Sports betting companies are increasingly eyeing market-making as a natural extension of their existing financial modelling and risk management capabilities.
The prediction markets space has blurred the lines between traditional wagering and financial trading, creating fresh opportunities for established bookmaking operators worldwide.
Unlike traditional sportsbooks, prediction markets are categorised as derivative exchanges, meaning they rely partly on market-making to ensure liquidity between buyers and sellers.
Earlier prediction products like Betfair struggled significantly due to a lack of liquidity, a problem that bookmakers believe their existing infrastructure can help solve.
On DraftKings’ Q1 earnings call, CEO Jason Robins said his company should have “one of the top two or three market-makers in the world” for sports contracts, “arguably the best,” given their modeling capabilities.
Robins added that he doesn’t see any potential challengers “outside of maybe one or two of our big sportsbook competitors,” signalling strong confidence in DraftKings’ positioning.
Flutter CEO Peter Jackson separately confirmed on his company’s earnings call that FanDuel is actively deploying in-house market-making services across prediction market platforms.
Both companies’ stocks are down more than 30% year-to-date, with prediction-related capital expenditure contributing to investor concerns about near-term returns.
Gaming researchers gathered in Las Vegas this week for the 19th edition of UNLV’s International Conference on Gambling and Risk Taking, a triennial event focused on cutting-edge gambling research.
UNLV PhD candidate Shivam Sharma presented research titled “Optimal Bookmaking with CRRA Utility: Existence, Uniqueness, and Numerical Methods,” exploring market-making best practices using Kalshi contracts on MLB games.
Sharma explained the core mechanics of market-making during his presentation, describing how liquidity providers and takers interact to move prices in prediction markets.
“How it happens is, there’s a liquidity provider, he goes out there, posts his limit order on both sides, and then a liquidity taker comes and takes the offer,” Sharma said at the onset of the presentation.
“It’s this dynamic between the liquidity provider and a taker that moves the prices…How can I post my limit orders, in which sequence, so that at the end of the day, I make a certain amount of profit?” Sharma continued.
Sharma noted key differences between modelling for prediction markets versus traditional stocks, including different payout structures and the direct influence of event outcomes on contract prices.
“There are some papers about an automated market-maker, but…there’s nothing out there as of now that tries to formulate this problem in a mathematical framework and tries to solve it,” Sharma said.
Inventory control emerged as a central theme in Sharma’s presentation, given how rapidly prices can shift across the lifecycle of a sporting event.
“As a market-maker, what you are really interested in is making sure that your inventory is within a certain bounds, so that you cap your risk potential, or risk-taking capability,” he said.
This kind of continuous risk management is already deeply familiar to major sportsbook operators, particularly in the context of live in-game betting and real-time pricing adjustments.
Analysts at Eilers & Krejcik Gaming reported in January that major US sportsbooks all posted uptimes of 65% or higher for college football games, with DraftKings leading at an average of 86%.
The average overround exceeded 5% for all major books tracked, with BetRivers topping the leaderboard at over 8% expected return on turnover.
Robins expressed confidence that DraftKings’ established betting expertise would translate directly into a profitable and capital-efficient market-making revenue stream going forward.
“In terms of profitability versus investment, the market-maker should be or is profitable already,” Robins told analysts at this month’s earnings call.
“That’s gonna be the one that’s sort of the least capital intensive in terms of investment, and I think it will produce really strong results in the near-term and continue to grow,” he added.
