Betfair has two locations on the same website (1) exchange or market (2) sportsbook or bookie. The first, the exchange or market, is a place where people bet against each other. The second, the sportsbook or bookie, is a place where people bet against the house. Both sell the same product, which are contracts that are, canonically, worth $1 if something occurs and $0 if it does not occur.

While both sets of prices are subjected to market forces, they tend to diverge; the key distinction is where Betfair makes its money. In an exchange Betfair makes a guaranteed profit of 2-5% of the winnings, but in a sportsbooks it makes an expected profit of 5%+ of the total wager.

An example helps explain what that means. In the exchange, two people come together and agree on a price for any given contract and Betfair takes a percentage of the winner’s winnings. For example, imagine a contract for Candidate A winning an election; user X believes that there is a K% likelihood of Candidate A winning and user Y believes that there is a K-5% (where K is between 0 and 100) likelihood of Candidate A winning. User Y will sell a contract for Candidate A to win to user X for K-2.5% (or somewhere between K and K-5%). Both of them think they have a better deal in expectation. In the sportsbook, Betfair overcharges for the contract and charges everyone the same price. For example, Betfair may charge K%, higher than most people’s subjective probability, and hope that there are some people with subjective probabilities that high to make a deal.

This difference is most obvious in full sets of mutually exclusive outcomes. Consider a two candidate race between Candidate A and B. Due to arbitrage traders, if people are trading Candidate A at K-2.5%, Candidate B is going to trade very close to 102.5–K%. So that Candidate A + Candidate B = 100%. But, the sportsbook is likely to sell at something closer to K% for Candidate A and 105-K%. So in the sportsbook Candidate A + Candidate B = 105%. This means that Betfair makes 5% in expectation if it sells equal amounts  of both Candidates.

One further note is that in the exchange we see the price that buyers and sellers come together, but in the sportsbook we just see the price they are willing to sell for. So, while we can approximate the “price” on an exchange as the mid-point of the bid/ask on the order book, we can only see the sell price on a sportsbook. Thus, another reason it is a little higher than the true underlying probability.