Trading places: Is the US ready for peer-to-peer betting?

Ever since PASPA was overturned more than 18 months ago, the merits of legal peer-to-peer exchanges coming to America have been frequently debated among industry observers and betting enthusiasts in the sports betting Twittersphere.

For high-staking professional sports bettors, particularly those who have already had legal bookmaking accounts restricted or closed, the ability to bet large sums into transparent and liquid markets with razor-thin margins without fear of stake restrictions is a tantalizing proposition.

As is the ability to trade markets in-play with the goal to lock in a profit, or to ‘green up’, which is made all the more attractive by the stop-start nature of most US sports.

Indeed, the emergence of exchanges in Europe two decades ago gave rise to a cohort of dedicated exchange users. Armed with one-click trading software, ladder interfaces displaying market depth, and even bots programmed to trade autonomously, this new breed of unemotional sports trader has carved out a living backing and laying everything from cricket and soccer to tennis and golf.

However, exchanges are also becoming a magnet for semi-pros, sharp players, value-seekers, layers, arbers, and matched bettors – the latter exploiting bookmakers’ free bets to lay the same selection on an exchange and guarantee a profit either way.

Across the pond, there are four leading exchange operators, with the quartet headed up by Flutter Entertainment- owned Betfair, the runaway market leader for almost two decades. The chasing pack consists of Betfair’s long-time smaller rival, Betdaq, which is part of GVC Holdings and recently introduced 0% commission on sports like tennis and golf; Cork-based Matchbook with its emphasis on US sports; and Smarkets and its fintech-like approach to exchange betting, including the integration of live price charts and a vision of treating sports betting like a financial commodity.

Former UBS analyst Jason Trost was just 26 when he launched Smarkets in London back in 2008. To date, this exchange, which is backed by Passion Capital and Deutsche Telekom, has processed nearly

$16bn in trading volume and currently employs around 120 people across its London, Malta and Los Angeles offices.

As legal sports wagering rapidly spreads in the US, Trost is bullish about the potential of exchanges. “Because America is so big and because of the number of sports, it is definitely going to be a big proposition,” the 38-year-old American tells EGR NA from Smarkets’ office in Downtown LA.

“Exchanges are already big in the UK, so I don’t think it is like reinventing the wheel – it’s that around 5%-10% of [US] customers will want to use an exchange, just like the UK.”

Rule of law

Despite the advantages of open, peer-to-peer platforms, there are naysayers, or you might describe them as realists, who argue that exchanges face an uphill struggle in the US due to unfavorable conditions.

For one, the idiosyncratic patchwork of sports betting legislation so far means some state regulations are unworkable for an operator of an exchange taking a small slice of commission (1%-5%) on winning wagers and trades.

So, providing exchanges are given the green light, commission would probably need to be hiked above 5% in many the season on actually them” instances to make it pay for the house, and even that may not be enough in some states.

A case in point is Pennsylvania’s stifling regulations, principally the exorbitant $10m online sports betting license fee and the 36% tax on gross revenue. This is by far the highest tax rate among the 14 states with legal sports wagering up and running.

SportTrade app

“It’s even more than unworkable,” says Alex Kane, CEO and co-founder of Philadelphia-based peer-to-peer sports trading marketplace Sporttrade.io. “I think the word is impossible. If a state like Pennsylvania had a 0% revenue share [with a land-based license partner], and a zero-dollar licensing fee, it would still be impossible.”

Kane is equally dismissive of a state like Illinois where lawmakers have limited the online-only betting licenses to a maximum of three and attached a staggering $20m price tag per license. “For an exchange it’s not even a possibility,” he remarks.

“So, you have Illinois and Pennsylvania, and it’s likely Florida, Texas and California are going to pass bills that are terrible and are very restrictive. I think the states where it is possible are ones like Maine, Massachusetts, Indiana, Iowa, New Jersey, Tennessee, Georgia and Virginia.”

But then comes the old issue of market access as many states have, and will have, limited online licenses and brands, or skins. Another challenge, Kane suggests, is simply educating potential land-based partners about exchanges.

“You’re dealing with people that don’t know how sports betting works, much less a peer-to-peer thing. A casino doesn’t care about lower costs for their bettors or the user experience you are going to give. A casino cares about, ‘How much money you’re going to give me upfront and how much money am I going to get each month?’ It could be the worst app in the world, but they don’t care.”

