Expect the unexpected: the potential for a 'black swan' looms large

When the Detroit Lions beat the San Francisco 49ers on the road 40-34 on 30 December – the last Monday Night Football of 2024 – there would have been some glum expressions on the faces of NFL traders at FanDuel and parent firm Flutter Entertainment. That result cost the New York-listed group $74m, its largest single loss on an NFL game during the fourth quarter of 2024.

However, it wasn’t straight pre-match bets, or in-play bets on the Lions’ battling back from eight points down at half-time, that inflicted most of the damage; it was chiefly the mountain of winning same game parlays (SGPs), or bet builders, that came as belated Christmas gifts for customers. Liabilities were compounded by the fact there were nine different touchdown scorers, many of whom were popular selections, while Flutter also reported that “all marquee players cleared their pre-game yard projections”.

One industry source said the game “was as bad as it gets” in terms of the outcome and derivative markets. Flutter highlighted details of the loss as part of a US profit warning issued on 7 January, in which it was also announced customer-friendly results impacted gross revenue to the tune of $438m. Categorising Flutter’s loss on the Lions/49ers game as a ‘black swan’ – a high-impact event that is hard to predict but in hindsight appears to have been inevitable – would probably be folly, though. Especially when we’re talking about the world’s largest publicly traded gambling company with a market cap north of $42bn, at the time of writing, and that generated global revenue of $14bn in 2024.

“For anyone else it would have been catastrophic but it’s water off a duck’s back,” surmises Andy Wright, who spent seven years up until 2021 in senior trading roles at Flutter-owned Sky Bet. Yet bookmakers, especially those in the US and particularly when it comes to the most bet-on sport, American football, are exposed to more pronounced revenue swings these days. Much of it is linked to customers’ propensity to gravitate towards high-margin betting options.

Alun Bowden, senior vice-president (SVP) at boutique analyst firm Eilers & Krejcik Gaming, said in a LinkedIn post in January that the situation creates what he referred to as “volatility timebombs”. “Recently, someone very smart said to me that at some point in the next few years the US sports industry is going to have a billion-dollar loss month,” he wrote. Bowden argued that senior figures haven’t cottoned on to the fact that one-off outcomes are built into high-margin, volatile products, such as SGPs, as a feature. “It’s supposed to happen at one point,” he said.

“The short answer is yes,” says Mark Hughes, chief trading officer at Fanatics Betting and Gaming, when assessing whether hefty losses on the NFL are inevitable from time to time with the explosive growth of SGPs. “I visualise this as a bell curve of outcomes in my head,” Hughes continues. “We often talk about the centre, or the average, of this bell curve, and that centre being the expected hold rate. For SGPs and parlays the centre is higher than for singles, so as a business we’re generally happy with these higher-hold bet-types. However, the bell curve is also wider for SGPs and parlays than it is for singles.

“This means we have a reasonable chance of experiencing very high hold rate days,” he adds, “but equally a reasonable chance of very low hold rate days. So, on average, we’re going to be better off, but with more variance.”

Hold on a minute

FanDuel experienced one of those good days with an extraordinary 39% hold in New York on February’s Super Bowl LIX, figures released by the New York State Gaming Commission revealed. For comparison, DraftKings achieved a not-too-shabby 26% hold. FanDuel’s market-leading parlay and SGP mix, combined with it being a bookmaker-friendly Super Bowl, paid off as the firm garnered $22.3m in gross revenue on handle of $56.8m in the Empire State as the Philadelphia Eagles overcame the Kansas City Chiefs.

But an event of the Super Bowl’s magnitude is when SGP liabilities can get scary, as hordes of customers tap similar game outcomes and player props into their digital betslips. What’s more, America is “a country built on strong narratives”, suggests Matthew Trenhaile, owner of Anubis Trading and most recently head of growth sports at Pinnacle.

Super Bowl LIX was a prime example, with Kansas City attempting to become the first team to win a third consecutive Super Bowl. Or the ‘three-peat’, as it was billed. “We’ve got Patrick Mahomes, a storyline where we believe we’re seeing the best quarterback that has ever lived, going for an unprecedented third Super Bowl in a row,” says Trenhaile. “America loves these narratives. In a UK pub there would be people desperate to shit on Mahomes and bet against the Chiefs because they always win.”

Trenhaile insists the mindset in the US is to find ways to “cash in” on what the public deem to be destiny. “So, they’re backing Kansas to win, Mahomes to go over his passing yards, Travis Kelce, Taylor Swift’s boyfriend, to go over his receiving yards,” he says. “Because everyone is focused on the fairytale narrative and want to be right when great things happen – rather than being right when there’s an upset – it creates these heavily correlated, non-diverse accumulator payout bombs.”

