Is the intricate realm of market-making the next growth driver for bookmakers?

(AsiaGameHub) –   The sports betting landscape of decades past is vastly different from the advanced technology used today, and the rise of prediction markets has unlocked fresh market-making opportunities for bookmakers looking to leverage this industry disruption.

Traditional sports betting businesses and prediction markets share loose similarities, such as financial modeling and pricing. However, predictions are classified as derivative exchanges and therefore rely partly on market-making to ensure liquidity between buyers and sellers. Earlier iterations of prediction products, like Betfair in the UK, struggled largely due to a lack of liquidity. In sports betting, the book acts as the counter-party to all trades, removing the need for such mechanisms.

The blurring of lines between finance and wagering has presented challenges for bookmakers, yet many of the largest betting companies have entered the predictions space in some capacity. If market-making is essentially a form of bookmaking—involving the acceptance of risk in the hopes of profiting from event outcomes—then bookmakers have the potential to excel in this somewhat nascent field, and they appear to be doing exactly that.

During DraftKings’ Q1 earnings call, CEO Jason Robins stated that his company aims to be “one of the top two or three market-makers in the world” for sports contracts, “arguably the best” given their modeling capabilities. He added that he does not see potential challengers “outside of maybe one or two of our big sportsbook competitors”. Flutter CEO Peter Jackson also mentioned on his company’s call that FanDuel is actively deploying in-house market-making services.

Both companies’ stocks have declined by more than 30% year-to-date, with prediction-related capital expenditures contributing to investor concerns. However, the potential to rapidly ascend to the top of the market-making profitability ladder could make this complex practice a highly sought-after commodity in the near future.

Research explores market-making strategies

This week, gaming researchers and academics gathered in Las Vegas for the 19th UNLV International Conference on Gambling and Risk Taking, a triennial event centered on cutting-edge gambling research.

On Tuesday, UNLV PhD candidate Shivam Sharma presented a paper titled “Optimal Bookmaking with CRRA Utility: Existence, Uniqueness, and Numerical Methods,” which examined best practices for market-making using Kalshi contracts on MLB games. This 20-minute presentation offered a deep dive into financial and statistical modeling that often resembled a doctoral-level course at institutions like MIT or the Wharton School.

“The process involves a liquidity provider posting limit orders on both sides, followed by a liquidity taker accepting the offer,” Sharma explained at the start of his presentation. “This dynamic between the provider and taker drives price movements… How can I strategically post my limit orders to ensure they are filled and I earn the bid-ask spread by the end of the day? This is the core mechanism—posting orders intelligently to generate profit.”

The meteoric rise of prediction markets has made market-making an attractive opportunity to exploit inexperienced traders or opportunistic prices, similar to the stock market. However, Sharma noted key differences in modeling for predictions versus stocks, specifically regarding payout structures and probabilities (where event contract prices are influenced by the event itself).

“There are papers about an automated market-maker, but… nothing currently exists that formulates this problem within a mathematical framework to solve it,” Sharma stated.

Inventory control and risk management

Sharma explained that in market-making, inventory control is the most critical factor due to price fluctuations. Since tomorrow’s price differs from today’s, this poses risks given the volume of stakes involved.

“As a market-maker, the primary focus is ensuring your inventory remains within specific bounds to cap your risk potential or risk-taking capability,” he said. In his MLB trading example, Sharma emphasized that his methodology relies on strategic implementation during specific periods of a game, rather than the entire contest.

This type of continuous risk management is familiar to bookmakers, particularly regarding in-game betting and live price adjustments. For instance, analysts at Eilers & Krejcik Gaming reported in January that major US sportsbooks maintained uptime rates of 65% or higher for college football games. Uptime is defined as the portion of an event where at least one betting market is active.

Among major operators, DraftKings led the category with an average uptime of 86%. The average overround, a metric for expected return on turnover, exceeded 5% for all books, with BetRivers ranking at the top at 8%+.

In the case of DraftKings, Robins is confident that the company’s extensive betting experience can be quickly translated into a new market-making revenue stream.

“In terms of profitability versus investment, the market-maker is or should be profitable already,” Robins told analysts during this month’s earnings call. “That is expected to be the least capital intensive investment, and I believe it will yield strong results in the near term and continue to grow.”