Making the first move: How Sporttrade aims to disrupt traditional sports betting

Philadelphia tech startup Sporttrade has its eyes fixed firmly on revolutionizing the traditional sports betting model through the launch of its sports trading platform which operates as an exchange rather than a sportsbook.

Founder and CEO Alex Kane’s vision is to create a customer experience that is more approachable than the sportsbook product. Having studied business law and finance at Drexel University in Philadelphia, Kane recalls the popularity of commission-free stock trading at the time with apps like Robinhood or crypto trading platforms like Coinbase known for being very easy to use.

At the same time, Kane was learning about sports betting and realized there was a huge rift between betting on the price of bitcoin, the price of Apple’s stock, or on the Phillies to win. Having seen how many younger people were pre-disposed to trading apps, he hatched the idea to create something similar for sports betting.

At the time of writing, Sporttrade’s fortunes were boosted further by the announcement in June of a $36m funding round from lead investors Jump Capital, Nasdaq Ventures, and Impression Ventures. The funding round is also backed by Jim Murren, former chairman and CEO of MGM Resorts, and Tom Wittman, ex-CEO of the Nasdaq.

Ahead of the firm’s plans to launch in New Jersey later this year on one of Bally’s three online skins, Kane caught up with EGR North America from his home office in Pennsylvania to share his vision on Sporttrade, why it has opted to move away from traditional American odds, and how it aims to capitalize on a first-mover advantage.

EGR North America (EGR NA): You secured seed funding for Sporttrade in 2019, but can you talk us through what you have been doing in the intervening period to build, refine, and prepare Sporttrade for launch?

Alex Kane (AK): Yes, so we raised a pre-seed round funding in 2019. And we did that by going through the Techstars accelerator. The specific accelerator we went through was the Comcast NBCUniversal LIFT Labs accelerator, which was great because we were able to get a lot of exposure and create a lot of relationships with the Comcast team.

Once a year, LIFT Labs take on between 10 and 12 companies that fit their thesis of interactivity, sports, or fitness, and they give you cash as well as office space in the beautiful Comcast Technology Center in Center City Philadelphia. It gave us a ton of exposure. We were able to put that Comcast emblem on pitch decks and that had an incredible effect on external stakeholders who we were talking to because it was no longer just an idea. It was something that was backed by Comcast.

So those relationships are still really strong. They are someone that has pretty deeply gone into the sports betting space, and they have a lot of digital properties that we’re pretty interested in because their viewership and our potential user base have a lot of overlap.

EGR NA: For those who may not be familiar with peer-to-peer betting exchanges in the US, how will Sporttrade function as a product?

AK: The best way to explain it is with an example. So, think of the Nasdaq or the New York Stock Exchange’s business model. They are listing securities such as Apple stock, and then they match buyers and sellers of shares of those securities. Sporttrade is similar in that we list sports outcomes. So, a sports outcome would be the Eagles to beat the Bengals in week one. And we match buyers and sellers by what are called contracts on those sports outcomes. A contract is an instrument that settles at 100 if the outcome occurs, and zero if the outcome doesn’t occur, and it’s priced by the market. The price that the market comes up with is the probability according to the market.

So, the Eagles are playing the Bengals, perhaps the Eagles are slightly favored and let’s say the market prices the Eagles at about $55 per contract. You, as a user, can go in and buy one contract of the Eagles to win at $55. And that’s a real live price as determined by the market. So, the Eagles march down the field and score a touchdown. And now it’s 7-0 Eagles. Now, the contract price for the Eagles to beat the Bengals is perhaps $75 per contract. And I, as a user, could say, ‘Well, I bought it at $55, now it’s trading $75 and I want to sell out.’ We’re bringing that kind of day trading dynamism of the stock market and we’re paring it down to a three-hour football game. That’s how it works. We list these outcomes and we match buyers and sellers of contracts on those outcomes. And the price of those contracts is equal to the probability according to the market.

EGR NA: Can you tell us more about the sophisticated financial software behind the Sporttrade platform? 

AK: The technology at a high level is almost exactly similar to a stock or futures exchange. It’s a very low-latency system. We’re matching buyers and sellers. What’s been really great is we’re able to bring a lot of folks onto our team that have built exchanges before. And again, we’re not really reinventing the wheel, the actual practice of what’s the best way to match buyers and sellers and do all those things has really been de-risked before we’ve even embarked on this venture. The answer is it’s built the same way a stock exchange is built. The differences are for regulatory reasons.