Trenhaile compares the situation to when the Hong Kong Jockey Club (HKJC) first starting laying bets on football (soccer for our American readers) more than 20 years ago. Back then, he says, a well-read newspaper in that part of the world published an accumulator every weekend, invariably involving European football’s top teams, and invariably odds‑on chances.

The upshot was the HKJC would “consistently have the same sort of liability every week based around this accumulator”, Trenhaile explains. “There was very little diversity because people didn’t use independent thought – they just used the selections advised. So, they [HKJC] had to get used to the fact they would have hundred million-dollar losing weekends when these bets hit […] the American market is interesting because it’s starting to exhibit similar traits to the Hong Kong Jockey Club phenomenon.”

This concentration of risk is accentuated by the fact major US sports, not just the NFL, have playoffs that culminate in a head-to-head match to crown a champion, unlike the top football leagues which just end on a certain date. The NFL also only has 272 regular-season matchups, compared with 380 games in a Premier League season. Crucially though, Saturday afternoon football bettors in the UK probably delve into the lower divisions and/or add teams on the continent when creating their accumulators.

More choice means risk is more diversified. The NFL doesn’t have that. Bettors in Sub-Saharan Africa tend to make the most of football’s vast betting opportunities by often including tens of favourites from across a vast array of leagues in accumulators – even when the potential payout exceeds the bookmaker’s limits.

Essentially, it’s treating football betting like buying a lottery ticket, says Wright, who has previously worked for KingMakers, the parent company of pan-African bookmaker BetKing: “It’s tiny stakes but they are betting every favourite across Europe. It’s multiples with sometimes 50, 60, 70 legs [but] of course the margin is unbelievably high with a 70-fold.”

Another thing that was unique to Africa, and sources say is increasingly happening in Latam markets, is customers following the crowd by backing football selections put up by influencers on social media. Suddenly liabilities on all these identical and near-identical bets can become astronomical.

“An influencer in Africa or Latam might put up a 20-fold of absolute nonsense,” says Ronan McDonagh, head of exchange and brokerage at Matchbook. “But if 100,000 people hit it, there wouldn’t be the money to pay out on Monday. A lot of firms are living in that world but saying, ‘it’s fine, it’s never going to happen’.”

Copying an influencer’s bet is convenient and less time-consuming than adding legs to an accumulator or a bet builder. It’s why the carousel of pre-packaged bets takes up prime real estate on the homepage of most bookmaker apps. McDonagh says he finds it “a chore” to manually create a bet builder.

“Whereas if there’s a pre-built one and it’s 12/1, 25/1 or whatever number you’d like to win a bet at, you’re just going to hit it. But do 10,000 or 50,000 people hit it?” he remarks. Some operators display a count of how many customers have backed it, while bet365 and Paddy Power also place flame icons next to their trending bets. Sure, some bookmakers’ bet tallies could be exaggerated, but seeing thousands have backed something reinforces FOMO (fear of missing out).

The result is that it’s not inconceivable to end up with customers in their hundreds of thousands, or perhaps more, backing the same 20/1-shot on the Super Bowl. Ben Colley, director of sportsbook at Unibet parent firm FDJ United, says: “When the betting public rallies around a particular opportunity, managing this enthusiasm becomes complex, as the safety net of a maximum payout can quickly lose its effectiveness.” Unlike the HKJC example or multiples bets on any given Sunday in the NFL, obviously football accumulators start to diverge the more legs included on a betslip, such is the breadth of leagues and teams over a weekend of fixtures.

“One man’s 10-selection accumulator is different to another man’s 10-selection accumulator,” Trenhaile notes, “so there’s a bit of portfolio risk distribution going on and it’s very rare you get this timebomb phenomenon whereby everyone’s picked the same teams.” Where a timebomb could feasibly happen, suggests Trenhaile, is when all 18 matches are played simultaneously for the final round of league-phase fixtures in what was an overhauled Champions League format this season.

“It’s conceivable that if a large bookmaker put up a promotion like ‘all teams to score’ it could create a timebomb effect,” he says. This is a point picked up by Colley, who reports that a “surge in mega-multiples” on the new-look Champions League this season illustrates “how momentum can build in the betting space”, he notes.

White here, white now

The term black swan is thought to have been first used by a Roman poet as a metaphor to describe something impossible or non-existent. It was presumed at the time that only swans with white plumage existed. That was until the late 17th century when Dutch mariners discovered the dark-coloured variety in its natural habitat of Australia.