The Smarkets betting exchange

Pooling resources

Besides significant funding, building a vibrant and fully peer-to-peer sports betting exchange will require interstate compacting. It’s a similar scenario to online poker where player liquidity is akin to oxygen.

For instance, in New Jersey where Betfair has operated a horseracing exchange (12% commission on winning bets) since 2016, the population is a modest 8.9 million. Ideally, the bigger states would be needed to come online and allow compacting to reach the desired critical mass.

The elephant in the room when it comes to interstate pooling is the 59-year-old Wire Act. With the DoJ having lodged an appeal after the US District Court for the District of New Hampshire found in favor of the New Hampshire Lottery Commission regarding the judgment on DoJ’s revised opinion of the federal Act, the case now heads to the First Circuit Court of Appeals.

Former US Vice President and 2020 Democrat presidential candidate Joe Biden has voiced his opposition to the Wire Act and, whisper it quietly, there is growing confidence that the DoJ will be defeated.

“I’m optimistic that at some point the Wire Act will get repealed or meaningfully reinterpreted so you should be able to do exchange betting between two legal jurisdictions,” says Trost.

Obviously, an exchange will still need to go to the trouble and expense of securing licenses in those states where compacting is permitted.

Speaking hypothetically, Kane says: “If Betdaq is in Indiana and wants to pool liquidity with New Jersey, Betdaq still needs to get a license in New Jersey.

Those licenses are seven figures upfront and that just gets you to the green flag. There’s rev-share, there’s minimum revenue guarantee, and there’s a minimum marketing spend.”

One way to circumvent the intrastate compacting barriers is for exchange owners to ‘seed’ their own markets or allow professional and organized syndicate market-makers to provide liquidity in return for favorable commission rates and rebates.

“The more [liquidity] that comes from market-makers, the less the Wire Act really matters,” Kane states. By having the world’s largest betting exchange market-makers with its in-house trading division, Trost points out, Smarkets can put this competitive advantage to good use.

“We don’t want to do this if we don’t have to, but we can put an exchange in every state and kind of synthesize liquidity with our own in-house market-maker. Because other exchanges don’t do that as well as us, they would struggle with having ring-fenced exchanges.”

Persona non grata?

Yet there are certainly no guarantees the opaque and mysterious world of market makers will be allowed or licensed by state regulators. It’s one of the chief reasons why Joe Brennan, CEO of sports data, betting and fantasy sports outfit SportAD, harbors doubts about US exchanges.

“It’s not likely that unlicensed market-makers would be able to operate within a peer-to-peer market in the US,” he stresses.

“There would be no guarantee of transparency into who these market- makers are and why they are setting odds and prices their way. It would be viewed as ripe for potential corruption and something the leagues would no doubt come out strongly against.”

Furthermore, you could argue another barrier to the peer-to-peer model taking off is the inherent nature of US sports betting in that it ostensibly consists of two-way markets: moneylines, point spreads and totals. When wagering on one selection you are effectively laying, or betting against, the other side.

These tight two-way markets will mean exchange users should encounter -103 or perhaps even -102 or -101 lines, although once you’ve paid commission of, say 5%, on a $100 bet matched at -103, the potential winnings, including stake, shrink from $197.10 to $191.95.

This is practically the same returns as the same bet placed with a bookie offering -110. “If it’s all two way markets, it’s very difficult because you are dealing with -105 lines all the time,” says seasoned gambling industry professional and former Betfair employee Scott Ferguson.

“PointsBet, for example, will go -105 lines. By the time you take commission, there isn’t really a great deal of difference [to bookmakers’ lines].” Indeed, the prevalence of two-way markets is partly why Betfair struggled to take off in Ferguson’s home country of Australia.

That and the fact online in-play betting is outlawed there. Furthermore, two-way point spreads on US sports aren’t always that conducive to trading.

If, for example, you bet the Baltimore Ravens (odds of -105) at -5.5 points and they race into an early lead, there needs to be someone on the other side to allow you to green up when the main handicap market close to parity now being presented to the customer has the Ravens at -12.5.

Smarkets founder Jason Trost

Revolutionizing betting

Ahead of Betfair’s launch in 2000, founders Andrew Black and Ed Wray paraded a coffin with “Death to the Bookmaker” daubed on the side around Russell Square in central London. The tongue-in- cheek publicity stunt near to the startup’s offices essentially proclaimed that this peer-to-peer online betting marketplace would disrupt the industry and lead to the demise of the traditional bookmaker.

