American bettors have a new opportunity this football season with the arrival of regulated sports betting exchanges in the United States. Experts say betting exchanges can benefit both professional and recreational bettors, but hurdles exist.
This summer, the New Jersey Division of Gaming Enforcement approved betting exchanges Prophet Exchange and Sporttrade. The companies, which are both led by 20-something founders, launched in September in New Jersey, becoming the first regulated sports betting exchanges in the United States.
Exchanges operate similarly to the stock market, with customers buying and selling sports outcomes instead of shares of companies. The exchange operator takes a commission for brokering the transaction, typically around 2% of the net profit of the winning side of the wager. On Monday night, for example, bettors could have taken a position on underdog Minnesota Vikings or Philadelphia Eagles at varying prices offered on the exchange and be matched with another bettor who liked the other side. That's one of the difference between exchanges and traditional sportsbooks -- bettors are up against other bettors, in most cases, compared to taking on a bookmaker with a built-in house edge.
Prophet Exchange experienced a 117% increase in volume from Week 1 to Week 2 of the NFL season, including $44,000 in trades on the Vikings-Eagles game, the highest volume on any game so far for the new platform.
"It's working," said Jake Benzaquen, the 27-year-old co-founder of Prophet Exchange. "We aim to compete the most on those prime-time games."
Exchanges compete against sportsbooks with their pricing. Since the commission is often much cheaper than the 10% or more of vigorish charged by sportsbooks, bettors find prices with less built-in house edge on exchanges. For example, bettors at Sporttrade only had to risk $106 to win $100 on the Eagles to cover the 2.5-point spread against the Vikings, while most sportsbooks were charging $110 to win $100 on bets on the spread. The money line at Sporttrade -- the odds to win the game straight up -- was Eagles -130 and Vikings +127. At sportsbooks, bettors were offered around -145 on Philadelphia and +115 on Minnesota.
To the uninitiated, the price differences may seem inconsequential, but experts say they add up quickly and can extend the life expectancy of a bettor's bankroll.
"If you're betting five college games and five pro games over a weekend, if you win more or lose less on all 10 of those games, it makes a material difference at the end of one week, let alone over the course of the season," Joe Peta, a longtime sports bettor and author of best-selling sports betting book, "Trading Bases," said.
But even Peta, who is a strategic advisor to Prophet Exchange and has a background in Wall Street, acknowledges that the new betting exchanges in the U.S. face difficult challenges, including gaining sufficient liquidity in an ultra-competitive marketplace, while also helping customers navigate a learning curve that has proven tough to conquer in other jurisdictions. In addition, exchanges must accomplish all of that while facing stiff competition from the deep pocketed sportsbook operators, who have been hammering the public with advertising for four years.
"[Exchanges] are a low margin product, so they will never be hiring Jamie Foxx or the Manning family," Peta said, adding that using an exchange is "not like looking up at the board [at a sportsbook]."
"It's different, and change is hard for everyone," he said.
Dealing in probabilities
Sporttrade, a Philadelphia-based company, tries to simplify the equation for new bettors by dealing in probabilities. An outright win for the Kansas City Chiefs over the Los Angeles Chargers in Thursday night's game was priced on Sporttrade at $65.5, representing a 65.5% win probability. The asking price on the underdog Chargers was $36. The winning outcome pays $100.
Alex Kane, the 28-year-old founder of Sporttrade, has partnered with market makers, who work behind the scenes to create the probabilities and provide the liquidity on the different markets offered. He calls them party starters.
"You solve the liquidity problem by bringing in market makers," Kane told ESPN. "They provide the impetus of getting the party started."
If liquidity is available, professional bettors will find ways to participate in the exchanges because of the pricing, but getting casual bettors involved is another challenge. Longtime professional bettor Bill Krackomberger is a fan of exchanges and is rooting for them to take hold in the U.S., but he's also worried about the size of the markets that will be available.
"The No. 1 hurdle for them to give over is having seeded markets," Krackomberger said. "I just hope they do that. Usually, it's only the sharp guys who are interested in this. It's not the square consumer, because they're not getting bonuses, there's not parlays and it's a little more difficult to navigate."
In addition to the more advantageous pricing, exchanges can provide a clue about which team professional bettors are backing by looking at how much liquidity is being offered on either side.
"Sharp groups will bet on the exchange and put $100,000 on Side A, while Side B has nothing available. Long term, Side B is right," Krackomberger said.
Exchanges the future of betting?
Other types of betting exchanges are entering the new U.S. market, too. Mojo, a platform that facilitates buying and selling shares of career statistical performances for NFL players, launched Monday in New Jersey, for example. But only time -- and money -- will tell if the American betting market is ready.
Prophet Exchange entered the market in the United Kingdom in late 2018 with a slightly different product, before deciding to halt its business in March 2020 when the coronavirus pandemic took hold.
"That's when we basically pushed all our chips into doing this in the U.S.," said Dean Sisun, co-founder of Prophet Exchange.
"I think there's a lot of noise and a lot of doubt that an exchange can't be a dominant player," Sisun added. "I think the reason is because a lot of people look through this with lens of what a sportsbook offers. There is no shot that an exchange can compete with that when it comes to parlays and teasers and if the seventh player on the Raptors will get 3.5 assists. But what the exchange does is, we'll dominate sportsbooks in money line, spreads and totals, and that's where the meat of the volume is anyway."
Exchanges, like Betfair and Smarkets, have been a part of the sports betting market in the United Kingdom for more than a decade but have struggled to compete for market share with traditional sportsbooks. Jason Trost, founder of Smarkets, estimates betting exchanges attract 10% of the amount wagered in the U.K.
"Exchanges form a fundamental part of the ecosystem, but from a [business-to-customer] perspective they haven't reached their full potential in the U.K.," Trost said.
Still, Trost believes the exchange model is the future of sports betting in the U.S.
"My hypothesis is that the simplified version of an exchange, aka a sportsbook, will not be flexible or powerful enough for the next generation of sports betting," he said. "And by necessity and competition, you will have to have an exchange."
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Exchanges provide new opportunities for American bettors of all levels - ESPN
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