The Worst Thing Since Sliced Bread
Slowly, then all at once; a phrase fit exclusively for crypto delusionists, sex, and my writing, apparently. Before I dive into the next part, I do want to address one point which is likely to be misconstrued. I am not anti-prediction market. I think options that expand outside of the regulated OSB landscape are an important catalyst for innovations that ultimately benefit the consumer, a point that Alex Kane has made better than anybody. Pushing the boundaries of regulation was the genesis for legalized OSB after all. With that being said, I firmly believe you can advocate for and believe in a product without withholding fair criticism (and satire) when warranted.
The next iteration will be funnier, you have my word.
The Worst Possible Development of All Time
If the greatest thing since sliced bread had an antithesis it may just be the integration of gambling and retail brokerages. Most of my self reflection recently has centered around one idea: why does the current prediction market discourse make me so uncomfortable? On its face it should be a net positive for professional, semi-professional, and recreational bettors alike - further liquidity across key markets with a favorably priced order book. Will there be adverse selection? Absolutely. Are recreational bettors likely to lose in the long run? Absolutely. Still, neither of those are dilutive to the product’s overall utility. Bettors are likely to lose in the long run, but they will lose less. From this perspective, one that takes the utilitarian benefit of professionals benefitting from improved liquidity, market makers profiting at thinner margins than legacy sportsbooks, and recreational bettors losing less on equivalent handle, prediction markets are unequivocally a net benefit to the ecosystem.
The current prediction markets aren’t sportsbooks in the same way you can’t lose your virginity doing exclusively anal. The utility benefit I described above begins to break down when you remove them from a highly regulated bubble from which they are intended to operate and instead observe them in the wild, or more specifically, a wild west where their primary regulating body is more concerned with preserving its regulatory authority over anything than it is in protecting the consumer. A series 3 license is required to advise clients on commodities and futures markets. If the world’s leading expert on corn worked for a financial institution he would still not be permitted to walk into the office of a multi-billion dollar company and induce their participation in the corn futures market absent such a license. To induce retail to participate in event contracts markets an exchange needs no more than Facebook advertisements. In a class of its own is Kalshi, who has expanded its “we invented sports, gambling, and the internet” campaign to include bizarre half-endorsements of market manipulation. In inducing participation in derivative markets and capturing benefits from such flow via internal market making exchanges are, in all practical aspects, a sportsbook.
Should we put a roulette table in the bank? I have some friends that would open an account overnight, but common sense tells most sane Americans that we should not, in fact, open a roulette table in the bank. Further to that point, to the extent there was a roulette table in the bank, it would be morally objectionable for the bank to cross-sell roulette spins when a consumer walks in to open a high-yield savings account. With that context in mind, consider for a moment your investment advisor called with a reallocation opportunity – for a low fee you are able to gain access to the highly liquid Alabama moneyline fund contract. Do you want to invest? As asinine and objectionable as both scenarios sound, this is the world we find ourselves in. A retail user at the moment can open their Robinhood account, which as a brokerage plausibly stores a material portion of their net worth, and be cross-sold sports gambling alongside investment in traditional asset classes.
Not only do these products diverge in substance, they also diverge significantly in return and outcomes. A diversified equities portfolio will, over the long run, have an expected gain; a diversified sports betting portfolio (for the retail client) has an expected loss. Even a non-diversified equities portfolio has a distribution of outcomes that very rarely result in a 100% loss; each sports event contract has a binary outcome between 0 and 100%. From a problem gaming perspective, this is unconscionable. There is no combination of circumstances that could create a greater likelihood for a cataclysmic problem gaming epidemic than cross-selling customers a gambling product inside a source of significant asset storage. At their lowest point, a problem gambler in a spiral is forced to redeposit to a sportsbook, get more cash for the blackjack table, or contend with dwindling credit on an unregulated sportsbook, offering both prospective opportunities to walk away alongside monetary constraints in terms of liquidity. The brokerage/sportsbook prediction market tie-up eliminates this hurdle almost entirely in many cases given the propensity for users to store significantly greater assets in their brokerage accounts than they would hold in cash or a checking account.
This tie up creates opportunity as well… opportunity for new problem gamblers to discover their addictive tendencies. The benefit of a sportsbook from a problem gambling perspective is that users know they are using a sportsbook and will be presented with sports betting optionality. Even users downloading Kalshi/Polymarket/Novig are aware that they are likely to be presented with the option to wager on sports. There is no expectation for a user with a brokerage app that they will be cross-sold sports betting through their interaction with the app. Not only does this partnership provide the option for users to bet on sports, it provides them with the temptation to do so. You didn’t go to the casino, fine, we’ll bring the casino to you. This, again, is challenging to defend even for the most ardent champions of a free market, of which I am one. Taking it one step further, users who have self-excluded from regulated sportsbooks are not protected from the cross-sell of sports betting. Imagine a world in which an individual self-excludes and rebuilds their life, only to be presented with the option to re-enter the sports betting ecosystem through an app that stores their savings. Not only have we brough the roulette table to the bank, we are now cross-selling the roulette table to people who have lost their life savings to the roulette table and have taken steps to prevent themselves from ending up in a similar position. Would you like to wager it all, the teller asks? Indefensible.