Yet while Betfair, commonly referred to in the early years as the eBay of betting, soon became the world’s largest betting exchange, processing more transactions per day than the London Stock Exchange, Betfair claimed, it failed to go mainstream.

Indeed, the tough nut to crack was the casual gambler confused by the concept of laying and the fact the site featured exchange-friendly decimal odds instead of UK-centric fractional pricing. In fact, Betfair eventually pivoted away from the exchange and launched its own sportsbook in 2012 to compete with the book-making industry, leaving the exchange to cater to the aforementioned ardent users.

However, a greater share of recreational US bettors may well be drawn to an exchange, partly because of the novelty of taking the role of bookmaker, but also the appeal of being able to trade markets before and during a game.

In addition, the American public has become more au fait with trading, albeit financial markets, thanks to the likes of Ameritrade and E*Trade bringing the activity to a wider audience. Applying similar concepts to sports betting won’t be all that alien to some.

“I think there will be a learning curve like there was a huge learning curve in the UK,” Trost says. “What you will have is the people who are really interested in it and will go through the pain to learn about an exchange. The people who aren’t, won’t. Betfair tried for years to get recreational people to use their exchange and, ultimately, they failed.”

Ferguson, who spent six years as Betfair’s head of education, says it requires those bettors who are patient and curious, although he acknowledges some people will be almost impossible to convert.

“The small guys see plenty of offers elsewhere for free bets, ‘justice refunds’ and all that sort of stuff,” he says. “They would rather go and bet with a bookie than an exchange.” In the UK, Betfair has been running a series of TV commercials and online video tutorials of late to try to explain, using real-world examples, how its exchange functions.

Fronted by British actor Clive Owen, the campaign is the company’s latest eff ort to acquire new customers, although Ferguson believes “the horse has already bolted.”

For exchanges to be viable in the US, Kane insists it requires what he calls a “bifurcated experience.” One interface for traders and one interface for casuals. “I show [recreational] customers Matchbook, Smarkets and Betdaq and their heads spin 80 times over and blow up.

For an exchange to work here in the US it has to look and feel like a sportsbook for sports bettors. You have to strip it down to where a user doesn’t even know what an exchange is. And your value proposition has to be more than, ‘Hey, we have -105 or -107 versus -110.’ It has to be about a fast and smooth experience.”

The best of both worlds

In a bid to target the more traditional sports bettor, Smarkets officially launched a hybrid version of its exchange and a sportsbook last summer, with standalone mobile sports and political betting app SBK.

Built by Smarkets’ LA engineers, SBK takes the current pricing from the fi rm’s exchange and presents it in a clean and polished bookmaking app that resembles financial brokerage platform Robinhood. Together with its social-optimized interface, competitive pricing, and proprietary software to help separate it from the vanilla sports betting apps built on outsourced tech stacks, Smarkets hopes to disrupt the mass-market betting sector.

And last September, Smarkets planted its flag in the US sports betting market by inking a multi-million-dollar, long-term partnership with Nasdaq-listed Full House Resorts. The deal enables the exchange to introduce SBK in Indiana and Colorado.

“For me, it’s what interface do customers want,” Trost says. “With Americans being crazy about trading, there will definitely be a customer base that wants an exchange interface and definitely a big segment that wants a bookmaker interface.”

He adds he very much views bookmakers as simple versions of an exchange. “People think of bookmakers and exchanges being apples and oranges, but one is just a very simple apple and one is a complicated apple.”

Despite the potential popularity of exchanges – be it true peer-to-peer models or platforms slanted towards market-makers – there are unavoidable speed bumps ahead.

Question marks hanging over the use of these market makers and increasing fragmentation caused by state-by-state regulation restricting liquidity are two obvious concerns. And often the legislation being introduced is far from ideal, and that’s if it even includes online.

“The biggest challenge is the regulatory framework, it’s not the technology,” Trost explains. “Each state is doing it differently and this also impedes progress.”

Indeed, a pragmatic Ferguson neatly underscores the triumvirate of key obstacles he feels hinder the rollout of exchanges. “The hard part is always going to be the taxation, the Wire Act and two-way markets. They don’t really do much for an exchange.”

Yet with legal US sports betting mushrooming into a multi-billion-dollar industry, these challenges aren’t going to deter some folks from trying, that’s for sure.