Episode Details

Our analysts Michael Cyprys and Stephen Grambling discuss prediction markets’ rising popularity and how they could disrupt the U.S. sports betting industry.

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Michael Cyprys: Welcome to Thoughts on the Market. I'm Mike Cyprys, Morgan Stanley's head of U.S. Brokers, Asset Managers, and Exchanges Research.

Stephen Grambling: And I'm Stephen Grambling, head of U.S. Gaming, Lodging, and Leisure.

Michael Cyprys: Today, we'll talk about sports betting and how prediction markets can disrupt it.

It's Wednesday, March 19th at 10 am in New York.

Sports betting used to be against the law in most of America, outside of Nevada. That changed in 2018, when the U.S. Supreme Court declared a federal ban on sports betting to be unconstitutional. As a result, many American states legalized sports betting. Over the last seven years, it's become even more popular and profitable. The American sports betting industry posted a record [$]13.7 billion of revenues last year. That's up from 2023's record of [$]11 billion, according to the American Gaming Association.

Now, prediction markets are set to potentially disrupt this industry.

Stephen, to set the stage, how is the U.S. sports betting industry currently organized and regulated?

Stephen Grambling: Well, as you mentioned, Mike, with the overturning of the Professional and Amateur Sports Protection Act in 2018, legalization of sports betting turned to the states. The path to legislation varies by state with different constituents to consider – beyond even the local government. You know, Senate and Congress, but also tribal casinos, commercial casinos, sports teams, leagues, etc.

We now have 38 states plus D.C. and Puerto Rico offering legal sports betting in some format, collecting billions of dollars in taxes in aggregate. At this point, the big states that are remaining are really only Texas, Florida, Georgia, and California. Each state forms its own framework across taxes, what sports can or can't bet on, and regulations around advertising. This means a separate commission for each state regulates the industry, in conjunction with state lawmakers,

Michael Cyprys: I see. And what exactly are betting exchanges and how do they fit within the U.S. sports betting market?

Stephen Grambling: Betting exchanges have existed for a long time in markets around the world. These are really exchanges – and are platforms – where individuals can bet directly against each other on an event outcome, rather than against a bookmaker. These exchanges match opposing bets and then take a commission on the winnings and typically offer better odds by eliminating traditional bookmaker margins.

That said, the all in commission can range at two to five per cent. Whereas the spread on a traditional singles bet is about five to six per cent. So, it's relatively small. This is also known as the, the vigorish or the vig, or what the book gets to keep. Due to the need to be perfectly balanced as an exchange, these platforms, which operate in various markets, as I said around the world, are generally more akin to premarket, single bets. So single bet, or sometimes people call them straight bets, are really just betting on the outcome of a match or the over-under. They don't typically impact things like multi leg bets, also known as parlays, since there's less of a consistent betting pool.

Because the type of bets are more limited than what a sports book offers, these exchanges somewhat plateaued in popularity in markets like the UK. For frame of reference, we estimate these singles bets are about $900 million in markets where it's legal for sports betting, and roughly another $800 million in states without legislation.

Again, this is really just the market for people who only bet on that type of b