A fair exchange?

When Flutter withdrew its Betfair exchange from New Jersey in 2020, the move seemed to sound the death knell for exchange betting in the US.

In a statement issued at the time, Betfair blamed a customer base used to “exotic wagers” as well as a reluctance from US racing associations to embrace the model for its failure to reach a critical mass.

The news was a blow to those who saw the US as a potential new beginning for a vertical which two decades ago promised to revolutionize the very nature of betting, but today occupies only a small – albeit important – corner of the industry.

“Thus far in the United States, every exchange is subscale or is yet to launch,” says Tom Waterhouse, CIO of Waterhouse VC, which has recently invested in two exchange products, BetConnect and BetDEX. “It’s not clear who the winners are, which makes it a very interesting opportunity for investors.”

Tom Waterhouse

Liquidity courage

The biggest challenge for betting exchanges eyeing up the US is the Wire Act, which prohibits bets crossing state lines.

“For an exchange to be successful it needs liquidity – that means everyone interacting with the exchange needs to be within the same pool, and right now that means inside state lines,” says Eric Frank, CEO and co-founder of leading regulatory consultancy Odds On Compliance. “That makes it very difficult for an exchange to operate independently in smaller states.”

For Frank, the best hope for exchanges in the US is to find unique interpretations that can tackle the cross-jurisdictional pool issue; essentially operating pools across state lines while ensuring the placement of wagers remains within the regulated state. “It will still come down to interpretation,” he says.

Startups targeting the space are already looking for such solutions. Daniel Schreiber, founder of BetConnect, says the company is currently in conversations with US legal counsels to discuss the opportunities that exist around becoming a liquidity provider for US-focused exchanges.

Daniel Schreiber, BetConnect

“It’s important for the exchange system to have good liquidity from day one in order to foster immediate credibility and engagement. You never get a second chance to make a first impression,” he says.

Another operator, Prophet Exchange, is optimistic of finding a regulatory solution to the liquidity challenge, particularly in New Jersey. Its COO and co-founder, Jake Benzaquen, says New Jersey’s Division of Gaming Enforcement (DGE) has been “open-minded and progressive” when it comes to thinking about differentiated operators entering the market. “We can only hope regulators across our future jurisdictions are as easy to work with and accommodating,” he notes.

Waterhouse adds that the DGE has also been signaling that it will allow out-of-state programmatic trading if liquidity providers attain a New Jersey Casino Service Industry Enterprise License (CSIE), a move which could encourage significant influx of exchange liquidity to the market. While this will be a major boost for the sector, navigating regulatory hurdles will still require the agile approach of a startup, according to Benzaquen.

“We report differently and because we are a startup, our company functions differently than the traditional operators they are used to dealing with. Practical hurdles are still relevant, mainly the Wire Act, but we truly believe we can make tighter markets than sportsbooks in any state in the US, regardless of its status,” he says.

Trading places

Taking on these exchange-focused startups is one more experienced brand, Smarkets, which has operated its exchange in the UK for more than a decade. Smarkets has an agreement with Full House Resorts to operate in Colorado and Indiana, albeit so far only via a soft launch of its SBK sportsbook app. While Smarkets COO Tom Hardman says the brand is keen to expand into more US states, it is taking a wait-and-see approach to its exchange.

“We are very much keeping an eye on how other exchanges fare as they begin to launch and we are exploring the possibility of bringing our leading exchange platform to the United States,” Hardman says.

Should operators find innovative ways to overcome the regulatory challenges, attention shifts to exactly how successful exchanges could be in the US.

Investors, like Waterhouse, will be betting that the 17 million Americans who were active users of the popular Robinhood trading platform in Q1 2022 represent a significant opportunity for betting exchange products, particularly given that these users have an average age of just 31.

Others will point to the experience of Betfair in the UK, which learned that a mass-market audience tends to be more interested in an attractive and simple user interface (UI) than the best possible value when placing a bet.

Schreiber at BetConnect concedes that the “spreadsheet” feel of Betfair will never be a “messiah for the mainstream” in the US.

“A far more intuitive interface is necessary to corral players and engage with the people currently using sportsbooks,” he says.

“There’s an opportunity here, as US sportsbooks have lazily followed European sportsbook design, and we hear from our US-focused investors that a high percentage of consumers are routinely surprised at how impenetrable or old-school the UI configuration can seem. If US exchanges follow UK exchanges in look and feel, they will struggle. Consumers want a fresh approach to a betting interface but will relish taking advantage of exchange prices.”

This is much the same thinking as that behind Smarkets’ SBK sportsbook, and there’s a strong belief among everyone EGR spoke to for this article that innovative products built upon betting exchange infrastructure could have a far greater impact upon the US sports betting market than exchanges alone.

Benzaquen at Prophet Exchange says that one look at the New Jersey betting market, which is “riddled with pain points”, shows the scale of the opportunity.

“Bettors who have been successful can no longer get their action down, pricing and innovation has been stagnant and sportsbooks have become a complete commodity. The market is not only excited for, but in need of innovation, and we believe exchanges are the answer,” he says.

Jake Benzaquen, Prophet Exchange

Frank at Odds On Compliance agrees that exchanges are a natural fit for contemporary American audiences.

“I do have confidence that exchange operators today can succeed because of the world their customers have grown up in. There are people across the country who have grown up on social media and they want to place wagers with their friends, fellow, and rival fans of teams they follow, not just against “the house.” People live major aspects of their lives on social media, peer-to-peer wagering fits naturally into that digital and real-life world,” he says.

Regardless, it would be wise for those looking to disrupt to heed lessons from more mature markets, particularly the UK.

“One thing we can say from experience in a mature market like the UK is that creating a successful exchange platform and ecosystem is difficult. It took us a few years and I think it will be the same for the American startups that are making moves now,” cautions Hardman at Smarkets.

“There are signs that exchanges could be successful in the US – trading is a popular pastime – but there’s a long way to go yet.”