With traditional betting, you only have the option of matching a bet set by the bookie and if you're looking for different odds, then there's not much you can do. Because of this predicament, betting exchanges began popping up and offering a solution to the problem. Basically, if the bookie was only offering 3 to 1 odds but you wanted 4 to 1 odds, then you could place that offer at a place like Betfair or Matchbook and wait for someone else to take you up on your bet. The way this works is that your offer is posted and others are able to come along and either fully or partially match your bet, so basically the betting exchange is acting as the middleman who connects people with others who want to play the same bets as each other.
A big benefit to these betting exchange sites is that they're live, so making a last minute bet has never been easier! Say during a NFL game you decide that the Giants are going to miss the field goal at 40 yards and want to put some money on it. All you have to do is hop on an exchange site and see if someone already is betting against that and if not, go ahead and put your offer up there and for something like that you should have a match almost instantly!
Here's another example to help better drive home the point for you. Let's say that there's someone who's holding the odds at 3.51 for the Giants to win the game. You see this and you think that they're going to miss the field goal every 2 of 3 attempts. You now have the option of "laying" on the bet by taking those odds and basically you become the bookmaker if you will. As you may have expected, if you win the bet, then you get the exact money they bet and you're a happy person! On the other hand, if you lose the bet, you're then required to pay out the money to your opponents at those odds that were set.
A betting exchange lets you act as the bookmaker and bet on any outcome even if it may or may not happen and you can choose your own odds.
Betting exchanges are live, so you can make a last minute bet even while the game is in session. Even though some sportsbooks have been adding this feature recently, not all of them have it up and fully functioning yet.
Many times, you'll find that a betting exchange will offer better odds, sometimes even up to 18% higher than any sportsbook ever would.
As you know, many sportsbooks have a limit on the maximum bet you're allowed to place and at times they may actually decline bets from those who've won on a regular basis. With a betting exchange, they want everyone, even if you win on a regular basis. This is because they make their money off of a small commission on every transaction. Sportsbooks only make money when you lose the bet, so this leads to a hostile environment.
To break it all down, look at betting exchanges as middlemen or peer-to-peer connectors. Basically, they just gather various gamblers from all over the world together to a neutral place where they can wheel and deal as they please.