Sports betting is the next frontier for Wall Street’s smartest quants to conquer

• Trading firm Susquehanna is dipping its toe into sports gambling.
• The space has exploded in the US as dozens of states have legalized online gambling.
• Just as quant traders have changed equity markets forever, sports betting might be next.

Quants and gambling have been intertwined from the start.

Math professor and first-generation quant trader Ed Thorp first rose to fame because he laid out the blueprint for counting cards in blackjack in his 1962 book “Beat the Dealer.” A typical night for the late founder of Renaissance Technologies, Jim Simons, when he was an undergrad at MIT included long-running poker games with his classmates. A now-infamous poker charity tournament in 2006 had some of the biggest names in hedge funds competing, including Citadel’s Ken Griffin, AQR’s Cliff Asness, and PDT’s Peter Muller, who came out on top.

But they all knew the real money was in markets, not poker pots. While some quant types have made their fortunes gambling — such as Bill Bentley, the man who “cracked” horse racing — the most ambitious chased basis points, not parlays.

Until now.

Trading giant Susquehanna has built out a 15-person unit focused on sports gambling in Dublin and plans to expand into the US. The number of “well-informed, deep-pocketed users” is growing on Novig, a sports betting exchange, the startup’s founder Kelechi Ukah told Business Insider.

With sports gambling exploding in popularity in the US thanks to dozens of states allowing online betting, these traders — known to use copious amounts of data and sophisticated programs to trade securities in markets around the world — are diving in in search of serious profits in a nascent space.

The increased presence of top-level quant firms is going to cut into the wins of the average gambler even more, said Jacek Dmochowski, a professor at the City College of New York who has studied the “optimal” way to gamble on sports.

Sports gambling in the US is no longer a business done under the table with a shady bookie or on a Las Vegas bachelor party trip. Every night, millions are betting on college and professional games, some to the point of no return — a study from UCLA found that states that legalized gambling have seen a 28% increase in bankruptcies compared to those that didn’t.

Through the second quarter of this year, online gambling site FanDuel averaged 3.3 million bettors each month. Flutter Entertainment, the owner of Irish gambling company Paddy Power and US-based DraftKings, made more than $7 billion in revenue across its different units in the first half of the year. Executives at MGM spoke on their earnings call at the end of July about timing product releases for the start of football season.

While the limits for many of these online platforms are relatively small compared to the trades the world’s smartest quants are typically putting on, the space is growing rapidly.

“Sportsbooks will have to basically alter their lines in response” to large wagers from trading firms, Dmochowski said.

“That’s going to make it harder for the betting public to make a profit.”

Easy wins are already vanishing

The trading firms that are slow to move have already missed out on low-hanging fruit.

“It’s a very similar dynamic to the electronicification of securities marketplaces in the 70s and 80s,” said Ukah, the cofounder of Novig and a one-time Jane Street intern.

Just as stock trading evolved from a phone call with a broker who would charge a commission to discount to online brokerages like eTrade to algorithmic trading shops, sports betting has gone from a personal relationship with a bookie to platforms like FanDuel.

“The final stage is the algorithmic execution phase,” he said.

Already, the smartest Novig users are sanding away the easiest returns. Novig, which pulls in odds from different sportsbooks, has seen arbitrages between different sportsbooks’ odds disappear after a few seconds now. Two years ago, it was several minutees, Ukah said.

“Everyone is much tighter,” Ukah said.

Dmochowski predicts an “algorithm arms race” between traders and sportsbooks to find “the optimal price.”

There’s demand from Novig users for the exchange to release software that would allow traders to program a bot to trade for them. Ukah said there’s no timeline at the moment to release this, but said the portion of the gambling market growing the quickest is from institutions.

“It’s an uncorrelated, high-volatility asset class,” Ukah said.

In other words, exactly what trading shops are looking for.