Does Parlay Betting Pose A Systemic Risk For US Sportsbooks? 

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Parlays were once again the story of New Jersey sports betting in June.

Parlay bets accounted for 43% of betting revenue ($31 million) on just 21% of handle.

It’s a similar story over the lifetime of the NJ sports betting market. Parlays have accounted for 47 % of the $1.1 billion in revenue on 20% of the handle. That equates to a 15.4% hold on parlays, compared to the 4.5% hold on straight bets.

Trick or treat?

Parlays, then, are something of a golden goose for US sportsbooks. But they are also a potential “atom bomb” for the industry, according to consultant Joe Brennan on Twitter

“One thing real bookmakers all say they fear is massive parlay exposure,” Brennan said. “The day all the favorites win.”

It is not exactly a new risk for operators around the world. In 2019, jockey Frankie Dettori rode home the first four winners on the horse racing card at Ascot in the UK, setting up potentially company-ending liabilities for the final two races.

His last two mounts were ultimately beaten, but the red figures on the screen that day forced bookmakers to reconsider their risk protocols – in the short term, at least.

Managing risk

In subsequent meetings, Sky Bet and bet365 blocked customers trying to parlay all Dettori rides. Sky Bet said at the time it had to impose restrictions, as it might not have been able to pay if the bets won.

“Let’s say 3,500 customers wanted to put just 10p each on [the six-leg parlay], we’d be looking at over a billion-pound payout,” a Sky Bet spokesperson said. “These potential liabilities are unprecedented, and there is no practical way to hedge this sort of demand.”

So, could US sportsbooks ever be put in a similarly ruinous position?

US sportsbooks fear the NFL

The most obvious risk stateside is NFL betting.

“When the favorites start winning and covering on Sunday and the overs are hitting, it starts to look hairy,” said a trading exec at a large US firm, who requested anonymity. “It’s common to get to Sunday Night Football and be looking at a big red number.”

The exec said liabilities could easily surpass $10 million at the largest US sportsbooks in that scenario. Likewise, if all underdogs start winning on the moneyline on an NFL weekend, that liability can mount quickly.

The liabilities are not enough to bankrupt a FanDuel or DraftKings, but two or three weeks in a row could ruin a quarter and potentially spook investors.

“As someone who has operated a parlay-based business, it is tough to see a single ‘run-bad’ day wipe out a quarter’s worth of profit,” Brennan said.

Big risk for small firms

On the other hand, a similar scenario could be calamitous for a smaller operator who doesn’t have $1 billion on the balance sheet like DraftKings.

“The smaller-cap companies taking only recreational action – a couple of weeks of this can wipe them out,” said Adam Bjorn, the COO of odds compiling firm Plannatech. “A lot of smaller books don’t have the systems showing them their true exposure.”

It is another way the biggest operators have an advantage: they can weather a month of bad results, then watch that money be plowed back into more parlays. In fact, most major US operators push their mobile customers toward parlays through push notifications and customized offers.

Hedging opportunity

For a risk to be truly existential though – a black-swan event – it usually needs to be unforeseen. Most books will have some kind of plan in place for an NFL gut-buster. 

“If smaller books need to offset some risk, the larger ones can provide that service, as used to happen regularly in the UK,” said Mark Israney, a partner at gaming consultancy Propus Partners.

“Obviously the small books wouldn’t be buying at a great price, but that’s the cost of hedging.” 

The themed parlay

The bigger risk, then, is the Dettori idea, where a common theme links several selections at big odds.

As Sky Bet outlined, those wagers can quickly add up to nine-figure liabilities.

Fixed-odds horse racing might bring that risk down the road as it grows in the US. But more realistic at present is something like all the underdogs winning on a high-profile UFC card.

Are US sportsbooks insulated from parlay risk?

All told though, the idiosyncrasies of US sports betting make it a little less susceptible to black-swan parlay risks. Fixed odds racing is not yet a thing, and the most popular parlays are usually picks at -110 or big favorites.

Even the risks from the bigger prices are easy to see coming.

“Every NFL gameday, large numbers of players parlay all the dogs at several hundred thousand to one,” said Tom Daniel, the SVP of risk management at Kambi. “But we stay on top of it and receive automated alerts at different levels of risk.

“It’s never got to the point where we’ve had to take evasive action such as restricting how players can combine events. It’s never been wipeout time and it’s never been that close to wipeout time.”

Bigger is better for US sportsbooks?

As ever in the US,  it is a tougher situation for the smaller firms.

They can least afford a seven-figure hit but they can also least afford to turn down hold-boosting parlays. For them, some risk is the cost of doing business.

At least they’re in the right industry for it.