Updated on 09/17/2011 6:06PM

Exchanges rate a shot in States


TUCSON, Ariz. - What should the American racing industry do about Internet betting exchanges - outlaw them, embrace them or start one of its own?

That was the most interesting and controversial question to emerge from this past week's annual Symposium on Racing here. It is an issue that already is prompting sharp disagreement among racing officials and analysts.

The success of Betfair, the British company that handled $5 billion last year matching up online bettors on different sides of sports and racing propositions, has people on both sides of the debate in a panic. Their fear is that Betfair and its imitators, rather than the American racing industry, will be the primary beneficiary of the coming expansion of international betting on American racing. They also fear that exchanges will start drawing current handle away from American parimutuel pools because Betfair offers fixed odds and a takeout of 2 to 5 percent, instead of odds that change at the top of the stretch and a 15 to 25 percent rate of takeout.

How to respond? On one side stand officials who believe that the exchanges must be prosecuted and banished because they will destroy racing as we know it. Leaders of The Jockey Club, the International Federation of Horseracing Author-ities, and the Australian Racing Board argued that exchanges are inherently illegal and corrupting and should be fought through federal legislation and fierce legal enforcement of intellectual property rights.

The opposing camp says exchanges are here to stay and should either be brought under the tent or imitated. Niall Wass, a Betfair executive who has attended the last two Symposiums only to be publicly scolded by American track operators, says his company is eager to make a deal with American racing and pay a commission for handling propositions on American racing.

Chris Scherf, the executive director of the Thoroughbred Racing Associations, has the most intriguing suggestion. He believes the American racing industry should form its own version of Betfair to eliminate the middleman and return the highest possible commissions to tracks and purses. Scherf argued persuasively that any legislation may be unenforceable and that it is a losing effort to dissuade the public from betting on more stable odds at a lower takeout.

Eugene Christiansen, a leading gambling consultant, put the issue in broader perspective by comparing it to how the Internet has transformed the music and travel industries by offering economically attractive alternatives. Those businesses that embraced downloadable music and discounted fares have thrived, while those who fought them are going out of business.

Attempts to regulate Internet gambling have a pretty sorry history, and even if one of the bills that has been kicking around Congress for five years ultimately passes, it is unclear that anything will change. Online poker, casinos, and sports betting are thriving, and it is doubtful that putting unenforceable laws on the books will stop them any more than existing laws keep people from betting on the Super Bowl. Betfair voluntarily does not open accounts from American addresses, but anyone determined to use the service can get around that.

Everyone involved in the debate is probably overstating the appeal of exchanges to American bettors. More than 75 percent of American handle is on multi-horse and multi-race wagers, which are incompatible with exchanges, and Betfair has thrived in a very different gambling culture where fixed odds and bookmaking are long-standing fixtures.

The idea that exchanges uniquely facilitate corrupt racing by allowing people to bet against a specific horse is also a stretch. Someone inclined to stiff a favorite can still bet against him by dutching a win pool or by excluding a favorite from multi-horse combinations. If anything, betting exchanges provide a better paper trail to investigate possible corruption than a cash transaction at a parimutuel window. Exchange opponents should stop pretending that there is something morally superior about the parimutuel system: Both methods match up people with opposing opinions, and the only difference is that the parimutuel system currently charges a higher commission.

The biggest lesson that exchanges are providing is a familiar one that this industry does not like to hear: Racing is a severely overpriced gambling proposition, and an increasingly savvy customer base is constantly looking to lower the sport's unreasonable 20 percent takeout.

Exchanges are just another manifestation of what has happened with rebate shops and simulcasting: Smart players are ingeniously lowering the excessive price of playing the game. Regardless of official foot-stamping, they will continue to do so until racing begins reducing takeout. In the meantime, the industry would be wise to follow Scherf's suggestion and be the one getting some commissions instead of nothing at all.