Nevertheless, the metaphor stuck to describe something as an extremely rare occurrence. In his 2007 book The Black Swan, mathematical statistician and ex-options trader Nassim Nicholas Taleb outlined the extreme impact of unforeseen events in a complex and unpredictable world. Ultimately, Taleb concluded that we’re bad at predicting future events. Modern-day events deemed black swans include the implosion of the dotcom bubble in 2000, the 2008 global financial crisis and Covid-19.

Black swans in the gambling industry have historically been few and far between, though one high-profile example was 5,000/1-shots Leicester City being crowned Premier League champions in 2016. The industry is thought to have lost at least £20m. Those on at 5,000/1 with fivers and tenners were probably mostly die-hard Foxes fans placing throwaway bets out of blind loyalty, rather than any statistical evidence the odds compilers and their models had vastly underestimated the club’s chances before a ball was kicked that season. In fact, some people have since run Monte Carlo simulations (a model using random sampling to assess probability) and proved 5,000/1 was a fair price.

On the turf, jockey Frankie Dettori going through the seven-race card at Ascot in September 1996 could qualify as a black swan event. Either way, the ‘Magnificent Seven’ was certainly a bloodbath. Some estimates put the industry’s losses that day at £40m, though this was before the internet, when Britain’s betting sector was far smaller than it is today.

On-course bookmaker Gary Wiltshire wound up losing £1.4m on the seventh race alone after stubbornly laying the major firms and fellow bookmakers in the betting ring scrambling to hedge their liabilities on Dettori’s mount, Fujiyama Crest. Such was the weight of money resting on that final ride, Fujiyama Crest had been backed from double figures in the morning into a starting price of 2/1. A financially crushed Wiltshire later sold his house and cars to pay back everyone he owed. On the flipside, the industry dodged a bullet in 2015 when Annie Power tipped up at the final obstacle at the Cheltenham Festival.

That blunder – labelled by the press as the £50m fall – dashed punters’ hopes of landing the four-timer that day on four hot favourites ridden by Ruby Walsh and trained by Willie Mullins. “If you go back 20 or 30 years there’s only a couple of examples, like Dettori and Annie Power,” Matchbook’s McDonagh says when highlighting incidents of “a scary number”. But he suggests the likelihood of similar liabilities has increased because user behaviour has altered dramatically when betting on horses and other sports.

“People have gone away from betting things at evens; they want to bet at lottery numbers. They want to do a bet builder to get a holiday out of it.” They may or may not be looking to pay for a holiday, but Flutter noted recently that around 25% of customers who had used FanDuel’s fully customisable player props SGP product, ‘YourWay’, included more than 10 legs.

Hedge funds

Some industry types preach that hedging is just for gardens, but what can be done to try to reduce scary numbers on these types of bets? Well, traders can always hope that customers cash out their winning positions, as Wright explains: “You can control the margin of cash-out, so you could always offer them more than it was worth if you are really trying to get out of a sticky position. That definitely works to an extent.”

In the case of Leicester City, the industry would have cut its liabilities significantly by customers cashing out over the course of that season. Colley says the increasing complexity of bet builders means it’s becoming “less straightforward to mitigate associated risks”. Indeed, hedging options are limited when users are queuing up to place bet builders on patriotic player props and match outcomes on a high-profile fixture.

Wright serves up an example of the England men’s football team in the final of a major tournament and customers clamouring to back a pre-packaged bet builder of correlated outcomes that includes England to win, Harry Kane to score anytime, both teams to score, Phil Foden to get an assist, and an ill-disciplined Italian defender to receive a yellow card. “What’s the number?” he says.

“Even if you do know that number – and some of the big tier-ones do know – what are you going to do about it? You’re not going to stop the betting on Harry Kane to score. If you’re Sky Bet that’s got that [bet builder] for £500m, where are you hedging? Are you ringing up bet365 and asking to bet a million pounds? What’s the point – you got [a potential liability of] £500m over here.”

While you could get clever with the front-end in terms of swapping out popular pre-packaged bets, Wright says hedging in the proper sense “doesn’t really exist” among tier-one operators but is more likely among challenger brands.

“The tier-three operators trying to establish themselves with limited cashflow have got to be really careful, so they could hedge with a bet365 or take out contracts with [insurer] Lloyd’s of London to pick up any losses over a hundred grand on any given day. But you pay an incredibly high premium for that product.”

In very rare situations you might stop accepting bets. Take Royal Ascot in 2019 when Dettori piloted the first four winners on the card on the Thursday, though much to the collective relief of the bookmaking industry, the flamboyant Italian’s fifth ride, Turgenev, was collared on the line.

