In a short three-year window since reversal of PASPA, the U.S. legal sports betting industry spread from one state to more than two dozen, with more states are getting ready to enter into the space in the near future. Never before so much has happened so quickly in the history of legal and regulated gaming business. The question now is where the industry is heading and whether its current business model will hold.
Over the years, Nevada casinos developed a model for offering sports betting which other states are now following. The model is based on a simple principle: offer odds that splits people’s opinion in half with the goal of achieving a balanced book to guarantee the juice. Although having a balanced book on each event is not always feasible, it is possible to achieve it over a number of games such as a season. Statistically, the net imbalance on a number of events can converge to a balanced position over a period of time as long as there is a captive pool of casual bettors who keep coming back.
The Nevada model worked well when it was the only legal sports betting state in the country. The only challenge they were facing was keeping out the professionals (sharps) who were armed with their own superior prediction models. To overcome this, casinos put bet limits on each game and tried to avoid taking bets from sharps and their associates. Bookmakers also realized the only way to combat arbitrageurs from getting between them was to either offer the same, or very close odds, to make it uneconomical to hedge a bet’s risk using another sportsbook.
It didn’t take that long before the inherent weakness in Nevada’s bookmaking practice became obvious. In 1980 Dr. Ivan Mindlin, a surgeon that turned gambler, and Michael Kent, a mathematician, who developed nuclear submarine technology, formed the now-legendary Computer Group. The group pioneered the use of computer algorithms for sports betting to produce what was called the delta, the difference between the Vegas line and the point spread generated by their algorithm. The greater the delta the more they bet.
By the early ‘80s the group expanded into a national network of sports bettors which included Billy Walters who pioneered the system of exploiting weak betting lines identified by the group. Some of the strategies Walers developed included manipulating books to move their lines by personally walking into a casino and making it known he was placing a bet. The bet he was personally making was a bait to influence the book to change its odds, he would then secretly use his network of runners to quietly place wagers on the other side which in total exceeded his bet many times over.
As the business gets bigger and becomes mainstream, new challenges and threats will emerge. Operators that only have local casinos could end up with lopsided books when a local team plays against a team across the country, thus exposing themselves to large risks associated with the outcome of the event. Another issue that will inevitably come up is discrimination of sportsbooks against sharp bettors. Historically, Nevada casinos have taken the same approach with sharp bettors as with card counters. This type of treatment most likely will be challenged in the future and the courts will rule against an operator that uses discriminatory practices because someone has been a successful bettor. This kind of tactic is somewhat similar to a broker-dealer not taking stock trade orders from Warren Buffet because historically he has been a successful investor.
There is also the threat from groups such as the reddit army who recently crushed some Wall Street firms. In today’s world, one can use the tremendous amount of sports data that is widely available into advanced computer modeling algorithms to make predictions and transmit the results over the internet at the speed of light to an organized group that targets sportsbooks. Now that online and mobile wagering is the norm, it is easy and convenient for anyone to make a bet. Social media and news aggregators such as Reddit which has millions of daily active users can act as a community that is thousands of times larger than Billy Walters’ network of runners. In today’s environment we can have many sharps who can detect weaknesses on the lines of bookmakers, influence a group such as reddit users in real time to attack the books in different states. We recently saw this in the securities industry where hedge funds that had shorted GameStop’s stocks lost billions of dollars in a well-coordinated effort that surprised and shocked some of the smartest guys on Wall Street as to how they were short squeezed out of their positions.
The sports betting business is becoming large enough to be the target of mass attacks by a new breed of invisible sharps and the communities that they will cultivate that could cost sportsbooks millions of dollars on an event. What worked in Nevada will not necessarily work across the country. The current model makes sportsbooks to be sitting ducks, as sharps need to succeed against them only 53 percent of the time to breakeven, anything above that will bring them a windfall that will be at the expense of the operators and the average bettors. The industry needs to evaluate its odds making practice and transition itself from being book makers to be securities style market makers.