Edition 06 Emerging Tech: A look on the horizon at betting exchanges
A model attempting to disrupt the U.S. industry status quo
Good morning and welcome to another Monday morning edition of The Handle! We’re discussing betting exchanges and various emerging tech companies infiltrating the U.S. market.
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What is an exchange? A sports betting exchange model is a Peer-To-Peer marketplace that matches players on opposite sides of a wager and takes a commission on the winnings of each bet (or trade). With an exchange, there are multiple advantages for the individual player including better pricing, more in-play betting options, and no limits or bans by the operator. Exchanges allow bettors to trade in and out of positions through the course of a given game or event, whereas traditional operators will lock out bettors to limit their personal liability. There are many pros and cons of the current sportsbook operator model as well as exchanges, and we’re going to discuss some players attempting to capture a share of the exploding U.S. market.
Exchanges: A Historical Look
While a newer phenomenon in the U.S. ecosystem, betting exchanges have been around for decades in the UK and financial exchanges have been around since the early 1970s. In the early 2000s, Matchbook, flutter.com, and Betfair were competitors in the UK exchange market. In December of 2001, Betfair acquired Flutter allowing for growth and sustained market dominance stretching to the present day, where Betfair is currently the world’s largest betting exchange. Paddy Power Betfair’s parent company Flutter Entertainment also owns Fanduel, America’s largest operator in online sports betting by gross gaming revenue. According to Legal Sports Report, exchanges account for around 10% of the UK sports betting market.
Aside from Betfair, popular sports betting exchanges in the UK include Matchbook and Betdaq. Matchbook has been operating since 2004 and has grown significantly, attempting to chip away at Betfair’s market share with significant marketing spend and marketing themselves as the superior option in terms of price and liquidity. Betdaq was founded in 2000 by Irish businessman Dermot Desmond and was later acquired by Ladbrokes in 2013 for €30M.
Another innovative tech option disrupting the UK market is Smarkets, running a P2P exchange and operating as a bookmaker, SBK, simultaneously. Founded in 2008 by Jason Trost and Hunter Morris, the betting exchange prides itself on offering the optimal sports betting product boasting the best prices. Smarkets recently raised an undisclosed Series B funding round and entered into the U.S. market in June 2020, rolling out Colorado as a digital-only operator through SBK.
Established competitors across the UK are feverishly competing for a piece of the pie and spending significantly on marketing activations to acquire customers. As the betting landscape across the U.S. matures, there is a potential window for exchanges to rise in volume and prominence and capture market share going forward.
A huge drawback and limit to exchanges is lack of liquidity, especially due to the Federal Wire Act barring gambling across state lines. Especially in less popular sports, the chances of finding someone to match the other side of a given bet can be low. It remains to be seen if being contained to one state will provide a liquidity pool sizable enough to sustain operations, but a few companies are expected to launch soon which we’ll be keeping an eye on.
Now, exchanges aren’t necessarily the panacea that they seem to be. Exchange-based models, especially prior to mass adoption, have to choose between allowing market makers or not having offerings on each bet. As an individual bettor, I have no interest in leaving an “open” unaccepted bet on an exchange, hoping someone takes the other side prior to the game beginning to give me action. If I leave an open bet on the Bucks -4.5 up, and then Giannis tests positive for Covid-19 and someone takes the Suns +4.5 before I can get my bet offer off the board, I’m shit out of luck. If no one wants to take the other side of my bet, I’m shit out of luck. As a result, getting true peer-peer liquidity is incredibly challenging, especially well in advance of a game beginning.
On the other hand, you can have market makers who offer the Bucks -4.5 and the Suns +4.5, but with a smaller straddle than offered by traditional books. This is more similar to what is seen in capital markets, but doesn’t quite have the same appeal of organic peer-peer betting. The other issue here is that market makers have to be compensated for taking bets. Until there is adequate liquidity in the pool for market makers to be able to accumulate profits, they have little incentive to ensure that bets are available at all times in the same way a traditional operator does.
In short, exchanges suffer from the critical mass problem that plagues any social media type start-up: they only really work with widespread adoption. This isn’t to say that I’m not hopeful for American exchanges. We’ve seen the success of simple, gamified trading with the advent of commission, and there is no reason sports wagering can’t adopt a similar operating platform. It’s just worth monitoring the depths of liquidity and the patience of the bettor if their desired wager isn’t available. After all, Citadel isn’t yet involved in providing liquidity here… yet… (Susquehanna Investment Group is active on exchanges in Europe through their subsidiary Nellie Analytics).
What do bettors care about?
These exchanges are “betting” on the price sensitivity of bettors in the long-term and attempting to prove to bettors their technology and platforms are advantageous and worth betting on.
Emerging U.S. Exchange Players
Sporttrade -- https://getsporttrade.com
Sporttrade, founded in 2018, is an open sports betting marketplace coming to NJ in the latter half of 2021. Bettors can more accurately assess their risk while operating with no vig compared to the traditional sportsbook operators' hold % and margins.
They’ve set up their trading exchange platform in a similar fashion to an equity trading platform, and their branding has followed suit. Their founder & CEO Alex Kane is attempting to apply innovative “capital markets principles and technology placing the customer at the forefront”, he discussed in a press release.
As you can see, Kane is welcoming any and all sharp action taking a contrarian approach to existing sports books who tend to limit and ban sharper winning players. Accepting and welcoming sharp bettors into the Sporttrade ecosystem allows the market to discover efficient prices.
Sporttrade works with multiple licensed market makers to perform the function of acting as an intermediary when the necessary liquidity to bring a buyer and seller together is lacking.
The Philly-based startup announced earlier this month that they raised $36M from financial and gaming companies, as well as key individuals including the former CEO of the Nasdaq Tom Wittman and the former CEO of MGM Resorts Jim Murren. Check out a Clubhouse session with Tom Wittman & Alex Kane at the end of this week’s piece.
Prophet -- https://www.betprophet.co/
Prophet is an NJ-based sports betting exchange founded in 2018 by CEO Dean Sisun & COO Jake Benzaquen. On July 12th, 2021, the team announced a partnership with Caesars Entertainment to launch for this upcoming 2021 football season in New Jersey & Indiana. Initially created and licensed in the UK, the company operated as a marketplace for existing wagers. In its first stateside endeavor, Prophet will be functioning as a traditional betting exchange.
Overall, the technology and concept, while cutting-edge and inherently different from existing technology, come with a steep learning curve and unfamiliarity to the common bettor. These exchanges will likely trend toward consumers with an understanding of financial markets and stock trading apps like Robinhood.
Miscellaneous Recent Consumption:
Press
Great newsletter from @PlusEVAnalytics, definitely worth a Twitter follow and adding the newsletter to required reading. This week’s newsletter: How Winners Win: A Framework for Breaking Down Expected Value
Sporttrade CEO Alex Kane & Former Nasdaq CEO Tom Wittman discuss the marriage of capital markets & sports betting:
Twitter
Pods Worth Listening To
Opportunities
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