Betting Exchanges Near Reality In New Jersey, But Will They Succeed?

December 7, 2021
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Supporters of exchange wagering in the U.S. are looking to capitalize on increased interest in retail investing spurred by Robinhood and other platforms, but key hurdles remain for the concept to reach its potential on the sports-betting side.

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Supporters of exchange wagering in the U.S. are looking to capitalize on increased interest in retail investing spurred by Robinhood and other platforms, but key hurdles remain for the concept to reach its potential on the sports-betting side.

Two companies who offer exchange wagering, Sporttrade and Prophet, are expected to launch in New Jersey in the coming weeks and are promoting the model as a more palatable concept for many than the traditional American odds system.

“You open up DraftKings and you look at the sportsbook, you may not know what you’re looking at,” Alex Kane, founder and CEO of Sporttrade, said during a panel discussion at last week's SBC Summit North America in New Jersey. “But on our end, you use prices and probability, who doesn’t get that?”

Although betting exchanges have seen some success in the UK and other international markets, the concept has yet to be tested in the U.S. even though exchange wagering is expressly recognized as a possibility in the laws of various states.

The biggest issue with exchange wagering in the U.S, proponents have argued, is the state-by-state model that prevents the exchanges from generating proper liquidity by reaching enough players, a particular challenge in less populous states. The issue is partly a matter of federal law, given that the Wire Act of 1961 prevents the transmission of sports bets across state lines and makes it impossible for bookmakers to directly lay off wagers via any kind of centralized platform.

In addition, much like with traditional sportsbooks, the risk profile for a state-by-state model can be more volatile because of local betting trends.

“I think the other shoe to drop in addition to the state-by-state licensing is really a federalization so that the risk books aren’t siloed to each individual state,” said Dave Olsen, president of Jump Trading Group.

“That’s better for surveillance, it’s better for price discovery and it’s better for the user ultimately so that if you’re betting in Indiana on Notre Dame, that can be balanced out by people in California that are taking the other side, but not when they’re disconnected.”

Although Betfair has been successful in carving out its own portion of the UK online betting market, betting exchanges have seen only modest success as more of a niche product, making them an interesting case study in a U.S. market dominated by the pursuit of scale.

Scott Shechtman, director of new markets with Nasdaq, expressed pessimism that exchange markets would see the same type of volume, rules and consumer trust as U.S. financial markets.

“I’m not sure I see it getting as far as that, and I think there’s a danger in thinking that it will get that far,” Shechtman said. “Look overseas where this has gone on a lot longer than the U.S, it has not gotten there.

“There’s a lot working against that kind of market efficiency and that kind of improvement and innovation,” he added. “I think I’d hesitate a bit in thinking about it as automatically such a big opportunity because we can look overseas and there’s a lot of examples.”

Sporttrade's Kane pointed to the excitement surrounding retail trading in the U.S. compared with European countries, as evidenced by the “Wall Street Bets” craze earlier this year that led to higher than usual trading volume and major spikes in stocks like GameStop and AMC, as well as a boom in cryptocurrencies.

“There’s just a huge cultural difference and I think that’s why we see just a massive opportunity in this because this market’s going to be so much different in coachability,” Kane said.

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