We also have to be the brokerage, so we have to own the user relationship. Customers have an account and deposit with Sporttrade, we will send their orders to the exchange from the Sporttrade app, and then we’re the clearing house as well. We’re in charge of making sure that counterparties are paid out and that when you win your bet you’re paid properly, in an efficient manner. We’re kind of that full-stack capital markets or fintech company rather than just the exchange or brokerage. In a lot of ways, we have to be that full stack for regulatory reasons.

EGR NA: Why did you choose New Jersey for your launch and how receptive has the Division of Gaming Enforcement been to you?

AK: New Jersey is the largest state by monthly sports betting handle, which is a barometer that some use to measure the size of a market. It’s also one of the most respected and revered gambling regulators, so they understand the market. There are around 20 online sportsbooks in New Jersey and the regulators want exchange wagering. It’s in the law and in the statute, and they’ve been waiting for it. They understand that things have to change, that a sportsbook is not an exchange, and there are fundamental differences. But I think what we’ve been so pleased with is the degree to which they want to make this work.

We have this vision to elevate the sports betting industry by applying capital markets principles. There are other things that perhaps other sports betting exchange venues haven’t tried before that we’re going to be really proud to announce soon. That goes towards consumer protection, market surveillance, and making sure customers are using this product fairly and responsibly.

To the best of our ability, we’re trying to use technology that’s been used in other industries to identify potential problem gambling and potential insider trading. We want to treat this like the next kind of asset class for the purposes of trying to treat that customer with the utmost respect and protection. Surveillance and resiliency are really important parts of our system that we’re just simply borrowing from capital markets.

The other reason we started with New Jersey is that it gives us credibility with perhaps newer sports betting regulators in other states that don’t have the track record or quite the breadth of understanding that New Jersey has just on the basis of being in this market the longest. It is one of the harder gaming regulators and they have a lot of rules. We’re working with them to try and evaluate the best way to launch this exchange wagering platform, while still creating the most amount of revenue for the state and protecting the customer.

EGR NA: New Jersey has a population of around nine million, which is fairly modest for an exchange model to work. How will your market makers help?

AK: Market makers are the epicenter of any exchange ecosystem. Without market makers, the system simply doesn’t work. Market makers serve this incredibly crucial function as an intermediary between buyers and sellers, when there isn’t exactly a buyer at a specific price at the same microsecond that there’s a seller at that same price. They perform that critical function of smoothing out the exchange experience. Just like market makers are critical to the capital markets or the crypto markets, market makers are going to be critical to betting exchanges, and Sporttrade is no different.

When people think about betting exchanges, they maybe think about poker or DFS. And they say, ‘Well, are there enough peers or are there enough individual users or customers in the state to make this work’, without understanding that, fundamentally, market makers are a big provider of liquidity, and we view them as partners. They’re signing an agreement with us and they’re providing a service to the exchange to ensure a liquid trading experience for our retail customers.

At this moment in time, we don’t have to and are not going to disclose the market makers. We would love for the gaming regulatory environment to really start to look like how it works in capital markets and would love to adhere to how market makers are disclosed, or perhaps not disclosed, and how someone like the New York Stock Exchange or Nasdaq handles that issue.

Unlike a sportsbook, we do believe it’s a privilege to be able to put an order into the marketplace and have that matched later by an incoming price-taking order, and we don’t believe that just market makers should have that privilege. Part of our vision is to democratize the ecosystem and allow anyone to perform what a market maker is doing from their account. And I think that’s the big difference between sportsbooks and an exchange.

EGR NA: How will you capitalize on first-mover advantage as the first legal sports betting exchange in the US?

AK: It comes down to the uniqueness, and it makes me excited and anxious at the same time. The more unique we make this product sets us up to have a bigger and bigger first-mover advantage. One of the challenges of the sports betting industry here in the US is that the barriers to entry are so high, it is really hard to de-risk things one thing at a time.

You have to get this very onerous license and you have to get a market-access partnership that costs a significant amount of money. And that’s not how it works in other jurisdictions like the UK, where companies are able to raise more modest sums of money and slowly de-risk the business model.

