If you hear Sporttrade founder and CEO Alex Kane evangelize about exchange-style wagering – as he is very happy to do – you may assume that he’s also predicting the downfall of the likes of FanDuel and DraftKings.
I think that’s a fair point as well. I was making a more general assertion that the exchange model that Kalshi employs (as does Sporttrade) is MUCH fairer for all consumers.
As an example – I don’t think I’ve placed a single bet on sportsbooks since Kalshi started offering…
These are companies that have been the face of the world of state-regulated sportsbooks, a world Kane largely hopes to see replaced.
But he’s far from negative on the sportsbook behemoths’ futures.
“Net-net, I’m very bullish on those companies,” the head of the prediction market company told InGame recently. He spoke before DraftKings’ announcement last week that it would be launching sports event contracts “in many states” in the “coming months.”
In Kane’s view, traditional sportsbooks can have a very lucrative role in the new world order as brokers, bringing customers to exchanges.
Kane and Sporttrade COO David Huffman have written before about the value of bringing customers to a prediction market, noting that while betting margins may not be as big as those of a sportsbook, overhead costs are incredibly low. Kane and Huffman estimate that Robinhood has the highest margins in sports betting because even though it only charges fees of 1%, so much of its fee revenue flows straight through to profit.
Robinhood made $25 million in fees from event contracts in October alone, and continues to make up the majority of Kalshi’s volume, the stock trading giant revealed in its latest earnings release.
He then games out the scenario one step further. If companies like DraftKings and FanDuel are going to find a new path to lower-cost revenue, they could have more room to spend on reinvesting in their product and perhaps unlock new ways of reaching customers.
“I truly think it’s a rising tide here,” he said. “The way that DraftKings makes their money today might change, but I think they’re going to make more of it because the take rate’s going to go down. They’re not going to take risk anymore. They’re probably going to be brokers.
“But the costs of the revenue they’re going to generate are going to be way lower, which is going to allow them to reinvest in the product. I don’t want to overshare, but I think that the worlds of traditional finance, crypto, and sports are going to continue to collide.”
That collision with finance could be a key part of getting the flow of trades in place.
Susquehanna International Group (SIG), one of the world’s largest high-frequency stock trading firms, trades on Kalshi through its sports arm. Kane says he could see some of SIG’s rivals on Wall Street joining the market-making fray.
“I think as the market matures, take rate’s gonna go down. I think as the market matures, more market makers are gonna enter the space. And I think really as the market matures, you’re going to see Citadel, they’re starting to get to it, Jane Street — a lot of people like that actually going to be willing to trade sports at such a low margin if it means they can win more flow.
“The market’s going to get so efficient where the take rate’s going to approach 3% even on these crazy parlays. It’s going to go back in the pockets of the consumer, and I think that’s a great thing. Obviously, I’m bullish on this.”
One question that some exchange-model skeptics have raised: Why hasn’t exchange betting revolutionized the industry elsewhere?
Betting exchanges such as Betfair have been around in much of Europe for decades but have not been able to unseat sportsbooks. In the United Kingdom, where Betfair was founded, exchanges hold less than 5% of the online betting market.
Peter Jackson, CEO of Flutter — which owns FanDuel, as well as Betfair and sportsbook Sky Bet in the U.K. — has argued that Betfair’s smaller share is proof that the exchange model only has limited appeal.
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But Kane sees it differently. In his view, the U.S. is dissimilar because of a greater investing culture. Fewer than a quarter of Britons are invested in the stock market, according to Hargreaves Lansdown, while more than 60% of Americans are. On the other hand, the U.K. has a much stronger culture around horse racing and betting. That’s what Betfair latched onto and, in Kane’s view, it came at the expense of wider appeal.
“There’s a big cultural difference I think in the U.S. versus other countries, the U.K. being one of them, on the attitude and culture towards self-directed investing,” Kane says. “I think here in the U.S., it’s ubiquitously accepted that everyone has a stock portfolio, and everyone has a broker, and everyone has a crypto account, and everyone has Bitcoin, and that’s very different from most other countries. Everyone has either Bloomberg or CNBC or Fox Business on — like part of the fabric in a way that I think horse racing and traditional gambling have been part of the fabric of the U.K. for years and years.
“Betfair ended up becoming a place for sharp customers. So, they had to charge the winners more, and then use that money to try to get customers and then educate them on how to use it. You don’t have any of that here.”
Kane’s vision relies on the federally regulated prediction market model winning out in a legal battle for the future of sports betting that could take years to settle.
His company tried for years to bring exchange-style betting to the U.S. via the state-regulated model. Sporttrade is licensed in New Jersey, Arizona, Colorado, Iowa, and Virginia, but Kane has been open about his frustrations with many rules handed down by states, which were not designed with exchanges in mind.
John, you seem like a nice guy. (Would be great to meet up sometime!)
But respectfully, there are tighter regulatory boxes.
Not saying I endorse it, but the @abusacca and I drove 1,699 miles around the state border of Iowa to ensure @sporttrade_app’s geofencing worked correctly… https://t.co/eDvl2Ai7JK
The company is applying for CFTC registration as a designated contract market to operate under the frameworks that govern prediction markets instead.
High tax rates for state-regulated betting operators have made it hard to offer a low-margin product. Seemingly small rules about topics such as how to test geolocation providers or disclosing investors can add up as some regulations are perceived to specifically stifle the exchange model.
“For us, it’s been such a challenge to get market makers because corporations can’t bet,” Kane says.
He adds that he doesn’t believe all of these rules exist with bettors’ best interests at heart.
“I think that the states’ true concern about all this isn’t to protect the customer,” he says. “I mean, they don’t care about holds going from 10% to 12% or 15%, which is so interesting to me and ironic that if they really care about the user, why wouldn’t they at least encourage some level of competitive forces to drive down the cost of a sports bet?
“What they really care about is tax revenue. So I hope that the right players in the industry can step up and say, ‘Okay, states, you’re concerned about player protection? We have player protection. We have market surveillance, we have mediation.’ ”
To Kane, the difficulties of operating in the state-regulated model and his bullishness about what a prediction-market-led world might mean for DraftKings or FanDuel go hand-in-hand.
“I think you’ll get just broader participation at a lower cost to the operator. When you look at the entire universe of sports betting, it’s just one massive pot.”
“The federal government gets some slice of that pie through the excise tax. States get some percent of that pie through gross game revenue tax. Geolocation providers get some percent of that pie, payments companies get some, it goes on.
“So hold could go way down, but you’re sharing it with way less people that don’t really add any value.”