State-by-state regulation can expose sportsbooks

The past week, I have had so many images of stocks, hedging, futures, and cryptocurrency in my head that I have gone on deep YouTube dives into clips and discussions of the film, The Big Short. And I didn’t even jump on any of the meme stocks or invest in anything. So what better time for a story about a possible market for sports betting futures contracts?

Now, we are not talking about futures in the traditional sports betting form, the kind where you place a bet before the season on who will win the championship. In this case, ErisX, a cryptocurrency exchange operator, along with attorney Jeff Ifrah, are looking to give sportsbooks the ability to essentially buy and sell betting tickets as a hedge vehicle.

Yes, it is a bit confusing, but the concern, says ErisX, is that sports betting is regulated by each state individually. There is no such thing as a national sportsbook. Fans tend to bet on their favorite teams. This can cause a problem for sportsbooks that are limited to accepting wagers from within state lines, as they often end up with games where the vast majority of the money is on the local team. If the local team wins, the sportsbook has as very bad day.

Sell bets on the other side

ErisX wants to give sportsbooks the opportunity to hedge against a massive loss by setting up a futures contracts market. Here’s how it would work. Let’s say the Detroit Lions are playing the Las Vegas Raiders. Because Michigan residents love betting on their Lions, most of the money bet on the game at a Michigan sportsbook is on the Lions. The sportsbooks wants to even out its exposure on a game at least somewhat, so it sells Raiders contracts on the futures market. If the Lions win, the sportsbooks has to pay out all those bets, but it was able to make money selling the Raiders contracts, so it reduced its losses.

In Nevada, the same thing might happen, but with the teams reversed.

ErisX says that only sportsbooks, vendors, and market makers (the companies that buy the contracts in the middle) would be permitted to participate in the futures contracts marketplace. Speculators and investors would be barred, so “outsiders” would be unable to gamble on the gamble, as it were. This would keep the market under control so it would be used just as a hedging option for the sportsbooks to decrease their risk.

Don’t get your hopes up

ErisX asked the Commodity Futures Trading Commission (CFTC) for its approval in mid-December, which began a 90-day commenting period. Experts believe the chances of the CFTC giving ErisX the green light are slim. Gambling futures contracts were banned in 2010. One of the fears is that by giving such an operation its approval, the federal government would essentially be regulating sports betting itself, which is a responsibility that is the domain of the states.

Les Bernal, national director of Stop Predatory Gambling, told Bloomberg that he believes a futures contracts market would let sportsbooks shift some of their risk to their customers. By reducing their risk on games that take lopsided volume, they can take more risk by accepting larger bets. But Bernal says that this just means that customers are taking greater risks with those bigger bets.

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