Are Exchanges Just Glorified Chat Applications?

I came across an interesting post here on why Betfair should fear whatsapp. Strange bedfellows for an article but the general thrust of the piece is that a chat application is similar to a financial exchange, in this case Betfair, and could theoretically disrupt its business model. I have to be honest and say it’s something I’ve never thought of.

If you read what’s said then you might think that this is so. The author goes into some detail about the similarities and given the depth of knowledge in some of the other posts on his site you might think that he’s got a point. He even says straight out that “A betting exchange is really just a chat application – in place of messages, you have bets; in place of chat groups, you have markets; and in place of the chat transcript, you have the order book“.

So that’s a fair comparison isn’t it?

Ummm, nope and here’s why.

Even a quick glance shows that they are very different beasts. A betting exchange like Betfair has to support regulatory compliance rules that vary across countries, markets and products, financial controls that vary across countries and accounts, PCI regulations, Know Your Customer regulations, reference data, reporting, risk management and fraud detection. There is a long list of overheads that just do not exist in a chat application no matter how fully featured that add a burden for every feature at Betfair.

And then there is the domain model and its interactions. Even assuming that there is a transactional requirement on sending a chat message for guaranteed delivery, it bears no resemblance to what an exchange does, especially when you realise that Betfair is effectively both an exchange and a broker.

Yes in a chat application you have a friend list (likely backed by a graph database) versus a directed acyclic graph of competitions, events and markets with the previously mentioned regulatory overheads that means that you only get a real-time filtered view.

Yes your chat app can show your friends statuses but you won’t see over 50K markets where maybe an average of 5 outcomes have 6 prices displayed (there are of course more behind the scenes) changing every 100ms. The volume of pricing data is huge and I’m even ignoring the complexity around pricing tiers delays or creating and pricing multiple bets like a treble or a goliath.

Yes you send a bet to the exchange in a way that if you squint hard enough might just look like a chat message. But then what about delayed matching, staring prices, best execution and partial matching? That’s not even a comprehensive list of what’s involved. There is the exposure model that allows you to straddle a market with multiple individual bets that allows you to leverage your position and use your effective profits before the event has even run. The global exposure functionality is one of the most complex and powerful operations I’ve ever come across.

And what is the performance requirement for a chat application? If your message is held up for 100’s of milliseconds or even whole seconds does it cause an issue? No of course not. It might make for a slightly dodgy user experience but that’s it. You cannot say the the same for an order hitting a financial exchange.

Yes, in a chat application you can see the static transcript of messages you’ve sent and yes in a betting exchange you can see your current position dynamically changing across all those active markets in real time.

And of course there is the minor issue that Betfair is dealing with money; the transactional requirements, the strict coding standards, the security testing and much more. Even a minor technical issue can balloon into a multimillion dollar problem (the Leopardstown incidence in 2011 being one example where a glitch saw a race being voided and £40MM wiped off the share price). Simply put, you don’t muck around when it comes to dealing with cash and that comes at a cost  (sorry for the pun!).

I’d like to think that I have a bit of an insight (and that I’m not being too biased!) having worked there for 4 years but an entity like Betfair is nothing like a chat app. There might be some comparison with a sportsbook but even that has many of the same overheads as an exchange model. This is no disrespect to whatsapp and the challenges it faces but there is no comparison in the complexity of them and Betfair and in fact they are so different that if you think they are similar then you’re not even wrong.

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