Innovative Financial Exchange May Enable Sportsbook Operators To Hedge Risk, Limit Volatility

Since the U.S. Supreme Court’s historic PASPA decision in 2018, a bevy of exotic sports bet types have drawn comparisons with complex financial instruments due to the volatile nature of the high-risk propositions.

But as the NFL playoffs approach, a new venture for commercial market participants faced with considerable hedging needs could represent the closest intersection between the financial and sports betting industries yet. On Monday, Eris Exchange (ErisX), a regulated futures exchange, unveiled a product designed to assist licensed sportsbooks in managing a betting imbalance on a given NFL Sunday (and other major wagering dates on the sporting calendar).

While sportsbooks in many cases strive for a 50-50 balance with most offerings, it is not always possible. ErisX’s suite of sporting event based contracts, pending regulatory approval, will enable books seeking to limit volatility to hedge their exposure.

“The sportsbook does not want to be in this position – it wants a perfectly balanced book where it makes its fees for the provision of wager taking services with no relation to the outcome of the game,” ErisX wrote in a press release. “ErisX’s suite of products will permit licensed sportsbooks to manage their commercial risk by creating a means to aggregate offsetting, independent state-specific books via commonly accessible futures contracts that trade nationally.”

How it works

Contracts offered on the exchange will be based on moneyline, point spread, and over/under wagers for each game. A sportsbook facing a high liability (see above) can hedge their risk by selling a contract on the exchange.

Take Monday night’s game between the Baltimore Ravens and Cleveland Browns, for instance. The buyer may decide to take the over (currently 45.5 points) on a $50 contract, while the seller, the sportsbook, takes the under. Prior to the game, both sides post a $500 collateral. A 24-20 win by the Ravens results in a victory for the purchaser of the contract. As a result, the buyer receives $1,000 in total — his initial $500 in collateral and the $500 posted by the seller.

In the event of a tie, the collateral is returned to each side.

Ahead of the launch, a number of licensed sportsbooks have expressed an interest in hedging potential losses with a counterparty through an ErisX event based contract, according to an industry expert with familiarity of the company’s business model.

Of course, not all sportsbooks do seek to balance bets in this way. In a conversation with FanDuel Sportsbook director John Sheeran in November, Sheeran said of balancing the book 50/50: “I understand why some smaller operators do it, because they want to reduce the volatility. And I don’t actually have any problem with it, but I think fundamentally, our job is to set the most accurate lines as quickly as we can, to the closing number effectively.

“I have the luxury of being part of an operator in a wider group that has the capability and the financial power to kind of deal with that volatility. A lot of smaller books don’t have that and I can understand why they would [look to balance action evenly].”

In time for football?

While the company hopes to launch certain contracts before the end of the NFL season, the regulatory process may be longer than usual since the derivatives are the first-of-their kind to attempt entry into the market, Eris Exchange General Counsel Laurian Cristea told Sports Handle in an email.

One aspect of the launch may raise an eyebrow from a keen regulator. According to ErisX, trading will be limited to eligible contract participants such as state-licensed sportsbooks, vendors and stadium owners with a “demonstrated need,” to hedge financial exposure associated with their commercial business. A stadium owner who stands to make millions on an additional home playoff game could hedge their commercial risk by purchasing a moneyline contract on the outcome of a game, ErisX noted.

The scenario played out in Week 17 of the 2019 NFL regular season with the NFC West division crown on the line. The 49ers clinched home field advantage with a late goal line stand, sending the Seahawks on the road for the opening round of the postseason.

In effect, a stadium owner is placing a wager against the tenant of the venue, to lock in a risk-less profit.

The launch of ErisX will be subject to regulatory approval from the U.S. Commodities and Futures Trade Commission. ErisX plans to launch shortly after receiving approval, Cristea said.

Latest posts