Could A Nationwide Exchange To Hedge Sports Betting Risk Happen In The US?

Posted on December 15, 2020

A US crypto and futures exchange has taken the first step toward launching a sports betting exchange where bookmakers could hedge risk.

Illinois-based ErisX announced today it filed a product self-certification to introduce the exchange for moneylines, totals and point spreads on major US sports.

Under its plans, wagers on the exchange would be considered futures contracts and therefore regulated on a nationwide basis by the Commodity Futures Trading Commission (CFTC).

That interpretation would make contracts tradable across state lines and not subject to the Wire Act.

Bets or futures?

Crucially, ErisX has to prove the contracts on its exchange have a financial purpose (i.e. not just for fun), or are to hedge commercial risk.

That’s why the exchange will be open only to state-licensed bookmakers and certain ErisX market-makers.

Stadium owners would also be permitted to hedge financial risks from on-field outcomes like making or missing the playoffs.

Other US-facing exchanges have also argued that bets are futures contracts.

The CFTC now has 90 days to rule on the ErisX proposal, with the outcome potentially having a major impact on the sports betting industry in the US and betting exchanges in particular.

How will the ErisX hedging exchange work?

The main purpose is to allow sportsbooks to hedge risk if they are lopsided on a game.

“Two or more sportsbook operators, operating in different states, may have offsetting books. Today they lack a means to offset their separate pools of interest directly with each other,” ErisX said.

For example, if the New York Giants were playing the Tennessee Titans in the NFL, New Jersey sportsbooks might have heavy liabilities on the Giants and want to swap some of that risk with Tennessee books.

ErisX said it plans to launch contracts this NFL season, and then move into the full upcoming NBA season.

Of course, its launch is subject to CFTC approval.

Is there demand for a hedging platform?

Aside from the legal uncertainty around the definition of a bet/future, there is some question about the need for a hedging platform.

Another Chicago-based company, LineLibrary, had a similar vision to be the central clearinghouse and hedging platform for US sportsbooks. 

However, that company pivoted to being an operator under the Vigtory Sportsbook brand earlier this year.

For one thing, modern sportsbook operators are simply unwilling to give away expected value by hedging. Instead, they are fine being lopsided on a game, knowing they will win in the long run.

Indeed, large-scale hedging is relatively unused at major European bookmakers. That is, outside of one-off events like the recent presidential election or the Floyd Mayweather vs. Conor McGregor fight.

As Warren Buffett famously said, a lumpy 15% return is better than a smooth 12%.

But of course, the US is its own market, and does contain smaller operators with heavy exposure to certain states.

Consider how a book like Action 24/7 might fare in Tennessee sports betting if the Titans won and covered eight games in a row on the way to the Super Bowl. ErisX might offer one way to reduce that risk.

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Brad Allen

Brad has been covering the online gambling industry in Europe and the US for more than four years, most recently as the news editor at EGR Global.

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