Does the betting industry need a B2B exchange?

As noted before in these pages, the advent of sports betting in the US has led to a number of entrepreneurs thinking up completely new concepts for the market. And because this is the US, many of these ideas have a financial slant. The latest to spring up is LineLibrary, a Chicago-based start-up that wants to act as a kind of B2B exchange where sportsbooks can hedge risk.

According to LineLibrary’s mission statement, there are millions of micro positions where sportsbooks cannot hedge specific action by shifting lines to entice wager creation. “We are developing the infrastructure to help the $400bn gaming market solve these idiosyncrasies at high speed and in real time,” the company’s website says.

The concept is the brainchild of Sam Rattner, a Chicagoan with a betting background, having previously started Engine Sports, a platform that allowed sports bettors to build algorithmic betting strategies in coding programs that could then be plugged into betting exchanges.

According to Rattner, the key target audience for LineLibrary is smaller bookmakers and operators who cannot necessarily afford to hold lopsided positions in certain markets.

“The current mechanism for hedging is buying algorithmic software from third parties and using those to identify when to shift lines or when to take bets from sharp accounts to balance action,” Rattner says. “But that’s very capital intensive and we’re dealing with smaller operators who can’t necessarily afford that.”

A new way

The other main option if action does get one-sided is laying off risk with traditional exchanges like Betfair, Smarkets and Matchbook, although that doesn’t come cheap either, with Betfair typically charging 5% commission on profits. Instead, Rattner believes LineLibrary can sit on top of the current sports betting market, acting as a true marketplace. He likens sports to the stock market, where the top level of infrastructure is made up of the exchanges like Nasdaq or the London Stock Exchange. The second tier is brokerages like TD Ameritrade, eToro or Robin Hood and that then spills down to retail investors.

“Sports betting starts at that second tier,” Rattner says. “Bookmakers operate straight to the consumer, like TD Ameritrade and Charles Schwab but they are not the NYSE. And the current exchanges all either have a sportsbook or are actively trading on their own exchanges.

“If TD Ameritrade launched their own exchange, would Charles Schwab send their client there? Because I don’t know if TD Ameritrade would execute others’ trades before their own clients’. The NYSE doesn’t have a brokerage for a reason. In theory, an exchange is built for the betterment of the market and it perceives no risk because it is not involved in the market. So, having independent infrastructure allows us to be more efficient. We don’t have the overhead to make sure we are hedging our positions or making sure we have liquidity from other retail users so we can charge much lower fees than those competitors.”

Sam Rattner

The next step

The plan is for LineLibrary to fully launch before the 2020 NFL season, with a beta version going live later this year.

“Full launch is obviously more than a year away, but we’re not building an app for the App Store that you can crank out in two months,” Rattner says. “This is a corporate level product where any bugs in the code can cost people a lot of money so we need to get it right.”

LineLibrary is currently working with a seven-man team of developers and engineers with experience building financial platforms and models, while the firm’s lead engineer was formerly the principal engineer at Betfair. “A lot of sportsbooks don’t have the technical engineering horsepower in-house to manage risk so they should be building a brand and marketing, and we can be a way for them to avoid risk,” Rattner says. The firm is still hiring for more engineering talent.

Beyond just operators, Rattner is keen for providers, market-makers and betting syndicates to bet into the LineLibrary pool in a bid to create a thriving marketplace. “The financial markets are efficient because there’s dozens of parties with different needs and views, from hedge funds to pension funds to day traders, and we want to replicate that,” Rattner says. Its’s worth noting the company has datacentres in 10 cities around the world to house local operator data in the cloud in an effort to be a truly global exchange.

Surplus to demands

As explained many times before, however, what makes sense in finance doesn’t always make sense in sports betting, and there’s often a reason these innovations have never taken hold in Europe – and often not for lack of trying. “LineLibrary looks to have done a lot of work for something that isn’t explicitly needed,” says one industry trading exec, speaking off the record.

“There are currently a good few outlets for laying off risk, including guys like Colossus Bets who will take it off you, then a few more unconventional outlets like syndicates who will always take a hedge, although it’s fair to say it’s a ‘who you know’ situation.

“Then you will get hedging facilities within larger bookmaker units – you will often hear of large running accumulators being shifted to someone like bet365 or Hills via a call from a trading director. I will say it looks very cool and certainly the type that we like working with. I will keep an eye on this area.”

The trading exec adds: “I think they will have more joy with syndicates than they will bookmakers, as any of them worth their salt will want to keep their margin where they can.”

The LineLibrary exchange

There are also smaller administrative details that could hamper the growth of a B2B exchange, starting of course with the Wire Act which would seemingly prohibit any sort of national or global exchange. Will LineLibrary also legally be able to accept wagers from operators around the world, even if they do come via the cloud? Or would it need licenses in each jurisdiction? There would also be ForEx implications for “foreign” bookies wanting to hedge or withdraw.

Casino approach to betting

The idea of wanting to eliminate all risk also might seem alien to real bookmakers, according to Jeevan Jeyaratnam, a senior odds compiler and trader at Abelson Odds. “Any operator closing out positions regularly gets less volatility but also endures slower growth rates,” Jeyaratnam says. “It’s almost a casino attitude to NGR [net gaming revenue] focused on high turnover and small margin.”

Taken further, operators who have taken a good volume of bets at a bad price for them are not going to be able to simply offload that to the marketplace for free. And, on the other side of that, Jeyaratnam notes: “Any firm worth its salt won’t want to give away positive EV [expected value] by hedging out of positions all the time. Why would they?!”

He adds: “I’m sorry, this has come over as pretty damning. It wasn’t the intention but the more I look and think about it, the more I doubt its efficacy. What they are proposing simply isn’t bookmaking as we know it and I cannot see how it can prosper.”

The LineLibrary team

The concept could perhaps be more useful around one-off events like the McGregor versus Mayweather fights where operators were looking to offload some of the huge risk that was piling up on McGregor, or indeed more recently where Frankie Dettori threatened to ride all six winners on the card at Royal Ascot and bookies needed a way to reduce liabilities from that six-leg parlay.

Whether that’s enough opportunity to build a sustainable business around is another question, but if LineLibrary does deliver the low commission, low latency exchange it has promised, it could find plenty of other interest from syndicates, bettors and market-makers around the world. LineLibrary, it seems, likely has a future, just not necessarily the one its founders originally envisioned.