On May 10, New Jersey residents will be able to — for the first time — bet on horses via a betting exchange. The exchange, operated by British betting giant Betfair along with New Jersey’s Darby Developments, is a non-traditional way to play (primarily) the win pools. While those outside New Jersey may bet to win on the three horse in the third next weekend, people on the exchange can bet at a locked-in price, like buying a stock on an exchange. As well, “layers” will be offering up prices on horses; essentially betting a horse to lose.

This form of betting might be new to North America, and it might sound a little strange, but it’s not new to just about everyone else. It’s been available in the UK since about the year 2000, and Australia’s fixed odds and exchange market – established close to a decade ago — is booming.

What do we need to know about this form of wagering? Well, a lot of the story is good (really good), some of the story is not so good, and one part of it can be potentially not very good at all.

First up, the average age of a Betfair racing patron is the late 30’s, whereas in horse racing it’s about 20 years senior to that. The Betfair customer is mobile and app friendly, loves technology, and is a stats geek who’s drawn to wagering for profit. As well, Betfair attracts those who trade the market, just like you’d trade a stock exchange. Selling a horse at 2-1 and buying him back at 3-1 is no different than picking up 100 shares of AAPL at $101 and selling them at $103.

This is very positive because these are exactly the types of players racing needs. Handicapping and wagering is a skill betting game, but racing does a poor job embracing it. Betfair, and exchanges, force racing to confront this problem, and offers it a new market to sell to, through a medium customers like. In the long-run, this not only involves hopefully increasing revenue from wagering, but selling nights out at the track, new horse ownership and building new fans, too.

What else is good is that exchanges are a form of fixed odds wagering. There are hundreds if not thousands of players in New Jersey who stopped betting, for example, at Freehold, or other small harness tracks because of odds that change after the bell. It’s a complete scourge for the sport, and is a fierce attack on the name of the game – getting value for your wagers. Betting exchanges allow you to lock in a price and not be at the mercy of the late simulcast money. That means something.

For potential new customers, and old customers who have long left the game (along with those thinking of leaving), this is really big news.

What’s not so great about the exchange is that when negotiating this deal they had to work with old-time horse racing. And much of old-time horse racing thinks people are still driving to the track in their Pintos. When I wrote a white paper on exchange wagering for the industry in Canada eight or 10 years ago (I have been betting and studying exchange betting since 1999), I said the following:

“The worst thing North American racing can do when approving an exchange is taking too much off a bet through takeout. Exchanges bring in new demographics (and attract poker players and others like them) precisely because they offer a low vigorish to the most price sensitive. Sabotaging this edge sabotages the exchange’s number one selling point. When setting prices, racing needs to think like a pro-growth tech company, not like a 1950 racing monopoly, because it’s not 1950 anymore.”

Right on cue, New Jersey didn’t disappoint. Worldwide, exchanges work with about five per cent commission. In fact, recently when Australia racing tried to raise prices to over eight per cent, it killed handle (and purse revenue) and they had to backtrack. What did New Jersey do? They passed it with 12 per cent takeout, yes, 12 per cent.

With only 20 per cent of wagering in the win pool, and a good deal of money coming from six to eight per cent signal fees, there is absolutely no reason to worry about cannibalization. New Jersey tracks and/or horsepeople should have never pushed for this high price. It’s short-sighted and has a chance to handcuff any potential growth. Let’s hope it doesn’t.

There are a ton of great benefits from an exchange, along with some not-so-great things, like pricing. But, what can really throw a gasoline bomb into the fire is if those playing on the exchange from inside the sport are doing so illegally.

On an exchange, horses are bet to lose. If you’re a trainer who has the eight post, plans to have the driver send the horse to the back and brush at the end, you have a pretty unique advantage. Betting the horse to lose is “free money”, right? If you do that three or four times you can make a nice buck. Parties all around, pop the champagne.

Well, you’d best think twice. Betfair’s back end, and its technology, has pretty much perfected catching people doing such things. Unlike the aforementioned 1950’s when paper trails with betting were impossible, today it’s all one big paper trail.

“Jockey Eddie O’Connell has been banned from horse racing for four years. Betfair, the world’s leading betting exchange site, alerted the Turf Club about fixings in the horse racing, after they had two UK based ‘lay’ bets on O’Connell to finish outside the top three in his race.”

“Matthew Hopkins, the former apprentice has been banned from racing for three years following a betting probe. He placed eight back bets and one lay bet on Betfair on December 21, 2012.”

In Australia, harness trainer Justin Abbott (a blast from the past for Meadowlands fans and horsemen), was initially given five years (later chopped down to about a year) for laying his horses, i.e. betting them to lose. His profits were $97.55 on one horse and $235 on another.

Betfair’s tech team is not a judge looking the other way when a leading driver drops a boot, or uses a whip too much, or lets his buddy pass up the inside. They mean business, even if you only made $97.55 on a bet.

Sure the headlines could be ugly, but if someone wants to test the system by nefariously defrauding customers, they probably have been doing it for years in the pari-mutuel pools, anyway. It’s about time they’re caught and sent away so the vast majority of honest trainers and drivers can go about their daily business, trying to earn a living.

Over the next few months, New Jersey’s exchange will be humming. The sport is hopeful that new fans and bettors will be backing and laying, trading, and creating some buzz with the new medium. Despite some issues and potential bumps in the road, it deserves everyone in this sport’s support. New ways to wager can create new fans, new horse owners, and, in time, create more revenue for a sport badly in need of it.