Risk Management for Sports Wagering in a Casino Environment

Casinos don’t carry insurance policies on the money wagered so they must manage the risk themselves. When you throw sports betting into the mix, it gets complicated. Former casino executive and regulator Richard Schuetz explains why the “leasing” of sports book operations might not be the best idea for every casino.

Risk Management for Sports Wagering in a Casino Environment

I recently lived in the country of Bermuda for several years and the law of Bermuda insisted that people drive their cars on the left side of the road. Because I have a tendency to daydream when I drive, I opted not to have a car because for my entire life I had driven on the right side of the road. I thought my decision to skip driving in Bermuda was the best decision for me and for the people of Bermuda. To get around on the island, I relied on taxis and public transportation, and one of the components of Bermuda’s public transportation system was a fleet of water ferries.

Every morning I would trek down to the dock and climb on the Pink Ferry (a system route identifier and not the ferry’s color scheme). This was a small ferry and there were a number of expats who rode this ferry with me, and these expats were primarily from the United Kingdom. Many of us would sit on the open-air top deck of the Pink Ferry (when it was not raining) and visit on a wide variety of topics as we rode across the harbor to the capital city of Hamilton. It was also the case that many of these folks were involved in the insurance, reinsurance, and captive insurance industries and had strong backgrounds in quantitative analysis, a reality that gave them both an interest in and understanding of gambling and betting. Like gambling and betting, the many varieties of insurance industries are all about risk management, and it was this reality that often provided a common language between my many expat friends on the top deck of the Pink Ferry.

Since the Supreme Court’s decision on the Professional and Amateur Sports Protection Act this past May, I have been spending more time thinking about the expansion of sports wagering in the United States, and a portion of this time has been thinking about the curious challenges managing risk presents within this evolving system. State’s rights, the Wire Act, and the different models being employed across the U.S. all have implications for risk management, and my new hobby seems to be in engaging in little mental exercises about all of this. I am also a bit bewildered why there has not been much discussion about risk management since that fateful day in May.

There are many interesting discussions that can be had about risk management as sports wagering evolves in the U.S. The process by which a multi-state operator does or does not manage risk across state boundaries is terribly interesting to me, and should be of interest to each state involved for it potentially influences handle, win, tax revenues, and the use of non-state authorized sports betting providers. The role of the unregulated bookies in assisting both the legal wagering operations to manage risk, albeit possibly unknowingly, as well of the management of risk for themselves using the legal environments to hedge or arbitrage is also of great interest. Another interesting area is found in the process of managing risk in a commercial casino that does not allow online wagering outside of the casino’s footprint. It is this topic that I will focus upon in this article for it is the easiest to explain. It is also a model with which our friends on the other side of the Atlantic are least familiar, for the differences between a U.S. casino betting operation and betting across the pond are very different.

I was fortunate to be involved with several books while a casino executive in Las Vegas, and one of these was the Stardust book, and the Stardust was something of a legendary place in the betting world. The Stardust established the betting lines for not only Las Vegas, but also the world for U.S. sporting events. The Stardust was also known for taking serious action, with an emphasis on the serious. It was also a great place to hang out, and while we did have some phone betting accounts, the vast majority of our betting action came through the front and side doors, or one of our hotel rooms.

At one time, people who many considered to be bad guys, if you catch my drift, managed the Stardust. The Nevada Gaming Control Board did request that several of the principals of the Stardust leave the state, and pay a substantial fine as they were leaving. The movie Casino was loosely based on the Stardust experience, if that helps the reader appreciate what the Stardust was, and wasn’t. I also think it is important to mention that I joined the property after the alleged bad guys had left the building, although maybe one or two got left behind. I would also suggest that these alleged bad guys were very capable operators who really knew the casino and sports betting businesses, albeit they were arguably bad accountants, especially when it came to measuring the revenue contribution subject to Nevada’s gross gaming revenue tax. They could run a joint, however, and that should surprise no one for many alleged bad guys had been running gambling in the United States for a very long time, and they knew the business well. I often enjoy suggesting (tongue in cheek) that, as far as casino operations go that organized crime was better at it than unorganized crime with unorganized crime being the big casino gaming corporations of today.

My title at the Stardust was vice president of casino operations and that left me with responsibility over the book there, as well as all other gaming departments. The book manager at the time was Scott Schlettler, and Scotty was something of a legend in the betting world. I was honored to be associated with Scotty, and found him to be extraordinarily honest, honorable, and smart. I have also previously mentioned in print that managing Scott was like herding cats, but the proof of the pudding was in the tasting, and Scott ran a great book, and taught me much about the business.

I stayed quite close to the book during my tenure at the Stardust because it was an important source of betting and casino revenue, it was great fun, and I also needed to stay between Scott and the Boyd Group’s corporate folks and some of the agents from the Nevada Gaming Control Board. Neither of these entities had as much patience for Scott’s tendency towards directness as I did.

