Product

Smarkets CEO on the launch of its sportsbook app and taking on Betfair

Smarkets has launched a new sportsbook app to spearhead expansion into the recreational market and the US. EGR Intel sits down with CEO Jason Trost to find out how the firm can reach new customers without losing sight of its core principles

Picture a grizzled gambling industry veteran and chances are Jason Trost isn’t the first person that springs to mind. The Smarkets CEO has long pitched his company as a fintech firm rather than a sports betting company and consistently been critical of the margins that bookmakers impose on their customers. However, Smarkets has been around since 2008 and, like Trost, is becoming part of the UK sports betting furniture. So, what has he learned after a decade-plus in the industry? Sometimes it’s better to say nothing.

“I’m tempered by experience,” he tells EGR in August, following the launch of the company’s SBK sportsbook app. “When I founded the company, I was very shouty about taking on Betfair and all that kind of stuff, and it took me donkeys years to build the product that I needed to. So, I learned it’s better to wait until you have the product before you hype it. You want the product to do the talking.”

Indeed, Trost now sees similarities between his younger self and some of the US firms currently appearing on the sports betting scene in the post-PASPA world, pledging to revolutionise the industry with low-commission exchanges and financial-style trading concepts.

“I wish them well,” Trost says. “They’re like me when I started. I thought I’d take down Betfair in two years, but it takes a while to build the exchange, the technology and the brand. There’s so much logistically to do. Even if you have tonnes of money, you can’t skip a lot of these steps unless you buy an existing operator. I see why the promise is there, and why they’re excited about the opportunity, but there is literally just a lot to do here.”

When talking about the US market, there is indeed a lot to do for exchanges, and no-one’s really sure if it’s even worth doing because the Wire Act would seem to prohibit the pooling of liquidity between various states. That uncertainty is one of the driving factor’s behind the launch of SBK, the firm’s new sportsbook app. The product was developed chiefly by engineers in Smarkets’ LA office with one eye on the US market, which Trost believes will ultimately mirror the UK. In other words, despite what you may read on Twitter, 95% of the US betting market will be accounted for by sportsbooks with around 5% left for exchanges – assuming the Wire Act problem is ultimately solved that is.

CEO Jason Trost

Elegant solution

SBK aims to tap into that larger sportsbook market but the prices and limits for the product will be derived from the exchange; an elegant sidestep of the Wire Act, and one that regulators are fine with, according to Trost (presuming they actually understand what is going on, which is a long shot).

It will also have the slick and simple interface that recreational players want, with good odds and some new innovations built squarely with Saturday punters in mind, including the Auto Acca feature and a social betting feed where users can share bets and their reasoning. According to Trost, the Instagram-style feed was inspired by his experience as a day trader in Chicago where all traders wanted to talk about was their trades and opinions.

The two features are pretty novel for an industry where new ideas aren’t necessarily ten-a-penny but have both drawn some pushback, with some raising questions about the casino-style Auto Acca in a regulatory environment increasingly focused on responsible gambling.

As for the social feed, many firms have tried to crack the social gambling code and, to date, all of them have broadly failed. So why does Trost think SBK will succeed where others have stumbled?
“The reason most of those social ideas have failed is because at its core, the betting proposition needs to be amazing. And I think most of those social betting websites have a so-so betting proposition and put social first,” Trost explains.

“I think we will succeed because at SBK’s core we have the best odds in the world. So even if you don’t want to participate whatsoever in the social network, you’re getting the best odds in the world. That sets us apart from all these other experiments.”

Despite this portrayal of the feed as a bonus, Trost is “pretty convinced” that some form of social networking will work. “It’s not a question of whether we’re going to ditch it all together,” he says. “It’s more like we’ll see how customers want to use it and iterate based on the results.”

Smarkets SBK

The sweet spot

Trost is rightly proud of Smarkets’ engineering prowess and ability to iterate, with 70% of staff in technology in one way or another. He says the firm ships new versions of the Smarkets app sometimes twice a week, and at least once every two weeks.

“We are one of the few betting companies that has a tech team in-house,” he says. “We’re just able to out-iterate all of our competitors. A lot of the start-ups don’t have the resources we do and the big companies that we’re competing against certainly don’t have the speed that we do.”

All this iteration and expansion doesn’t come cheap of course. According to documents obtained by EGR earlier this year, Smarkets is seeking to raise new funds to support its US and sportsbook expansion. No valuation was given but the firm highlighted a “record” Q1 2019 for the business, with revenues of £8.4m and costs of £3.8m, leading to EBITDA of £4.6m. Trost declines to comment further on the fundraising, but highlighted the difficulties of the modern UK betting market.

“Betting is one of those industries where everybody just assumes you’re rich if you’re in it,” he says. “It’s not like you put up a website and you’re printing cash. I think a lot of people from the outside think that and don’t think about the marketing costs, the tech costs and the other regulatory costs.”

Exchange battle

He’s not the first entrepreneur to find the UK sports betting market a tough nut to crack but the core Smarkets product is a solid business that appears to be taking exchange market share, according to Oddschecker data, and regularly earns plaudits for its slick mechanics.

