Taste of America: How US entrepreneurs are combining financial trading with sports betting

“This industry has been around a hundred years and there’s been literally no innovation.” So says Scott San Emeterio, CEO of tech start-up Ball Street Trading which is trying to bring something new to the online betting space. San Emeterio has a point. Online sportsbooks are still based on broadly the same template as the sheet paper football coupons that were laid out in British betting shops decades ago. And for decades there’s been no need for major changes, because customers are familiar with the format and, after all, why fix what doesn’t really need fixing? Instead innovation has been largely around the fringes; speeding up bet placement or offering a slicker form of cash-out for instance.

However, the US betting market is not bound by the same history and traditions as Europe, meaning this famously innovative nation has a chance to do what it does best: reinvent the metaphorical betting wheel.

One of the early themes emerging from the market is a focus on peer-to-peer trading and betting with a financial bent. If Britain is a nation of shopkeepers, is America a nation of traders? “There are more people here who are familiar with how markets work than understand betting,” says San Emeterio.

“I think it’s in everyone’s best interest to adopt a market format with percentages rather than -110 for example. In the US specifically, the average 22-year-old has much more information and ability to get up the trading learning curve than I did. And many of them were involved with the crypto boom, so understand how markets work through their Binance or Coinbase accounts.”

San Emeterio aims to tap into this trading proclivity with a platform that lets users trade live sporting events. The system mimics events-prediction market PredictIt, where the winning choice of two pays out at 100 cents and the loser pays 0 cent. So, in a true 50/50 match-up, either side would cost 50 cents. That middle point moves up and down as people buy and sell, reflecting the changing win probabilities in a given match. Rather than betting against peers, however, Ball Street users are essentially buying and selling from the house as a way to get around early liquidity issues.

Ball Street’s concept in action

Ball Street is initially pitching its market concept as a free-to-play game, with DFS or poker style tournaments based around who can make the most money trading a given match, but San Emeterio says it could migrate those customers to real-money gaming down the road. “The people playing this are used to financial markets,” says San Emeterio. “It’s a trading platform that happens to use sports as the commodity.”

Trade away

Sporttrade is another start-up looking to bring financial concepts to the betting world, with its product more closely mimicking a pure betting exchange, albeit with odds also presented as a percentage chance instead of US or decimal odds. The fact both platforms are choosing to do away with odds altogether is telling of their ambitions.

“We have a lot people asking for American odds or different point spreads but that’s not what we want to achieve,” say Sporttrade CEO Alex Kane. “We want to target non-bettors who aren’t already using a sportsbook who we think we can attract.”

“We think if we get 1-2% on the NJ userbase we’ll do well,” says Kane. “That’s a lofty goal but we can get a few users highly engaged.”

Predictably, in a market where competition for screen time comes from the likes of Netflix, a key focus for both companies is making the product as simple to use as possible. Both said they and their friends had picked up the Betfair Exchange on mobile and were stunned by how complex it was.

“My friend wanted to throw his phone out the window, he was so confused,” says San Emeterio. At Sporttrade too, beta customers hated the fact there were four boxes on a given market to back and lay each team, so that was quickly trimmed down to two boxes.

Peer-to-peer

Across the board the two platforms share many similarities – but it’s perhaps no accident. They both bring elements of peer-to-peer contracts to betting, perhaps in recognition of the fact that Americans are used to gambling with one another though mediums like poker and DFS. “Certainly Americans have the appetite for peer-to-peer transactions,” says Ryan Rodenberg, a sports law professor at Florida State University.

Sporttrade more closely resembles traditional betting exchanges

Beyond that, Americans want the feeling they can actually win, says Kane from Sporttrade, highlighting one of the major early debates in the US market: account closures and restrictions. There seems to be a general feeling that restricting winners is downright un-American and that whatever ultimately becomes the dominant product or concept in the US will cater in some way to winning bettors. After all, the American Dream itself is an aspirational one.

The other commonality between the two products is the financial slant. Both products borrow ideas and terminology from the financial world, Ball Street more obviously so. And it’s a potentially very attractive market to tap into; not just the Wall Street types who might be enticed to trade NFL on the weekend, but the actual institutions themselves, who could theoretically see sports as an attractive alternative assets class being, as it is, completely uncorrelated to the wider financial markets.

It’s a crossover that’s never quite happened in European markets; the liquidity available on places like Betfair is miniscule compared to financial markets, but things might be different in the US if institutions commit early. After all, liquidity begets liquidity and there are already real-life examples of the cross-over between the two industries. Nasdaq, for example, operates a subsidiary called Longitude which supplies pool betting technology to gaming operators.

According to Nasdaq, its experience with huge volumes of high frequency transactions enables it to deliver bigger more stables pools with a wider variety of betting options. “We’re finding some really strong interest from the [betting] market,” says Longitude CEO Scott Shectman.

