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The American gambling industry and its regulators have an opportunity to police digital sports betting. They should take it before fraud becomes rife.
Wagering on sporting events has evolved rapidly overseas in recent years. In Europe, Asia, and Australia, gambling on events while using “in-play wagering” and live data feeds more closely resembles the trading environment on the Nasdaq than a Las Vegas sportsbook.
Legalized sports betting is now on its way to a broader rollout in the United States. In May, the Supreme Court struck down a more than 25-year-old law that effectively banned commercial sports betting in most states. A number of states have already moved to allow the practice.
Many bookmakers have made efforts to limit fraud and manipulation, but more can be done to ensure a level playing field. Regulators and sporting bodies would be wise to learn the lessons of the financial industry and adopt a range of policies and surveillance tools while the market in the United States for sports betting is still nascent.
Many investors, regulators, and capital market players were caught flat-footed when markets were computerized decades ago. New digital products and trading methods created fresh forms of electronic manipulation and unintended consequences that were difficult to track within a sea of data. Authorities took months, for example, to trace and explain the causes of the Flash Crash of May 2010.
The cost to the financial industry of catching up with the bad behavior was significantly higher than if it had invested in defensive technologies at the start. The United States has taken years to start the Consolidated Audit Trail, and it is estimated to have cost the industry over $50 million in its first year.
Many systems for monitoring the integrity of sports betting around the world look at odds or prices across bookmakers. This type of approach was abandoned in financial markets over 15 years ago because it does not provide the granularity needed to properly police trading.
The systems that monitor financial markets today are much more powerful and can handle large volumes of data. (Nasdaq’s SMARTS stock market surveillance software, for instance, can handle over 60 billion events per day and can detect manipulative activity in real-time.) Monitoring bets alongside live feeds of events will be crucial to understanding possible manipulation, particularly as a result of wagering during a game.
Individual bookmakers monitor their own customers very closely, but policing a marketplace requires more than simply trusting its participants. Even monitoring the entire market only at the price level could still allow nefarious activity spread across multiple bookmakers to go unnoticed.
To truly oversee sports betting markets, regulators should require licensed operators to share all transactional betting data so that it can be examined for patterns known to indicate irregular activity. Cooperation across states is also important so that as large a slice of the market as possible can be monitored.
Surveillance technology can be a major factor in how well a new market operates and enforces a safe, level playing field. These systems should be able to handle high volumes of data and have some level of machine learning capability. As the quantity of data, the range of products, and the sophistication of traders grow within sports betting, these new technologies will become necessary.
As a market operator and technology company, we fully endorse this necessity.
There is a vast gray (or black) market in wagering that exists beyond our shores. But with this new opportunity, the United States has a unique chance to set an example by overseeing this marketplace with integrity.
Scott Shechtman is head of new markets, market technology at Nasdaq, and Tony Sio is head of marketplace and regulator surveillance, market technology at Nasdaq.
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