The sometimes overlapping worlds of investing and wagering were abuzz on Wednesday after the chief executive officer of Robinhood Markets Inc. said the trading platform operator is considering stick-and-ball sports betting.
“A lot of our customers, who index on Millennial and Gen Z, are interested in sports in general,” Robinhood CEO Vlad Tenev said during the company’s investor day. “So we're keenly looking into that space. Nothing to announce just yet, but it's so important to our customers and in culture that we're excited about it.”
Robinhood’s interest in legal sports betting follows its foray into election wagering earlier this year, wherein the company saw more than 500 million event contracts traded in just over a week.
Based on that success, Robinhood sees a future in the event wagering business. Sports seems like a natural extension of that interest.
A slide from Robinhood's investor day re: election betting. The company says more than 500M in contracts were traded in about a week. pic.twitter.com/pBWtazaYoc
— Geoff Zochodne (@GeoffZochodne) December 4, 2024
Funnily enough, DraftKings Inc., a regulated online sports betting operator, saw the boom in election wagering and is now thinking of getting into that business itself.
While the Boston-based bookmaker offered U.S. presidential election odds in the Canadian province of Ontario, it’s now looking into the federally regulated contract trading that Robinhood and others offered in the U.S.
“Definitely something we're looking at in advance of the next presidential election, and potentially it'll be an opportunity to look at something sooner,” DraftKings CEO Jason Robins said in November.
If it were easy, everyone would do it
However, it won't be easy for either company to cross over.
There is litigation and regulation that stands in the way of their ambitions. Moreover, Robinhood and DraftKings will be trying to lure customers away from competing platforms that are already entrenched in election wagering and online sports betting.
So it will be a challenge. Robinhood and DraftKings could overcome those obstacles, but it won't be a breeze for either company.
Let’s start with the regulation. Robinhood’s election contracts were under the oversight of the Commodity Futures Trading Commission (CFTC), a federal regulator, that could be the entity to police sports-related contracts as well.
Tenev acknowledged this on Wednesday. The CEO suggested a Robinhood version of sports betting would be different from the state-regulated version many Americans are already familiar with, wherein they are wagering against an operator (the “house”) that provides them lines and odds for point spreads, totals, props, and moneylines.
“These are regulated event contracts offered through our FCM license, or Futures Commission Merchant, regulated by the CFTC,” Tenev said. “So, very, very different. So, that said, we are interested in exploring all kinds of events. A lot of people have been talking about the potential for sports event contracts and taking that into the regulated space.”
The trouble with the regulated space is that the regulator, the CFTC, doesn’t like those products, as evidenced by its ongoing fight in court to prohibit Kalshi from offering political contracts. The CFTC has struck out so far, which allowed Kalshi and Robinhood to take action on the presidential election using their event contracts.
Insurance policy
The legal fight isn’t over. Furthermore, the CFTC is not putting all its eggs in one basket. The regulator has proposed a rule that would prohibit regulated exchanges from listing certain contracts contrary to the public interest. Those include contracts involving “gaming,” the definition of which covers elections, awards, and sporting events.
The CFTC's proposal drew pushback from online gambling operators, as the Sports Betting Alliance objected to the rule during the public comment period.
“Currently, the proposed rule overlooks the compelling economic purpose that an institutional futures market could serve in allowing operators to hedge commercial risks,” SBA president Jeremy Kudon wrote in an Aug. 7 letter to the CFTC. “Labeling any contracts involving gaming as categorically contrary to the public interest will limit the industry's hedging ability, a move that we believe has not been sufficiently considered by the CFTC. We object to the proposed rule to the extent it forecloses an institutional futures market for this purpose.”
Robinhood objected to the proposed rule as well, with the president of its derivatives business telling the CFTC that the regulation is “overly broad” and that the regulator had not shown why a series of sporting events could not be used by investors to hedge risk.
An example used by the company was all of the “commercial participants” invested in a Los Angeles Lakers season, such as corporate sponsors.
“Specifically, consistent with Congressional intent, Robinhood Derivatives believes the Commission should focus on prohibiting single sporting events or contests,” Robinhood's J.B. Mackenzie said in a letter.
The CFTC has yet to finalize the rule, which could make it harder for Robinhood or DraftKings to offer election and sports-related contracts. The CFTC also has supporters, such as the National Football League.
"The NFL is concerned that if sports related gaming contracts were to be permitted, such contracts may not be used in a legitimate effort to mitigate commercial risk," said Jonathan Nabavi, the league's vice president of public policy and government affairs, in a letter to the regulator. "These contracts would mimic sports betting but seemingly without the robust regulatory features that accompany regulated and legalized sports betting and which help to mitigate threats to the integrity of our contests."
Barring any change at the state level, DraftKings would likely have to subject itself to CFTC oversight to offer election betting in the U.S. That would take time, and there’s no guarantee the CFTC or the law will permit it at all by the time DraftKings gets through the regulatory process.
State your case
State regulators are also the ones blocking DraftKings from offering election betting markets to sportsbook users. And if Robinhood were to try to get into more straightforward sports betting, it would have to deal with those same regulators.
These are just a few considerations. In a report to clients on Wednesday, Citizens JMP Securities analyst Jordan Bender outlined some of the business challenges facing Robinhood on its road to legal sports betting.
“Building out a sports betting product requires a checklist of costly and time-consuming initiatives,” Bender wrote. “The sector has proven it can take years (if not decades) to properly build an end-to-end app with product and technology, including the need for executives, and potentially holders, of the stock to obtain gaming licenses.”
Given this and other concerns, Bender said they believe the “more sensible path” for Robinhood would be to set up a betting exchange wherein users wager against each other. The company could also look at buying a sportsbook operator, but purchasing even a “sub-scale” bookmaker would take a ton of time and money, in JMP’s view.
Meanwhile, DraftKings and FanDuel are already well-entrenched as the leaders in online sports betting in the U.S. Robinhood could dabble in sports wagering using federally regulated contracts (which, again, is not a certainty), but if it wants to offer a more straightforward sportsbook, it will face tough competition.
“We are not writing off Robinhood as a legitimate threat, or any other company looking at entering the space, but we believe FanDuel and DraftKings products and technology will only improve as companies develop a differentiated strategy,” Bender wrote. “Overall, we believe there is no outside threat to the top two companies at this time, and that any others attempting to gain meaningful market share will need to do so over time, through a strong brand, product, and loyalty.”
