At the FIA Futures & Options Expo on 4 November, a group of industry experts discussed the growing interest in event markets, which offer binary options based on the outcomes of sporting events, the release of economic indicators, and even pop culture. These markets hold an especially strong appeal for a large and growing number of individual investors who have moved into trading stocks, options and futures over the last several years.
"As a retail firm, we try to go where our clients are and we know that two of the key areas that clients are interested in are the sports world and the events world," said JB Mackenzie, president and CEO of Charles Schwab Futures and Forex, who moderated the panel.
The rise in popularity of event trades has been particularly pronounced during the coronavirus pandemic, the panelists said, as many Americans turned to trading from home. Intense volatility across financial markets and a move toward zero- or low-commission trades also fueled the boom.
"With this big influx of customers over the past two years, certainly since the pandemic kicked off, what we've seen in the growth in prediction markets, the growth in sports betting and in crypto is that people want access to opportunity and they want a chance to make money with that access," said Travis McGhee, chief executive officer of the North American Derivatives Exchange, a binary options exchange that operates under the regulation of the US Commodity Futures Trading Commission.
Also speaking on the panel was Alex Kane, founder and CEO of Sporttrade, a Philadelphia-based fintech that bills itself as the first US-regulated sports-betting exchange. The company is working on getting state-level regulatory approvals, starting with New Jersey and Colorado this year.
"When I was introduced to sports betting, I realized that it looked a lot like financial markets 30 years ago, with wide spreads, single dealer platforms… you can't put limit orders in, customers can get limited or banned," Kane said. "We saw a huge opportunity to build something that looked and felt a lot more like a Schwab, a Robinhood, an FTX, or a Coinbase. We saw how many Americans were voracious about day trading and how big the sports betting opportunity is. This is where Sporttrade sits: at an intersection, saying this isn't betting sports, this is trading sports," he said.
In June, Sporttrade raised $36 million in funding from a coalition of investors including Jump Capital, Hudson River Trading and Tower Research Ventures, enabling it to lock in partnerships with institutional market-making partners to create a liquid market. Nasdaq is also working with the company, providing it with market surveillance technology as well as financial support in the form of convertible debt.
While Nadex and Sporttrade have seen growing interest in their markets, both have faced regulatory hurdles and challenges along the way. For instance, US state laws vary widely when it comes to sports betting, and federal law keeps much activity from crossing state lines.
"We have access to two states so far," Sporttrade's Kane said. "We're going to be announcing some more states soon, but it's a very fragmented market. We are doing this the only way we can, which is a state-by-state method and setting up an exchange in each state."
Meanwhile, Nadex and other designated contract markets are navigating various regulations concerning event contracts. For instance, CFTC Regulation 40.11 prohibits event contracts that reference gaming or an activity that the CFTC determines by rule or regulation to be contrary to the public interest. As prediction markets continue to grow, market participants will have to work with the CFTC to evaluate whether a contract falls on the permissible side of the line, the panelists agreed.
Dean Carlson, head of digital asset investments at Susquehanna International Group, said that his company is currently limited in providing liquidity on sports markets in the US due to regulation but he is hopeful about participating in the future.
"In general, we can price or trade any risk that's out there. It's not that different across financial markets, betting markets - it's all the same. It's probabilities. However, to trade it, we can only do that in a regulated environment and so we're limited at this moment to financial markets and sports betting markets in Europe where it's legal and very liquid. [In the US], as sports betting rolls out across the exchange format, I think we will be actively participating in those markets as well."
Despite the optimism about their long-run viability, the panelists agreed that greater regulatory engagement is needed.
"Prediction markets are exploding and there is an increased ability to trade overseas. From a US regulatory perspective, the opportunity is there to say, 'We're going to bring this under our regulated tent and we're going to be part of the conversation'," said Neal Kumar, a partner at law firm Willkie Farr & Gallagher.
"When you talk about things like sports betting and the transformation this country is undergoing, it is an opportunity for the regulators to really jump in and help the process, because it's not going away," he said.
- News & Commentary