Under Nevada’s Senate Bill 443 passed in April 2015, a business entity could register with the state’s gambling regulators and place large bets with licensed Nevada sports books on football, basketball, boxing and other sporting events.
Some believe the new law will have no tangible impact, while others believe it will significantly benefit Nevada by increasing its sports wagering handle. Most likely, the long-term outcome will be something in between. The new law will result in a more robust wagering market with higher handles at the expense of lower margins. The change will also squeeze smaller books, pushing them to form a coop or to join a betting exchange.
Bookmaking started as the business of splitting people’s opinion in half and not as a statistical science of predicting a game’s result. Casinos avoid large exposures to a game’s result, their goal is to balance their books rather than try to predict a game’s outcome. A bookmaker has to be risk averse with no large exposures to any event. A new and more sophisticated statistical system developed by a high-tech odds maker could change the traditional method of odds making.
The new law will allow entities with the knowhow of computer modeling and stock exchange style arbitrage to profit from inconsistencies and inaccuracies of odds offered by different bookmakers. The future of sports wagering business could be closer to Wall Street form of trading than Nevada’s traditional sports wagering model that also includes fans’ emotions and loyalties for a team element.
Currently, a Nevada operator can make 4.5 percent margin on head-to-head handles and can enjoy higher percentages on parlay bets. SB443 has the potential to change the current business model, making sports wagering to be part of the big data revolution. Computer modeling and use of large amounts of publicly available data on past performances of athletes will allow Wall Street style program trading and arbitrage hedging. These new techniques will force those who lack sophisticated risk management tools to upgrade their software or join a larger book.
Chances are program trading algorithm could exploit market inefficiencies and will identify variances between mathematical expected results and the odds offered by a book. Program-generated bets will force Nevada books to change their odds more frequently. Like any other business, for a trade to take place, there has to be two parties on each side. If a book shies away from a bet offered by an entity because it doesn’t have the confidence to take the wager, it will be turning down business opportunities and will be hurting its reputation and its customer base.
By having higher percentage of wining bets than losing bets, program traders that develop better systems will thrive at the expense of those who develop inferior products. These entities will also win against those books that lack sophisticated risk management tools to shield themselves against the better-equipped traders.
Traditionally, Nevada sports book managers have worked together to avoid big bets that would unbalance their books by a large amount. Generally, a teamwork strategy works within an inefficient and a monopolistic market, but with the internet and mobile wagering already gaining traction in Nevada, this strategy is becoming more difficult to sustain. If one of the licensed operators deviates from this strategy and also uses an algorithm that is at par with the traders, it could confidently evaluate each betting opportunities on real time basis and take away market share from its competitors.
Currently sports handle in Nevada is a tiny fraction of the illegal domestic market, and the business generated by international bookmakers is much larger than the business generated by Nevada. Even though runners provide hedging for illegal bookmakers, they are not the most efficient market forces, and over the years, Nevada books have learned how to protect themselves against these bets. As online and mobile wagering is becoming the norm, a more robust and automated risk management tool is vital.
One can debate why a well run computerized wagering entity will even bother with Nevada’s relatively small market when it can already exploit the imprecise odds offered by non-Nevada markets who have larger liquidity, charge lower commissions, impose lower taxes and also may offer some rebates. The argument against this belief is that the new law will allow sports wagering entities that operate in different markets to legally use similar techniques used by Wall Street securities firms to hedge and arbitrage between different markets and put pressure on Nevada’s higher margins.
We cannot stop technology and we know protectionism will not work. We also don’t need to worry too much about the impact of SB443 on the casual bettors. There will be new entities entering into the marketplace offering data and information catering to the casual bettors who place bets purely for the pleasure associated with betting in their favorite teams. Similar to the stock market and the travel related businesses, consumers will be the ultimate winners of new technologies. Casual bettors will end up receiving better and more convenient offerings.
With more readily available data, rational players will place their bets closer to the game time to allow for more visibilities about the players, the weather, etc. as well as taking advantage of more information such as last minute injuries. Also new technologies will produce more wagers during a game far exceeding the current pre-game bets.
The future of sports betting is in second screen wagering, where fans, while watching a game on TV or on the internet, place in-game wagers using their smart phones and tablets. This is what will appeal to the millennials, also other forms of gaming that excite the new generation could be marketed through sports wagering products i.e. the opposite of the current model of sports books being an amenity to a casino.
Despite sports wagering’s recent growth worldwide, it is still a localized and fragmented business. The internet, mobile devices and video streaming technologies will transform sports wagering to a global and robust business. Nevada operators, not internationally exposed, will benefit from allying themselves with global odds makers to receive up to date odds for major international events such as the Super Bowl, Olympics, FIFA World Cup, Grand Slam tennis tournaments to reduce hedging opportunities by bet trader entities.
To compensate for the inevitable lower margins, Nevada books need to start utilizing new improved systems that offer more sports, more betting selections and offer more innovative in-running bets. It is up to the industry to be pro-active to embrace the new law and new technologies to make Nevada the de facto world-class betting hub for other states when they legalize sports wagering.