The next day, bet365 refused certain four-fold and five-fold accumulators involving Dettori. Sky Bet did similar on the Saturday by not laying multiples covering three of his bigger-priced rides, as the odds on the six-fold accumulator were over 3,000,000/1. The firm told the Racing Post at the time that if 3,500 customers backed that accumulator for just 10p, the potential payout would have been over £1bn. Wright, who was working in the trading room at Sky Bet back then, says: “We had a decision to make because we couldn’t afford to pay out customers […] we’d have probably had to do a fundraising round. As unlikely as it was that he would ride through the card, you can’t take a bet if you can’t pay it out.”

Bird’s-eye view

Those who criticised both firms at the time pointed to all the occasions down the years punters’ similar longshot multiples on Dettori’s rides would have ended up in the bin. Operators roll out the welcome mat for customers who happily place these negative EV (expected value) bets – be it a six- or seven-fold on a star jockey, a 20-team accumulator of odds-on favourites or a 100/1 bet builder with 50% in-built margin. Occasionally though, these bets win.

Colley says: “There has been considerable discussion about potential black swan events in the industry, and it may indeed be time for us to prepare for such occurrences, however this doesn’t alter the fundamental principle that this behaviour is desirable; ultimately, the liabilities generated stem from high-quality business.” In other words, recreational bettors having a flutter on negative EV bets.

As players continue to embrace bet builders/SGPs, these bets continue to shape the industry – and drive growth and profits at the leading firms. Supplier Kambi reported that almost a third (32%) of pre-match bets its network of sportsbooks laid on Euro 2024 were bet builders, up from 11% at the previous tournament. Last year’s Copa América was even higher, at 39%, compared to 17% in 2021.

This fundamental shift in player behaviour is why Entain shelled out £203m for sports modelling and data analytics company Angstrom Sports in 2023, with its capabilities boosting BetMGM’s offering in North America. That same year, Fanatics Betting and Gaming gobbled up PointsBet’s US business as it included Banach Technology (co-founded by Hughes) and its risk management and quantitative-driven trading models. Buy rather than build seems to have been the ethos.

So, does Hughes think the US industry specifically could eventually sustain a $1bn loss in a month, as was suggested by Bowden’s source? “I find it unlikely.” he says. Explaining his thought process, he adds: “For example, if the industry was doing $20bn of handle in a month, we would need to see a −5% hold rate in that month, and I still feel that range is unlikely over that time period.

I think it’s more likely we might see it on a given Super Bowl where there is possibly a −40% hold on $2.5bn handle – but that’s one day a year.” Nevertheless, Hughes acknowledges that unlike a global sport such as football and its sheer depth of leagues, matches and popular players, there is “more concentration” with the  NFL. “This doesn’t necessarily change the expected hold over time, but it does leave room for bigger swings,” he says.

Ways in which to reduce variance – or the tightening of the bell curve – could include greater diversification of bets, which you’re likely to see at operators with larger customer bases, or if there were more games. Hughes says: “As you approach an infinite number of matches, or trials as we say in statistics, you will have more certainty of hitting the mean.”

Yet while US bookmakers are particularly exposed to wild swings with the NFL, the rest of the industry isn’t immune, of course. As discussed, there’s the lottery-like, mega-football accumulators in regions like Africa, which one industry consultant said on LinkedIn recently was, in his view, a “hulking beast” of a potential black swan. Meanwhile, a Champions League clash involving two heavyweights, including an English side, could easily inflict hefty damage to a UK bookmaker if it’s a high-scoring affair and popular player props all hit.

Moreover, in Wright’s view at least, the bet builder craze has widened the window of opportunity for big customer-friendly results. “Ten years ago, the opportunity for a black swan existed but it was really limited to football accumulators on a Saturday afternoon or mid-week fixtures when people were picking the same 10 favourites,” he says. “A big, standalone football game on a Monday night, yeah a lot of people might have backed [Wayne] Rooney to score the first goal or Man United to win 3-1, but it’s not going to hurt you that much […] with this timebomb referred to by Alun [Bowden], bet builders have accelerated the potential for that because it could happen in any big game, in theory.”

As for Flutter and its US profit warning, Regulus Partners issued a note in January, partly titled ‘around 10% of swans are black’, in which the independent research firm said FanDuel’s “brief run of bad luck” was almost inevitable after four years of structural margin improvements. It was also emphasised how US sportsbooks were especially vulnerable to painful shocks, as “15% of US wagering is balanced upon less than 300 [NFL] games played over just 18 weeks – with this level of risk concentration, black swans are bound to appear in flocks”.

Underlining the point, the team at Regulus Partners issued this ominous warning to the industry: “The problem with black swans, both in ornithology and in risk metaphor, is that they are not as rare as people think.”