Q&A: Inside the stock market for sports

The first 18 months of the US betting market have been characterised by an explosion in the number of completely new betting concepts from US entrepreneurs. And a recurring theme among these new ideas is the intention of weaving financial concepts into the fabric of betting. The latest of these is the Fanvest Wagering Exchange, which brands itself the stock market of sports.

But the financial-style concept is not without its dangers. Jason Trost, an American businessman and former trader, founded his UK-facing betting exchange Smarkets back in 2008, pledging to deliver a betting product with a financial bent and low margins for customers. The concept has carved out a profitable niche, but Trost himself told sister publication EGR Intel last month he underestimated just how hard it would be. Will the US be more receptive to the financial concept?

Below, Fanvest co-founder and head of product Fern Murias takes EGR North America through the firm’s imminent plans for launch and why the betting market is so ripe for disruption.

EGR North America (EGR NA): How did the idea come about?

Fern Murias (FM): So, the idea came about four years ago, when our CEO John Culver started applying some of the methods used in traditional security analysis to sports betting. So, analyzing NFL teams in the same way that a financial analyst would look at companies in the stock market. Simultaneously, he started to break down the economics of the sports betting industry, the incentives of bookmakers, and some of the structural inefficiencies of the sports gambling market in general.

EGR NA: What sort of issues did he see?

FM: Just to name a few, there’s a lack of a secondary market for betting instruments and a lack of alternatives to invest in over the long term. And then your return is not directly correlated to the asset’s performance. So sports betting is binary in nature in that you either win and double your money, or lose and lose 100% of the investment. So, if you bet on a team to cover a three-point spread, there’s really no difference if that team wins by four or by 40.
So, the goal is to create a sports derivative where the value of the asset moves as a result of team performance. So, this product would also cater to people who want to go long on a specific team in the same way that an investor goes long on a stock over multiple weeks. We set out to create a self-contained marketplace with its own logic that would allow users to trade teams like stocks and solve some of the structural inefficiencies of the gambling markets that I mentioned before.

EGR NA: What’s the underlying security here, i.e how are teams valued and investors paid out?

FM: The metric that drives all of the valuation and pricing of our assets is average scoring margin. We found that scoring is obviously the largest factor in gauging whether a team will win or lose so we base our pricing on that.

EGR NA: Do you have an example?

FM: So, if it was the Texans and the Titans playing each other, you would generate the projected scores for each team and that would be the share price for each game. Those prices will move throughout the week, based off market demand. And then after the game, we will have a post-game distribution almost like a dividend payment that will be given to the users, which is directly equal to the margin of victory or taken away from them if they lose.

EGR NA: What’s the timeline for roll-out?

FM: This year, we’re launching our phase-one product. We’ll have a weekly contest, which will be available initially and then a season-long contest that’ll come a bit later. In the weekly contest, teams are going to trade on projected scores like the example earlier. So, at the beginning of the week, on Tuesday morning when the markets open, the price of each team will be solely dependent on the opponent that they’re playing that week.

And then with the season-long, we have come up with these initial team offering (ITO) prices. We have a formula that updates the prices after each week. And again, that’s largely dependent on the margin of victory.

EGR NA: Will this be a real-money project?

FM: For the weekly games, it’s going to be free to enter but we are giving out a cash prize each week to the winner of the weekly contest. For season-long, it’s the same type of thing where it’s free to enter but we will offer a larger cash prize at the end of the season to the winner of that contest.

EGR NA: Ball Street Trading, which we’ve covered before, is doing a similar free-to-play model with plans to build an audience then potentially transition to real-money. Is that your plan too?

FM: Yeah, we are certainly keeping our options open. At this point, we’ve seen a lot of traction with the contest model in general and that’s certainly going to remain our phase-one product. And if that is successful, we will keep that going. We plan to turn on the revenue switch once we hit the post-season so we will have a post-season challenge where we actually charge an entry fee, with the same contest model. How we really envision growing is moving closer to a broker-dealer model over time where the assets that you’re trading on, the shares, can be liquidated for actual cash value. But again, we are staying nimble and seeing what gets the most traction with users.

EGR NA: So, this would become a true exchange?

FM: It would be a peer-to-peer marketplace in the sense that we’re facilitating a liquid market but users would be trading with each other. And then we would act as the house and the broker-dealer there. But we would also engage in market-making to make sure there’s always liquidity on the platform and people can get trades when they want to.

EGR NA: So, you’re not necessarily looking at RMG licensing in the near term? You’re not going to try and launch in New Jersey with real-money this year for instance?

FM: No, not this year. It’s certainly coming in the near term we hope and suspect, but not this year.

EGR NA: How would the post-season contests be classed in the legal sense?

FM: We’ve worked pretty closely with our legal team, Goodwin Procter, in terms of determining where this would come out. And I think the contest format – the post-season challenge that I mentioned – would likely fall into the game of skill category and have the same rules and regulations as DFS contests typically do. So that’s what we envision for the near term, and then as we scale up and move towards that broker-dealer model, it’ll certainly be a different regulatory tack.

EGR NA: Liquidity is key to any kind of exchange. It sounds like you guys are going to trust your pricing and you’re happy to market-make to an extent?

FM: Our goal in the early days is that any user who wants to make a trade on the platform will be able to make that trade. Obviously, we will be taking risk into account but we will certainly be engaging in market-making activities to ensure that people can always clear trades.

EGR NA: Is the tech for this built in-house?

FM: Yes, we have a technical adviser on staff who is a really brilliant guy. He is a full stack developer and has had a few successful exits. He’s architected the technical structure of the product. And then we decentralize a lot of our operations so we have been using an outsourced development firm, and then we have a few developers that we have engaged on a contractor basis.

EGR NA: And you’re pleased with the product? It is ready for prime time?

FM: We’re certainly getting there. We have a variety of features in mind and we’ve been going back and forth as to whether to try to fit everything in the initial launch or not.

The strategy we came up with is more of a continuous roll-out where we plan on releasing new features to the users throughout the course of the season. That’s something we’re pretty excited about.

EGR NA: Have you gone out to investors? What’s the response been like?

FM: We launched our convertible note offering last summer and we’ve raised over $300,000 so far via that. That funded initial product development, marketing and legal. The product development and marketing are the two big uses of proceeds right now and that is still ongoing. So, we are continuing to raise capital via that instrument and we anticipate going out for a Series A round after the season’s over and after we’ve demonstrated a successful product.

EGR NA: There are a few of these financial-style concepts floating around in the new US market. Why do you think there are so many people with financial backgrounds who want to crack the sports market?

FM: With PASPA loosening up, sports betting as a whole is taking off right now and people are starting to realize there’s been a lack of innovation in the sports betting industry for a while now. DFS is really the main innovative product that’s been launched in the last few years. I think there’s a lot of people trying to approach the market with new innovative and creative strategies. One aspect where we really feel something has been lacking in the industry is the general design, the user interface and user experience so that’s something we’ve put a great emphasis on.

We want to break down the barriers of the sports betting industry and make a product that is accessible and easy to understand for people that typically haven’t bet on sports and haven’t played daily fantasy. One area we found a lot of traction with is people who are sports fans in general and maybe they play season-long fantasy league with their friends, or maybe they work in finance or something like that. But we’ve seen a lot of traction with these devoted sports fans, who have always had a negative perception of the sports gambling industry and DFS. So we hope to create a product that will go after that underdeveloped market right now.