Betting on the Edge

A new Nevada law will allow an expansion of sports betting in the state

The Nevada legislature recently passed Senate Bill 443, which allows business entities to place race and sports pool wagers with licensed Nevada race and sports books.

The practical impact of this new law is to allow sophisticated and well-financed professional sports betting entities to bet into the

Nevada pools. These professional sports betting entities will use computer modeling and analytical techniques to determine when the betting odds or lines are inconsistent with expected

results.

This happens with point-spread betting because the sports book typically sets the line based on the anticipated equal wagering on both teams as opposed to the expected result. When the line is inconsistent with the results generated by the computer modeling, the professional sports betting entities will place wagers.

These models typically use massive amounts of publicly available data to assist in predicting results. Some professional sports betting entities may seek and use non-public insider information regarding a sporting event to gain an advantage. This may include learning the extent of a player’s injury or the coach’s decision on starting lineups, which can be valuable information in predicting outcome.

Other professional sports betting entities are involved in arbitrage. They look to exploit differences in odds or lines between bookmakers or between betting platforms such as bookmakers that offer point-spread betting and betting exchanges.

Many of these professional sports betting entities will be well financed, as they will effectively make use of the new business entity to raise equity investment based on the perceived value of their prediction methodology. Like the success claims of some handicapping services, sometimes called tout services, some will be legitimate, others not. Some may be Ponzi schemes and others simply thieves.

A primary question is whether the legitimate professional wagering companies will even bother with Nevada. The sports handle in Nevada is only about $4 billon, while the illegal handle outside Nevada is about $1.2 trillion.

Both the legal and illegal markets are generally available through the internet, with more than 8,000 available wagering sites.

The legitimate professional wagering companies may prefer the non-Nevada markets for several reasons. The large liquidity of these markets will allow them to place much larger wagers before they are either stopped by the book for risk management purposes or the books move the line and erase the expected statistical advantage.

Second, many illegal books operate in lower or no-tax or tax-reporting environments. Third, the illegal books may offer lower commissions or rebates.

Regardless of the method, professional sports betting entities may prefer to use bookmakers that offer the lowest commissions. Bookmakers in unregulated or under-regulated jurisdictions may have advantages because they may have lower taxes, less regulatory expense and no requirements to maintain a physical sports book.

Suppose the legitimate professional wagering companies do come to Nevada. We are inviting the sharks, so the idea clearly is to promote a Wall Street-like betting market. The first question is whether Nevada will care whether its markets are exploited by professional sports betting entities that use insider information to create the expected returns that they promise investors.

The SEC, which regulates financial markets, believes that use of inside information negatively impacts the integrity of the financial markets that it regulates. Will Nevada regulators have the same concerns and, if so, how can they regulate insider trading?

Shark-infested waters also could change the nature of sports wagering for the casual bettor—those who the state is trying to attract because they spend money on other types of wagering and non-gaming offerings. Sports books have long been seen as an amenity for the casino player and not profit centers in themselves.

The advent of large professional betting operations also may negatively impact the casual bettor. They are often sports fans or sports betting fans that view betting as recreational, often consistent with fan loyalty for a particular team or for the enjoyment associated with betting. That they may end up the big losers in the equation is simple economics.

When making a point-spread bet, the bettor must pay $11 to win $10 (or some multiple of these amounts). If he wins the wager, he receives $21—the $11 he wagered plus the $10 he won. If he loses, he loses the entire $11.

Likewise, the professional sports betting entity is seeking a positive return. To overcome the house advantage, the sports betting entity in the point-spread wagering world needs to win more than 11 times for every 10 losses for bets of equal size. This would be 11 out of every 21 times or over 52.4 percent of the time. So, assuming the sharks win over 52.4 percent of the time or go out of business and the house has 4.55 percent, who are the losers? It would be the casual bettors, who will necessarily lose more than if the entire pool was other casual bettors.

The question is whether we end up like horse racing. The handle in race wagering has declined, but would be significantly worse if not for professional sports betting entities. They generate a significant amount of the handle through advance deposit wagering using computers. The sports betting entities do not go to the track. Practically no one does, because the casual bettors’ interest in the sport continues to decline, in large part because its fan base from the 1940s and 1950s is dying.

This law may have no effect whatsoever, or it also may boost sports handle and kill the sports book as we know it.

Anthony Cabot is one of the premier legal experts in land-based and online gaming, and is a partner in Lewis & Roca in Las Vegas. He is also a partner in the iGaming North America Conference.