There’s a Plan to Bring Sports Gambling to the Futures Market

in Finance

Proponents of a new proposal before the CFTC say they’ve found a way for legal sportsbooks to manage their risk.

The futures market is often referred to as Wall Street’s casino. Now, in a twist, there’s a proposal to let casinos start trading futures.

The marriage of the gambling industry and high finance is being pushed by a cryptocurrency exchange and a Washington lawyer. Hoping to grab a piece of the billions of dollars flowing into the U.S. sports betting industry, they’ve designed futures contracts based on National Football League games and are petitioning regulators to bless them.

That could be challenging: Congress banned financial instruments involving gaming in 2010. But the promoters argue that the futures, tied to the outcome of a football game, have nothing to do with gambling. Instead, they’re marketing the contracts as risk management tools for legal sportsbooks, akin to any other financial derivative a business might use to offset potential losses or protect against price swings. They’re essentially asking regulators to think of casino operators as farmers, but instead of using futures as insurance against a bad crop they might be trying to hedge a Tampa Bay Buccaneers win.

Trading in the football futures would be limited to licensed sportsbooks, vendors, and companies that agree to help set prices and take the other side of trades as market makers. Individuals and hedge funds that may just want to speculate on the contracts would be barred from the market. “This is not a substitute for gaming,” says Thomas Chippas, the chief executive officer of ErisX, the exchange that wants to list the contracts. “There is underlying economic risk that is being hedged.”

ErisX formally asked the Commodity Futures Trading Commission in mid-December to approve the futures, setting off a 90-day waiting period so that the agency could seek comments from the public. The exchange and its partner, attorney Jeff Ifrah, have spent several months meeting with the agency’s commissioners and making their case with help from a well-connected CFTC lobbying firm, Delta Strategy Group. If the CFTC assents to their proposal, they would like to quickly offer futures for professional basketball and baseball as well.

The CFTC is treading carefully. It’s asked interested parties to weigh in on a series of questions, including whether the futures “are contrary to the public interest”; whether they could be used to influence the outcome of a sporting event; and if the products would fall under the ban on gaming contracts. If the agency signs off, some critics say the regulator, which was established mainly to police agricultural commodities and protect farmers, would be entering into territory it knows little about.

It could also in essence be putting a government stamp of approval on the gambling industry. Even if individuals are never allowed to trade such futures, giving gaming companies the ability to transfer some of their risk would allow casinos to accept more—and larger—wagers. “The only winner under this type of proposal are the casinos themselves,” says Les Bernal, national director of the Washington advocacy group Stop Predatory Gambling. “It’s going to lead to citizens losing billions of dollars more money than they already are losing.”

The CFTC’s “approval is highly unlikely,” says Patrick McCarty, who runs his own government affairs firm and as a Senate Agriculture Committee aide helped draft the derivatives provisions in the 2010 law that barred gaming contracts. He also notes that the CFTC should be wary of setting a precedent that down the road could put it in the position of doing an end run around gambling regulation, which is the responsibility of the states. “It’s like opening a door that the commission doesn’t want to go through.”

Another potential hurdle is the sports leagues themselves. In comments to the CFTC, both the NFL and the National Basketball Association were lukewarm on the prospect, saying the agency should take its time studying the issue. “We want to work with the sports leagues to make sure their concerns are addressed,” Ifrah says.

The CFTC’s decision is likely to be closely watched not only in the gaming world but also on Wall Street, where gambling is a favorite pastime of traders. Gaming is seen as a big business opportunity as well. Betting on individual sporting events, which was legalized by the Supreme Court in 2018, now accounts for an estimated $1.4 billion in annual revenue in the U.S., and data firm H2 Gambling Capital predicts that may double soon. Twenty-five states and the District of Columbia now allow sports wagering, and more are considering legalizing it.

“The numbers in this space are enormous,” says Chippas of ErisX. His company was brought into the venture after its lobbyists at Delta Strategy introduced the company to Ifrah. A criminal defense attorney who’s also developed an expertise in gaming law, Ifrah came up with the idea for the contracts and launched a business called RSBIX to design and market them. The lawyer says he’s never placed a bet himself.

In its application, ErisX is seeking approval for three different types of contracts on NFL games, each mirroring a common type of bet. One is based on the so-called moneyline, a wager on the outright winner of the game. Another contract takes into account the point spread for the favored team. And the third is on the “over-under,” or the total points scored. The futures are designed to help solve a problem in sports betting that’s cropped up because it’s legal only in individual states. That can result in the local team drawing most of the wagers, setting up a sportsbook for an imbalance that could potentially lead to a big loss.

The problem is particularly acute, the futures advocates say, with high-profile events such as the Super Bowl. In its CFTC application, ErisX cited reports of Rhode Island- and New Jersey-licensed sportsbooks losing millions on the 2019 game between the New England Patriots and the Los Angeles Rams—which the Patriots won, 13-3—because of uneven betting. The disparity, ErisX and Ifrah say, could be eased by the gaming company buying or selling futures contracts on games it’s concerned about. Sportsbooks make money on fees charged to bettors, so they try to stay as neutral as possible in the wagers they accept.

The trades would work like this: A casino in Pennsylvania, say, that’s getting too many bets on the Philadelphia Eagles against the Patriots is nervous that an Eagles win will force it to pay out much more than it’s taken in. The casino goes to the exchange and sells contracts based on the game, taking a position that the Patriots will win. The buyer on the other side could be a sportsbook in New Hampshire with the opposite problem.

Once a sportsbook makes a request to buy or sell, it will go to a central order book where other casinos, vendors, and market makers could see the offer and agree to the trade. From that point on the futures can be bought and freely sold by any of the allowed market participants before the game.

One company that’s agreed to be involved as a market maker—helping set prices and agreeing to take the other side of trades—is Susquehanna International Group. One of the largest options traders in the world, it also owns a sports betting business in Ireland, though that’s not involved in the U.S. futures effort. “It’s such a novel concept that addresses this need when sportsbooks have reached their limits,” says David Pollard, head of strategic planning for Susquehanna.

https://www.bloomberg.com/news/articles/2021-02-02/there-s-a-plan-to-bring-sports-gambling-to-the-futures-market