Sports Gambling Stock Market

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Realistic rating: 8.0

Today marks the one-year anniversary of one of my favorite websites, Intrade, closing all American accounts thanks to the friendly folks at the Commodity Futures Trading Commission, so what better occasion than to take a page from their brilliant idea and apply it to my favorite professional sport: gambling.

Futures (i.e. odds on something like a team winning its division, conference, championship, etc.) are becoming a more and more popular bet at Vegas sportsbooks, so popular that the books usually release the odds for next season within 24 hours of the current season’s champion being crowned. As futures currently work, the books open odds on a team winning a division/conference/championship, and gamblers can place bets they can later cash if their speculative outcome comes true.

Futures are typically a bad investment that only get worse the longer you down the road you speculate. Take a look at the NFL odds going into Week 16. Totaled are the sums of the win percentages Vegas estimates for all the potential outcomes of each event.

Type

Total Win Probability

Number of events

WP per event

Individual Games

1659.89%

16

103.74%

Division Futures

743.72%

7

106.26%

Conference Futures

250.94%

2

125.47%

Super Bowl Futures

127.69%

1

127.69%

As you can see, in each individual game, the average sum of the two teams’ winning percentage is only 3.74% over 100%, so the house edge is relatively minor. This edge grows a bit when looking at the seven division futures still on the board (the Colts already clinched the AFC South) but takes takes a massive leap once you start looking at conference and Super Bowl odds, with the sum of all the teams’ winning percentages each coming out to over 125%.*

*This also doesn’t include the fact that with futures bets, the sportsbooks get to hold your money for a long period of time and gain interest on it, so there’s also an added opportunity cost to bettors.

Ignoring the house edge, there are are two slight inconveniences to bettors under the current futures betting marketplace:

1. There’s no way to buy and sell futures after purchase. There are only two available exchange times: Initially purchasing a ticket and cashing it out should it win.

For example, about six weeks ago, I purchased a futures ticket on the Texas Rangers to win the World Series at 25-1. (For the gambling unaffiliated, this means $25 payout for each $1, so 1-in-26 total odds. These odds can also be expressed as +2500.) Since that purchase, the Rangers have traded for Prince Fielder and signed Shin-Soo Choo, bringing their odds down to 12-1 and effectively doubling the value of my initial investment. While I thought the Rangers were better than 25-1 odds six weeks ago, I think 12-1 might be a bit low today. If this were a stock market, I could sell my “shares” of Rangers stock for double my initial investment, but I don’t have that opportunity with current sportsbooks.

2. There are no opportunities to “short” teams if you think its odds are too low.

For example, I think the Denver Broncos’ current odds of 5-2 to win the Super Bowl are far much too low, but there’s no way to invest in belief other than betting on every other team’s Super Bowl odds, which as shown above, is not a very good investment.

There’s an easy way to fix these issues: The Intrade model.

Intrade is—I mean, “was”— a betting site that that allowed users to purchase shares of the an event occurring with the price of those shares constantly fluctuating based on the market’s estimation of the event’s probability of occurring. The payout for each share was $10 if the event occurred and $0 if it did not. So for example, if the market said that Mitt Romney had a 35% chance of winning the presidency in 2012, then his shares would sell at $3.50, and if he won, their price would rise to $10.00 per share. Not only does this model allow for investors to sell their shares if they’re currently bearish on a previous investment, it also allows investors to short outcomes they think the marketplace is trading at too high a price.

Now, here’s the big question: Why would the sportsbooks want to change their current futures market models to an Intrade-style marketplace? The books already make huge profits on futures, and the last thing they want is betters taking money off the table and cashing out.

To answer this question, let’s look at two ways the Intrade model could be applied to Vegas sportsbooks:

1. The sportsbook could sell a set number of shares at an opening price, and then after they are all bought up by bettors, simply serve as an exchange marketplace charging a small commission or broker’s fee for every transaction.

This is is pretty much exactly how Intrade worked, but the books would likely eschew this kind of model due to the fact that they would never want to create a self-imposed limit on the number of bets they can take in. However, this could be solved by…

2. The books would have an unlimited number of shares available to sell and could have two prices on the board: the bettor buying price and the bettor selling price.

The bettor selling price (i.e. what bettors can sell their shares back to the books at) would be slightly lower than the buying price, which would allow the books to make a slight profit.

For example, with the Broncos’ current 5-2 Super Bowl odds, they would be selling at $2.86 on a $10 scale or $28.57 on a $100 scale. (It’s probably more appropriate to make this a $100 since Super Bowls futures markets aren’t binary and have a multiplicity of outcomes that require a more granular scale.) Sportsbooks could make the selling price, say, 95% of the buying price, so if you wanted to sell your $28.57 Broncos shares, the book would buy them from you at $27.14.

(This also opens up the opportunity for a secondary marketplace that will by and sell these shares at different rates from the books, further mirroring the stock market.)

These methods would still allow the books to make huge profits, albeit likely a bit less than they currently make with their aforementioned 25%+ house edge. (However, the vast majority of bettors likely wouldn’t even exercise their right to sell back their futures ticket, as the public is usually just looking for a thrill and not interested in using sports betting as an investment.)

But still, is that enough for the books to want to revert to this model? They might not have a choice.

This marketplace improves the customer experience, and at a microeconomic level, market forces say that at some point, a firm will take a risk at reduced profit margins if they can appeal to more customers and thus take a bigger market share. While this book’s profits margin per bet may not be as high as under the previous system, that will likely be offset by the higher total number of bets they receive. This would create a domino effect on the other books.

At a macroeconomic level, this new model could also benefit the the entire sportsbook industry, as the “stock” price of futures could be an easily circulated figure. Now, not only could ballparks and sports networks flash scores on a video screen or bottom line, they could also have a live stock ticker listing all the current teams’ prices and net changes they made after games. The stock figures would become ubiquitous, thus raising public interest in the sports gambling industry and bringing in more bets.

Bottom line: This really wouldn’t be too drastic an overhaul of the sportsbook industry and wouldn’t take very look for bettors to get used to the new pricing method (especially if the old odds format was printed right next to the new stock price format). Market forces say that one day, a struggling sportsbook will break from the norm, try the Intrade model (or another more customer friendly model), and reap the benefits of a larger customer base. It’s really only a matter of time.

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