Risky Business

You wouldn’t think that the federal Commodities and Futures Trade Commission would have anything to do with sports betting, but it will soon decide an issue that could be crucial to the success of the industry. Gaming executive and inventor Bruce Merati (l.) explains.

Risky Business

As legal sports wagering gets more momentum across the U.S., there is a need for the American Gaming Association and the Commodities and Futures Trade Commission (CFTC) to define the boundaries between wagering and financial markets. According to recent articles by Sports Handle and Bloomberg, ErisX, a cryptocurrency derivatives exchange, is looking to trade risks associated with wagering on its platform and has requested CFTC for regulatory approval. Such trading will create overlaps between two highly regulated industries.

Trading risks of sporting events outside of gaming regulators’ oversight could have detrimental effect on sports wagering. The immediate alarm is loss of full supervision and control by state gaming regulators. If bad actors place wagers on a sportsbook it can find its way to the exchange, contaminating the records of other operators. Limiting trading participation on ErisX to licensed entities will not necessarily provide assurance to gaming regulators about the transactions traded outside their jurisdictions. Such restrictions will not prove that the source of the wagers traded on the exchange were legitimate to eliminate concerns over regulatory issues such as money laundering and match fixing. In order to ensure integrity of sports wagering it is critical that all aspects of the business fall under the jurisdiction of gaming regulators including the power to review all wagering related transactions at any time.

In the past when legal sports betting was only legal in Nevada, operators used to keep close eyes on the patrons walking into their casinos to place large wagers. They followed the practice of calling each other, the state’s Gaming Control Board or the FBI when they saw something suspicious. Now that the business is legal in many states and wagers are accepted over the internet, connecting the dots is much more challenging and use of an exchange outside the jurisdiction of gaming regulators can make the oversight even more difficult.

There is also the risk that financial institutions get creative and gravitate towards complex structures that will exert undue influence on the business. History has shown that the financial industry can get ahead of regulations causing harm on other industries by pushing the envelope. The economic meltdown of 2008 which brought a long recession, a housing crisis and a major banking crisis, was all caused by aggressive loans and practices of financial institutions.

On the positive note, the securities industry has created innovative technologies and products such as electronic exchanges, derivatives and futures markets which play a productive role in the economics of many industries. These vehicles and services provide valuable benefits as they allow producers and consumers with the financial tools to better manage their businesses by entering into options and futures contracts offered by the financial markets to limit their exposures to risks.

The sports wagering industry can benefit from the mature and proven technologies the securities industry has already developed such as electronic trading and derivative products. Instead of using existing financial exchanges, the gaming industry can introduce its own dedicated betting exchange (BetEx) in compliance with federal and participating state laws and regulations. The gaming industry can create its own exchange for a new and innovative class of bets, called composite bets that can be trade on the exchange. The betting exchange can also act as the risk trading platform between sportsbook operators to manage their risks. Unlike single head-to-head events and unlike parlays which need every bet to win, composite bets are offered to include a number of sporting events and do not require the bettor to hit on each event in the portfolio to win on the bet. Bookmakers and their registered clients can trade composite bets on the exchange until the last event in the portfolio is completed. Composite bets will create new gaming revenues for operators and will generate additional tax revenues for the states that offer sports wagering.

In summary, composite bets are offered by licensed operators to their customers within their own jurisdictions for events that span over a period of time, such as a week, a month or a season. The derivatives of the bets that are already placed with licensed operators can be traded on BetEx, a multi-state betting exchange. As events are completed and their outcomes are established, deviations from the expected results create a market for the derivative products traded on BetEx, an auction style electronic trading platform, that matches buy and sell orders of already placed bets. Similar to financial exchanges, BetEx matches the trade orders in an orderly manner, creating bid and ask prices for the derivatives to represent the market price for the remaining events. Because the bets are placed with licensed operators and do not cross the state lines, they comply with the 1961 Wire Act and their derivatives are traded on an exchange similar to financial derivatives. The BetEx ecosystem of licensed operators offering props, taking bets on the props and trading derivatives of the bets on an exchange complies with federal and state gaming laws and regulations.

Articles by Author: Bruce Merati

Bruce Merati is cofounder of BC Technologies, a sportsbook system provider and CEO of Uplay1, a gaming IP company.