From Wall Street to Ball Street

“People from finance now feel comfortable stepping into gaming opportunities post-PASPA,” says Ball Street’s San Emeterio. “I think we have an opportunity to create something great here. I think the American betting markets will ultimately develop in a market format where the players feel they have an advantage over simply paying -110 to a sportsbook. Markets work. If done correctly with integrity there is no reason why it shouldn’t work.”

Alex Kane is equally bullish on the adoption of Sporttrade on Wall Street, saying: “I can tell you from the financial side, we’ve had people approach us and say they’ve been waiting for this for a while, and can they connect to our API? All of those companies see this as a long-term opportunity where they could open up a sports trading arm and invest heavily.”

The investment is theoretically a win-win-win. The bank or hedge fund develops a bot or market-maker that generates profit for the business while also providing liquidity in various markets and therefore low margins for any smaller-scale punters who have either been kicked out of normal bookies or simply want to pay -102 for an NFL side rather than -110. The exchange operator of course creams off a small margin for facilitating this transaction.

Sporttrade CEO Alex Kane

Sporttrade has also held talks with professional bettors ahead of its planned launch in New Jersey this year, with former ESPN analyst and pro bettor Rufus Peabody among those who have provisionally agreed to market-make to help get the exchange get off the ground. Peabody has been particularly vocal on social media about the limits applied to his betting activity and his support of a low-margin exchange marketplace. And he is willing to put his money where his mouth is. It’s an added bonus of course that Peabody and others like him bring some influencer-marketing exposure and legitimacy to the fledging business.

To encourage this type of liquidity-generating activity, Sportrade will also be offering beneficial commissions for its market-makers. Kane declines to share exact rates but says they will be “some way below” the planned 99 basis points (equivalent to 0.99%) on volume for normal customers. Even that rate is below European standard, with the cost charged on each transaction rather than on net profits as Betfair does.

“The American consumer hates the word fee,” says Kane, explaining the decision. “They don’t mind if they’re paying it without knowing it as part of the transaction. We thought if we take 3% of someone’s profit at the end, they’ll dislike that. But if we’re taking less than 1% on turnover, when some books are taking 8% then we could be very disruptive.”

Obstacles in the road

There are, however, a few questions to be answered for exchanges and peer-to-peer betting platforms. The first is the shark/fish ecology that plagues any P2P ecosystem, including DFS and poker, where the experts with their bots and algorithms just drain money from recreational players. It’s a similar problem for exchanges and the reason why European operators have had to introduce unpopular ‘Premium Charges’ where big winners can be taxed at up to 60% of profits.

San Emeterio speaks about segregating the retail and institutional traders to protect smaller players but that’s a long-term view and not particularly helpful for liquidity now. And where do you draw the line at who can play with who? Should pro bettors drawing $50,000 a year out of the system be forced to play with the hedge funds or thrown in with the $20 bettors?

Another question is the exchange incumbents. Exchange betting is worth hundreds of millions annually in Europe, and the likes of Paddy Power Betfair, Smarkets and Matchbook all have designs on the US in one form or another. They hold a massive advantage in terms of tech, budget and operational expertise, although they too will face the liquidity challenges unless they can share liquidity internationally – something which has been allowed with Betfair’s New Jersey horseracing exchange. Is it perhaps wishful thinking to expect a start-up to compete with a Paddy Power Betfair and its $7bn market cap? Whether regulators will even allow lay bets is another question.

Kane is not perturbed however, suggesting the likes of Sporttrade will have a significant head start over the likes of Betfair and Matchbook in terms of building a player base. “I think there’s going to be a large degree of retrofitting their current technology to the US market which could be clunky,” he says.

San Emeterio for his part sees a potentially more symbiotic relationship with the foreign invaders, suggesting Ball Street could be a useful starting building block if acquired. “If we have users, any companies that want to come to the US and acquire a user base then that could be an interesting proposition too,” he says. The founder also suggests Ball Street could be a good exchange partner for DraftKings as it expands its betting product across the country.

Ball Street’s Scott San Emeterio

Ultimately, all grand plans will rise or fall upon a single lever; liquidity. For all the visions of financial institutions ploughing money into sports betting markets, exchange concepts will still rely on recreational users to really take off in the near term. It’s never quite happened in Europe, with a market share of around 10% in recent years but, as already noted, the US has some unique flavors with its history of peer-to-peer competition and winners-first philosophy, that could prove a fertile breeding ground for exchange concepts.

The fact that Ball Street and Sporttrade exist show there is an appetite for innovation in the sports betting sector in the US, and that there is space for something more than the standard online sportsbook which has changed relatively little in the last decade. Whether Ball Street and Sporttrade are going to be key cogs in that revolution is still to be determined, but you can bet your bottom dollar they won’t be the last big thinking start-ups to try and change the industry.