Our goal is to be synonymous with trading sports. If you like buying the Eagles at 55, and selling them at 75, we would like to be synonymous with the only venue where you can do that. Once we launch in additional states beyond New Jersey, I think we’ll start to cement that first-mover advantage, with the challenge being a race to be the first in that state. And I think it comes down to distribution. It’s going to take a lot to not only be the first mover but also educate the user. Someone that perhaps is used to -120 or +100, seeing the Eagles trading at 55. What does that mean? There’s going to have to be significant investment in educating customers as to what this model is. Why is it simpler and why is it better for you? And I think if we’re able to do that, we will cement a first-mover advantage.

EGR NA: What was the thinking behind expressing odds as a percentage rather than using traditional betting odds like -110 each side, and also calling the bets contracts?

AK: Our fundamental belief here is that the more we make our product look like DraftKings or the 20 other sports betting apps that all look the same, we’re shooting ourselves in the foot. We’re taking away our biggest advantage, which is that this is a trading app. This isn’t a bet-and-hold app. And that has its challenges because you have to educate the customer. If we make this look like DraftKings or FanDuel when we go out there and say we have better odds, how many users care about that? I have my doubts that there are enough customers that care about -105 versus -110.

To overcome being inundated with bonuses and all the things that the sportsbooks are doing to try and retain customers, we just want to totally avoid that entire ecosystem for as long as we can. And say, look, this is a trading app. If you want to place bets and not be able to cash out and all that stuff, sportsbooks are for you. But if you want to actually trade sports like you trade cryptos or stocks, this is the only option.

EGR NA: What sort of players are you hoping to attract?

AK: It’s a two-part answer. Any individual that uses Schwab interactive brokers, eToro, Robinhood, Coinbase, any of those kinds of brokerages, and watches sports, they’re going to love this product. There’s a lot of customers that are out there from our testing and being able to build our database of waitlist customers, specifically in New Jersey, and that’s something we’re really excited about because it really is the financial center. In fact, almost every major stock exchange, or many of the major stock exchanges, have their matching engine in Secaucus, New Jersey. A lot of folks that work in finance perhaps live in New York and commute back to New Jersey, so there’s a really great epicenter there for potential customers.

Longer term, this may sound crazy but we fundamentally believe that this will be the predominant way to bet. We believe that because you can’t bet on sports legally when you’re 18 but you can use Robinhood and Coinbase. What we’re finding as we interview these customers that are 21-22 years old is they’ve used Robinhood for three years and we show them this and they go, ‘Oh my gosh, this makes so much sense. I can buy Eagles at 55 and they go to 75. I can sell them,’ and they get it. And I think it’s that pre-disposition that the younger audiences have. They’re almost getting spoiled by using a natively built application that’s snappy, that’s simple, and isn’t in your face. And I think those are qualities that we fundamentally believe we’re going to have that some of the other sports betting apps out there struggle with. You download a sports betting app and you think you’re doing sports betting and then you see pools, fantasy, and casino. It kind of looks like an Excel spreadsheet. We fundamentally believe [the Sporttrade model] is going to be the predominant way to bet because Americans are traders.

EGR NA: Imagine we speak to you again in 18-24 months’ time, where will Sporttrade be by then?

AK: Hopefully we’re talking about a world where there are similar innovative products coming into these markets. I’m someone who believes in putting the customer first and I think the market structure right now doesn’t do that full stop across the board. We would love to see more innovative companies get their chance to contest the market, and to introduce innovative, dynamic, and approachable products. There are hundreds, if not thousands, of American entrepreneurs that are forced on the side-lines and the periphery because of the market structure. It’s nowhere near the UK where you have many folks saying, ‘I have an idea. I want to go raise capital. I want to use ingenuity and entrepreneurship to create something new.’ That really doesn’t exist here. And I hope that by being successful, we’re able to carry that torch and say Americans do deserve a chance at their own market.

I was born and raised in Pennsylvania, I don’t have any inhibitions or plans to move. Under the current regulations, there’s no way I could ever launch here in PA, and I’m seeing all of these companies from other jurisdictions that have no presence here come and contest this market. And that’s what’s great about the US is that we’re supposed to have an open, competitive environment, with free market principles that allow anyone to compete. We just need to make sure that ‘anyone’ includes American entrepreneurs. I hope that by us being successful, the story is not about Sporttrade but more about what it means when you give people a chance.