduced, but this approach has not worked in Australia and will not work.
This fee makes very poor business sense for Betfair. It definitely discourages punters – I can say that from personal experience as I have bet a lot less with Betfair since hitting their limits. There are times now when I am actually better off going to a traditional bookie – and I never thought I’d say that. Betfair needs to take a rational approach and be less greedy. By getting rid of this fee they would end up with a healthier exchange and with smaller slice of a bigger pie which could well lead their business to be profitable in Australia.
If you want to know how you are doing with regard to the charge, you can check your current position and how likely this charge is to impact you by checking Betfair’s Premium Charge link.