It is no secret that the sports betting world is stopped dead in its tracks during the coronavirus pandemic.
Many are concerned about the well-being of the tens of thousands of gaming industry employees, as well as the health and safety of the world population.
However, some opportunists are offering wagers on nominal binary propositions such as the flip of a coin or weather events. Betting on the weather is here.
Unfortunately for sportsbook operators in the US, weather betting already has a regulated market. Those looking to get in on this “new” offering will have to enter a whole new world of regulation.
Markets to markets: a primer
Sports betting operates, in some ways, similarly to other financial markets.
While exchange-based wagering is often the easiest visual comparison for individuals, other forms of sports betting are also not dissimilar from some other financial markets.
Indeed, one of the primary differences between sports betting and financial markets is the regulator.
States have historically regulated sports betting markets via their gaming commissions, along with criminal oversight from the federal government. In modern times, entities like the Securities and Exchange Commission (SEC) and the Commodities and Futures Trading Commission (CFTC) regulate the financial markets.
Quickly look at Twitter and you will find numerous gamblers who are looking for unique things to wager on without live sports. It seems that more betting sites are purporting to offer wagering on upcoming weather events.
No one owns the weather, right?
While no one actually owns the weather, financial regulators constrain the ability to wager on upcoming weather events. For example, sports leagues do not own sporting events.
If you think you have heard this before, you might have. Indeed, perhaps one of the most infamous corporations in US history was heavily involved in trading on the weather: Enron.
There are a variety of weather-related products that investors and traders use, in addition to investing in commodities affected by weather events.
The CFTC defines a weather derivative as:
“A derivative whose payoff is based on a specified weather event, for example, the average temperature in Chicago in January. Such a derivative can be used to hedge risks related to the demand for heating fuel or electricity.”
One of the arguments made by some (not me) against treating sports betting as a product that should be regulated like other financial products: it does not provide a legitimate hedging opportunity like other derivatives, such as weather products.
Why the weather?
According to the group that operates the Chicago Mercantile Exchange, weather directly affects 30% of the US economy.
Weather derivatives offer businesses and traders the opportunity to hedge the risk associated with the negative impact of a weather-related event.
The creation of weather derivative markets is relatively new, conceptualized mainly in the 1990s with the first contract being executed in 1996.
What types of weather contracts are available?
According to researcher Hilary Till, the most common type of contract is on future temperatures; think an over/under of the temperature in a specific city on a certain day. But contracts are also available for rain, snowfall, and wind speed.
Till notes that temperature-related contracts account for 98% of the weather derivatives market.
Trading weather derivatives?
Everyone gets into trading via a different interest. Like with gambling markets, consumers need to be aware of the reputability of trading platforms.
While some sports betting or online casino sites might offer betting on weather derivatives, it appears unlikely that those platforms are registered and regulated by the CFTC or another regulator. Thus, they risk running afoul of regulators enforcing registration requirements and other rules.
That said, there are trading platforms in the US that are regulated by the CFTC that operate legally and permit qualified individuals to trade weather derivatives.
Like registering to open a sports wagering account, trading derivatives on a reputable and regulated platform require registration and verification of the user’s identity before they are granted privileges to trade.
Is weather betting an alternative to sports betting?
Trading weather derivatives is absolutely not a substitute for sports betting.
Sports betting sites that offer wagering on weather events are likely doing so without proper registration via the appropriate authorities and risk enforcement actions.
Weather derivatives serve an essential purpose for industries ranging from tourism to energy. They provide the ability to hedge against events that could negatively impact the underlying sector.
But they are also a sophisticated financial product and should not be viewed as something that can substitute for the absence of sports betting.