Potential transformation
Interactive Brokers (IB), a US securities brokerage firm, has developed a model that aims to change the way the sports betting space works. They believe that traditional sportsbooks can soon be bypassed, making the process more automated. This will lead to more generous odds by eliminating a significant portion of the margin that the sportsbook takes on a given market.
Interactive Brokers’ approach
The man in charge of Interactive Brokers, billionaire Thomas Peterffy, believes that the company can automate sports betting in a way that is compliant with US and overseas laws. Interactive Brokers now have their own Simulated Sports Betting Exchange, and they are giving commission credit worth as much as $1,000 to the first 2.2 million people who sign up for an account.
The new system will see the new accounts receive the $1,000 in funds straight away. The funds can be wagered on different types of sports, and those on the platform will be bidding against other users to get the odds on a given game.
Interactive Brokers are confident that this approach is legal since there is no involvement of cash. The company will forgo future revenue so they can bring in a new type of customer for their brokerage.
Platform users will place a wager on the percentage chance of the outcomes coming to fruition. There will be a commission deducted by the broker, which will change depending on the size of the odds. The commissions will be greater the shorter the odds are, and will become almost non-existent when they reach the 100/1 region. This would massively undercut the current bookmaker pricing model.
Scope for change
Sports betting has been around for centuries and is still extremely popular, despite being illegal for many years in the United States.
According to past research, the sports betting black market was taking as much as $150bn in bets every year. Since the ending of the federal ban on sports betting in May 2018, many states have legalized the activity or are on the way to doing so in the near future. Interstate sports betting is not yet legal, so each state looks after their own offerings.
However, nothing has really changed in the sector for years, with the bookmakers constantly taking in large margins on bets. This continues to be the case is in spite of the massive amount of data; the variety of sports teams, players, and events; as well as the powerful computing technology available.
Systems could be implemented to take out the need for a lot of the manual work that is required in setting odds for sporting events. And this is where IB come in.
Improvements on the way
For even the most basic types of bets, a perfectly matched book will be looking at a margin of about 4.55% on a given bet. This margin will increase the more uncertain or complex the bet may be. For the more specialist types of sports betting, such as spread and line bets, the margins become even greater. A lot of these costs boil down to a bookmaker’s ability to create the odds or the markets.
There have been attempts in the past to navigate around the legal issues of having computerized betting in the US. These proved unsuccessful, mainly due to the restrictive cash transfer system in the US when it comes to gambling funds.
However, with federal laws now allowing sports betting, as well as more and more states on board, there are opportunities to revisit this approach once more.
Future plans for IB
Peterffy believes that if they wanted to allow real money bets, these could prove highly profitable. He also maintained that Interactive Brokers have the lowest commissions in the business, and that enabling such wagers would be a way of illustrating it.
Peterffy himself does not gamble, despite having a $20bn net worth. However, he sees the inefficiencies in the current bookmaking system, stating that “commissions on gambling have been huge because they are not transparent. We figure that in the UK, bookies earn three to 15 per cent on each bet.”
When asked about his goal for the platform by the Financial Times, Peterffy expressed: “I want to teach people how probability works. It always bugged me how hard it was to explain that. I want to turn gamblers into investors. If that happened, the economy would be better.”
