Sporttrade launched its mobile sportsbook in Colorado on Tuesday, promising “a differentiated and more fair product to eligible sports bettors within the Centennial State,” according to a press release.
Prior to the Colorado launch, Sporttrade had launched its stock market-like sports betting exchange in a single state, New Jersey. But its platform in Colorado will look slightly different than its Garden State offering, as regulators in the former state are still working with Sporttrade and a rival exchange, Novig, to cobble together rules concerning how exchanges will operate there.
In Colorado, as Sporttrade founder and CEO Alex Kane pointed out in an interview with Sports Handle, “an operator can offer exchange wagering as long as the [state] commission approves the commission rate.” Colorado’s Limited Gaming Control Commission (LGCC) set about authoring a more comprehensive set of guidelines in June, but as Sports Handle reported last week, it decided to table approving proposed rules due to concerns about how “external market makers” would be taxed, licensed, and regulated.
In the current set of proposed regulations, an external market maker is defined as “an entity or authorized person with the State of Colorado, other than an individual acting in their personal name within the State of Colorado, that has funds on deposit with an internet sports betting operator or sports betting operator by placing wagers, and buying and selling wagers on the exchange.”
“Sporttrade was ready to comply with those rules, and Colorado said they didn’t want to approve the new regulations,” said Kane. “So we said, ‘We’ll launch as an ISBO (internet sports betting operator) and will voluntarily not offer exchange wagering.’
“We basically worked with the regulator to say, ‘Well, if you’re not comfortable with an operator offering this type of wagering, that’s fine.’ So we went into our system and eliminated the ability for consumers to place an exchange wager, which is defined as two bettors playing against each other on the opposite end of a price. The only way that can happen in our system is a limit order, so we eliminated that from our system.”
In even simpler terms, the only difference between the platform Sporttrade has gone live with in Colorado and the platform available to New Jerseyans is that a bettor can’t ask for a better price in Colorado. Rather, they must wait for their desired price to be offered before locking in the wager.
The eBay of sports betting
While Sporttrade makes money by taking a 2% commission — or vig — from every trade, the upstart exchange Novig does as its name suggests. Instead of charging a fee, Novig, which has yet to go live in any jurisdiction but hopes to launch in Colorado this fall, plans to generate revenue from institutional traders, internal market makers, and its “premium analytics tools,” according to a Q&A on the company’s website.
“We’re actively exploring different B2B offerings as well,” Jacob Fortinsky, Novig’s co-founder, told Sports Handle. “We have an internal market-making team. We have our own proprietary models on the research and pricing side. We’ve hired Ph.Ds and former quant traders on Wall Street.
“The actual technology that’s powering sportsbook models is fairly outdated. Some of them are quite sharp, but we think there’s a lot of room to apply state-of-the-art machine learning and methods to these markets that we think are incredibly inefficient. We think we can do a better job establishing fair market.”
From a user-interface standpoint, Novig looks a lot like a standard sportsbook, with spreads, moneylines, and totals listed. But lift up the hood and one will find that things function quite differently than the house-vs.-bettor status quo.
“We are creating an environment for anyone, whether it’s an individual or institution, to either take the best price on the market or offer their own,” explained Fortinsky, whose company completed a seed-funding round last week involving a group of investors that includes Hall of Fame quarterback Joe Montana. “It sort of functions like eBay. It’s entirely anonymized, so you see the best price that someone’s willing to offer. You can either play at those prices or you can list your own price. That’s how we enable peer-to-peer betting.
“Most two-sided marketplaces have the challenge of generating early stage liquidity. So in order to overcome this cold start, we ourselves are trading. That’s the internal market-making. In the stock market, if you’re buying a share of Apple, there’s some chance you’re buying it from Joe Schmoe, but realistically, you’re buying it from a Citadel or J.P. Morgan that’s selling millions of shares. We put individuals, institutions, or ourselves on a level playing field. On eBay, let’s say you want to sell a pair of AirPods. The best price someone’s selling at is $120 and you undercut it at $110 and become the one who’s listed at the top.”
