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Not Your Father’s Casino Game

Why sports betting is something completely different

Not Your Father’s Casino Game

After the Supreme Court repealed the Professional and Amateur Sports Protection Act (PASPA) in May, the gaming industry had a wake-up call that could lead the industry to new opportunities. Several states immediately jumped in and started offering sports wagering and many others are planning to join the bandwagon in the near future. The question now is how the casino industry will deal with the expanded bookmaking business, which has its own unique challenges.

Now that the gaming industry outside of Nevada is embarking on offering a product that is very different from anything they have ever offered in the past to their patrons, there are new questions as to how the bookmaking business will evolve, which state will dominant the business, whether there will be a tribal network and whether Congress or the government gets involved to impose federal regulation.

Sports wagering is effectively a futures contract that is closer to the options and derivatives offered by the Chicago Mercantile Exchange than those offered by a casino. Event wagering is a financial contract between a bookmaker and a bettor speculating on a future event or a series of events that has uncertain outcomes, and odds are essentially prices offered for correctly predicting the results of an event.

The main difference between sports wagering and other games offered by a casino operator is that all the elements incorporated into a traditional casino game such as blackjack or slot machines are under the control of the operator. In contrast, the content for sports wagering belongs to a totally different industry. And although in some ways, wagering on sports are similar to wagering on races, they are fundamentally different products: one is offered with risk and has fixed odds and the other is offered with zero risk and is pari-mutuel. In horse racing, casinos primarily act as a conduit between a bettor and the racetrack. And in exchange for their services, casinos receive a handling fee without taking any risks or offering any odds.

The key stakeholders in sports wagering are leagues, media, regulators, law enforcement agencies and bookmakers, and at the core of the business are the fans. In case of a match fixing or a money laundering scandal, all stakeholders will get adversely affected. Therefore, it is essential that all parties work together to ensure the integrity of the business. The main threat to sports integrity comes from fraudsters looking to make quick money by fixing the results of a match or laundering cash by betting on both sides of an event with two different operators, thus guaranteeing getting paid by one of them, washing 95 percent of their illicit monies.

To protect themselves and the industry from bad actors, over the years Nevada operators learned how to deal with integrity issues by keeping a close personal working relationship with each other as well as with Nevada regulators and law enforcement agencies. However, now that the industry is spreading across the country, there needs to be common regulations between participating states combined with a digital system and a process that would deter bad actors and uncover unlawful activities.

Another challenge the industry is facing is competing with illegal bookmakers who can afford offering better odds since they have low overheads and pay no taxes. To be successful, the legal markets need to be efficient, create large pools and offer competitive odds. State-ringed sports wagering, specially for smaller states, produces small betting pools with uncompetitive prices that professionals, often called the wise guys, can exploit at the expense of the average fans. Without fans there will not be any sports wagering.

With all the historical data that is readily available, sports analysts who crunch the data can get an edge over fans who casually bet on their teams. Since statistically one only needs to have a hit rate of 53 percent to make a profit, the professionals more likely will go after the uncompetitive markets and will profit handsomely at the expense of the average player who will eventually lose interest after a series of losing streaks.

Overall, the professionals have a higher chance of profiting from a smaller market. Having an aggregated market makes the job of arbitragers and wise guys more difficult. Through interstate compacts, larger pools are created, aggregating multiple markets that will generate more liquidity, more competitive odds and lower risks for participating bookmakers.

A recent book titled Sports Wagering in America, authored by Tony Cabot and Keith Miller, analyzes the pros and cons of different scenarios from policy, economics and regulation points of view. However, from a technology point of view there seems to be only two broad possibilities. One is to keep the business local—within the casino’s own resort or within the borders of the state in which the operator has the license. This approach will cause operators to avoid large wagers and offer odds with bigger spreads than other markets.

A market that is not robust will not be exciting. We saw this with poker, which showed having a small pool—low liquidity—is a major disadvantage to the business.

The other possibility is a cooperative agreement between various states to create a network that shares a common hub, i.e., an odds exchange with a centralized risk management system. Under this scenario, there will be several B2B licensed odds providers acting as intermediaries between the centralized risk management operator and licensed operators.

The best solution to combat match fixing and money laundering is having one or two centralized hubs that follow a common protocol. And the ideal technology is use of a private blockchain network with a secure database structure that assures privacy and records a wager as a smart contract between the bettor and the book, with built-in logics to detect and report suspicious wagers to regulators, law enforcement agencies and the leagues. With today’s technologies, these goals are achievable.

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