At the Stardust we had a fairly aggressive attitude towards risk acceptance at the book. Part of this was because I generally accepted larger wagers in all casino departments than did other executives in properties of like circumstance, with the notable exception of any property that had a Binion named Benny or Jack in an ownership position. More importantly, we accepted a higher risk position in our book because we perceived it to be of benefit both to the book and the other casino revenue generating departments. We had long-term faith in our people and lines, and managed the book in a way that reflected that belief.

The book in the Stardust generated enormous foot traffic for us creating a tremendous energy at the north end of our building (a building that is no longer there). It was also our observation that sports bettors enjoyed other casino opportunities, such as dice, poker, blackjack, or guessing the age of a cocktail server or pit boss, or who could flip a coin and get six straight heads (around real players, there is always peer-to-peer action). There is also a fabulous story of the time the FBI was told that a bagman would be heading out the back of the building one night, and when the FBI intercepted him and grabbed his satchel, it was full of chocolate chip cookies. Hey, even alleged bad guys just need to have fun sometimes.

The Stardust had a fairly regular customer base in the book, and this was in part a result of the fact that players knew they could get down at this store. Another segment of the market we owned was essentially every casino executive in town who liked action, and that is probably a bigger number than most might guess.

We believed that it was not a particular problem if one of our players was to beat us, for it seemed that this often resulted in a temporary loan more than a revenue loss. I recall few instances where a player would win big and then give up the betting habit, and as a casino operator I had no issue with an individual with a wad of money in his pocket who was feeling that he was smart and/or lucky. This is about as good a situation as we could hope for in a casino. There were a great many traps within the Stardust beyond the book, and it seemed that many of these winners stumbled upon one of these traps. Moreover, no sooner was a sporting event over than another would start, and again, a player with a wad of cash in his pocket who was feeling smart and/or lucky could find much to like about that next event.

Part of what allowed us to do this was that we had a staff that had been behind the counters for a very long time, and they had been trained and watched by Scott. All of this experience provided the advantage of being able to sense when something was not right. The staff also communicated well, and information was not compartmentalized. We would even pick up the phone from time to time and chat with the Control Board or the FBI, tell them what was bugging us, and what we knew about the moves and the source of the money. They always took and listened to our calls, even if we could not pinpoint exactly what was bugging us. The point was, they respected our staff’s opinions and insights and saw us as an asset in being concerned about the integrity of the betting process.

We were also willing to accept a smaller hold percentage in our book because we thought that our aggressiveness, while lowering our hold percentage, actually increased our total revenue, both within the book and within the casino. Big sports bettors, when they play another game, generally also bet big. That is just what we believed, and we could never disprove this theory. And we certainly had greater volatility, but I had a boss who trusted my opinion that this strategy was necessary consequence of running a book to generate a higher level of overall gross gaming revenue and establish a name and identity on the Strip. We also did not automatically run off players for being too good. We had this crazy idea that knowing what the smart money was doing allowed us to refine our lines, and make better decisions. We also respected our players and I would guess that statement will make more sense to the old school folks rather than the new.

Another important reality of operating a book within a casino is that often times our high-end table game customers would want to make a large wager in the book, and that was cool with us, subject to my authorization. I knew going in that we could not even come close to balancing, but the last thing we wanted this customer to do was start visiting other casinos to get the desired action. That is when a casino runs the risk of losing a customer to a competitor, and the offering to specific individuals of very high limits is referred to as dealing to faces. We felt very comfortable in dealing to faces because even if the player beat us in the book, we normally got a shot at these winnings in the table games department, and I generally was more concerned with getting the money back than I was with which gaming department got credit for it.

It is this last example that can present challenges to a book that is distinctively separate from the rest of the casino operation, and yet these types of management contracts are finding acceptance with some operators in some markets today. In this instance the book is stand-alone by way of a lease or some other arrangement, and it needs to manage its financial performance independent of the rest of the casino. The facility may have a baccarat player who just won or lost a ton of money, but the separately operated book may not desire to risk its financial wellbeing to accommodate this player’s desire to unload a bundle on some upcoming sporting contest. I believe that this is a clear drawback for these types of arrangements because the segregation can allow for the money and the player to walk out the front door, and once the money and player are out of the building, it is harder to win the money and the player back. There are a few other twists that are unattractive about these relationships including issues with casino credit and AML concerns, to mention two, but that is another story.

The betting business is all about the management of risk, and there is certainly no right or one-size fits all model. A store needs to understand what it is trying to accomplish within the parameters of the law and regulations, and accommodate this goal with an appropriate risk management strategy. Anyway, this is some of the stuff that I have been thinking about that made me remember those great discussions we used to have while riding the Pink Ferry across the harbor to Hamilton with my expat friends.

Articles by Author: Richard Schuetz

Richard Schuetz started dealing blackjack for Bill Harrah 47 years ago, and has traveled the world as a casino executive, educator and regulator. He is sincerely appreciative of the help he received from his friends and colleagues throughout the gaming world in developing this article, understanding that any and all errors are his own.