‘Toeing an interesting line’
If Novig is approved to take wagers in Colorado, it, like Sporttrade, will enter the market as a traditional sports betting operator.
“It’s gonna be the same user experience, but for now we’re not going to open up API access,” said Fortinsky. “In the future, what we want to do is open up our API so users don’t have to go into our app to place bets. They could go directly through our exchange and could automate a lot of their trading and pave the way for high-frequency trading. Instead of clicking one button here and one button there, you can automate a lot of it and allow users and market-makers to trade in micro-second increments.”
What Fortinsky, a Harvard grad, is articulating should make perfect sense to white-collar finance types. But the challenge for sports betting exchanges like Sporttrade and Prophet, which have achieved modest success in New Jersey, has always been how best to translate their products into terms Joe Six-Bucks can understand.
“I think that 99.9 percent of customers don’t even know we’re an exchange and it won’t be why they will or won’t use it,” said Kane. “They care about great prices and great liquidity. We have aspirations to be a very big player, but are going to go about it in a manner that’s more responsible and cost-efficient.
“The customers that use our app love it. They never leave. You’re gonna get a great price, everyone gets the same limit, you can re-bet, get the best liquidity, no delay, and you can cash out some or all.”
Added Fortinsky, “We’re sort of toeing an interesting line. There’s going to be different language and user experience catered toward sharper bettors and hedge-fund bettors than casual bettors. For more casual bettors, the selling point is this is the first commission-free betting platform.
“It’s not enough to be the most profitable experience for users. You need to offer the best user experience overall.”
‘The most feared words in the English language’
Lloyd Danzig is a managing partner at Sharp Alpha Advisors, which has invested in the P2P-focused Prophet Exchange. He thinks betting exchanges offer the industry an opportunity to reach an untapped — and affluent — customer base.
“Growth in the U.S. sports betting market has been concentrated among companies targeting recreational, high-margin, price-insensitive users,” said Danzig. “There is a substantial underserved cohort of high-volume, price-sensitive, expected value-maximizers who haven’t yet found a home. Betting exchanges are the best vehicles for capturing this liquidity while attracting institutional participants as market makers.”
Other industry observers aren’t as bullish. Referring to Novig, Brendan Bussman, managing director of B Global, said, “They’re the latest on a list of people who’ve come along trying to do an exchange. People have flirted with this since the repeal of PASPA and it’s yet to be determined if they can make it stick.”
“I think it will take time,” said Chad Benyon, a managing director and equity analyst at Macquarie Securities. “I think it’s still going to be an area that’s gonna take a while from a regulatory standpoint. What we’ve seen in gaming in general is if an item can be regulated, it’s incremental, and there are consumer protections, they take a hard look at it. Any time they’re sort of reinventing something, there’s going to be friction.”
About six years ago, Bill Pascrell III, an attorney and lobbyist with Princeton Public Affairs Group, was hired by a handsomely capitalized global securities company that was considering starting a sports betting exchange.
“They decided not to get into the market,” said Pascrell, who declined to name the client. “They just decided to hit pause. Now they’re even less interested. If that company, with millions of customers, bowed out, what makes Novig and other companies think they’re going to be successful? I hope they are, but it takes massive capital.
“I’m a big proponent of exchanges, but it’s hard. You have to build liquidity. How do you build liquidity? You have to spend massive amounts of money on marketing, plus you have to educate.”
Referring to Novig’s co-founders, Pascrell added, “Jacob and Kelechi [Ukah] are very smart guys. I just hope they have enough capital for a runway of a couple of years, because it’s going to take a while to catch on. I think it’s a smart model, but you’ve got to have massive money to come into the exchange market.”
The wonkier the discourse, the more anxious Bussman gets.
“Be careful what we wish for on exchanges. At some point, the feds are going to say, ‘You’re appealing to a Wall Street crowd. How is this any different than Wall Street?’” said Bussman. “Warren Buffett is the biggest gambler alive, period. The problem is that’s federally regulated, and a lot of people in this industry don’t want to be regulated. Exchanges make me incredibly nervous when it comes to the feds. ‘I’m with the government and I’m here to help’ are the nine most feared words in the English language.”