Trost believes the firm is indeed taking share but accepts the product still needs work before it’s truly on a level with Betfair. The biggest issue is probably still liquidity, which is just about the most important part of any exchange.

“I think we need to be doing better at liquidity provisioning,” he admits. “We’re weak in American sports and we’re trying to add more markets and trying to add more data to those markets,” Trost says. “It’s a constant effort which I think will lead to more market share.”

Last year something like 40% of trades on Smarkets involved the firm’s own market-making team, which presents an opportunity for extra profit in itself but comes with plenty of risk as well. “I’ve learned that liquidity provisioning in sports is really difficult,” Trost says. “Everyone says betting is a mug’s game, and we must make tonnes of money, but at any one time we’re quoting 40,000 or 50,000 contracts.”

I think we will succeed because at SBK’s core we have the best odds in the world. So even if you don’t want to participate whatsoever in the social network, you’re getting the best odds in the world. That sets us apart from all these other experiments – Jason Trost, Smarkets

There’s two concepts that make liquidity provisioning extremely difficult, explains Trost, starting with information asymmetry, which means that market-makers are frequently offering bets to people that know more than they do. “All you need is one person with slightly better information to pick you off.”

The second issue is adverse selection. In short, you’re more likely to be traded against when you’re wrong than when you’re right. “Both those things really work against you,” Trost says. “Plus the fact that in general, sports markets are incredibly thinly traded compared to any financial exchange. So it’s really, I think, not possible to build an exchange without doing the model that we’ve done here.”

That model is not without criticism, even beyond the inherent volatility that comes with essentially being a professional punting outfit. Betdaq MD Shane McLaughlin penned an op-ed for EGR last year highlighting the inherent “conflict of interest” when an exchange is involved with so many transactions on its own platform. Trost, however, is dismissive of any unfair play suggestions, saying liquidity provisioning is fairly run and key to the value proposition of the product.

“Many financial exchanges are owned by people that have extra rights to it,” he says. “Goldman Sachs runs its own foreign exchange that it has preferential treatment on, so I think as long as the traders know the rules and everything’s upfront, I think it’s fair play.”

Would he ever consider a shortcut to boosting liquidity, perhaps by merging with Betdaq or more likely Matchbook? Probably not for the foreseeable future. “I have a good relationship with [Matchbook CEO] Mark Brosnan,” says Trost. “We keep the communication open but we’ve never seriously discussed merging. Who knows? I don’t have a crystal ball but I think we have a little bit of a different take on the market. We’re more financial-focused whereas I feel like Matchbook is slightly more on the entertainment side of things. I still see us as the only financial-first betting company in the world.”

Value over everything

It’s true that Smarkets is one of the few gambling companies that has never added a casino to its offering, likely to its detriment financially, but it’s always been a case of protecting the brand identity first and foremost. That remains a line in the sand for Trost, who says he finds it “depressing” that just about every betting company in the industry has a casino tacked on.
“If I’m a big punter and I have hundreds of thousands, if not millions, of pounds in my account and you showed me a roulette wheel, I would feel very insulted,” he says.

Smarkets exchange football

“If you really want to drill down to it, I think companies need to stand for something,” he adds. “If you look at most of our competitors, if not all of our competitors, I think you would have a hard time trying to establish what they stand for. I think casinos just send companies sideways. Are you there to monetise your customers? Are you there for entertainment? Or for live sport? And that leads to the death of the vision of the company.”

At this point it’s only natural, it seems, to bring up Betfair. Regular users of social media will know exactly how punters feel about the exchange market-leader and the apparent marginalisation of its original vision and core product. Betfair’s exchange revenues have been flat or down slightly for more than a year now, and relatively frequent outages lend credence to the idea that the company’s focus is elsewhere.

“I think it’s very clear that Betfair is not continuing to invest in their exchange enough,” Trost says. “The product is static and consumers know it’s not going anywhere which does them no favours. That creates huge opportunities for us to keep chipping away at market share.”

The most common charge levelled against Betfair is that it has stopped investing in the exchange when it launched its sportsbook. Is Smarkets not facing that exact risk now? As Trost points out though, SBK is fundamentally different because it is built on top of the exchange rather than a standalone product. All bets through the sportsbook go into the exchange, strengthening liquidity and, conversely, as Smarkets market-makers sharpen up and broaden out their pricing, that in turn strengthens the sportsbook offering.

“I really want to prove to the industry that there’s no difference between a bookmaker and an exchange,” Trost says. “Pretty much everybody in the industry thinks a bookmaker is an apple and exchanges are oranges, but they’re both apples.”

Trost has spent more than a decade building the Smarkets exchange into a genuine force capable of taking on the mighty Betfair, and his plans with SBK are no less grand, with the recreational mass-market and the US top of the priorities list. The exec may have been quietened by a decade in online gambling, but his ambition is undimmed.

#EGRB2BAwards | Betfair | Exchange | Product | Smarkets | Sportsbook

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