Loyola University Chicago School of Law, Weekend JD Dec. 2022
The question of why it’d be legal to gamble in the stock market but not the Super Bowl has been made moot in recent years. In the wake of recent Supreme Court decisions and state legalization, sports betting is widespread and seemingly ever expanding each year. Instead of debates on whether or not sports betting should be allowed, financial commentators discuss whether DraftKings is a winning bet as a “speculative play” to purchase stock in. This leads to a new question: are financial markets better regulated than the sports betting market?
Murphy v. NCAA
Prior to 2018, sports betting was effectively outlawed nationwide, excluding a few states such as Nevada via the Professional and Amateur Sports Protection Act of 1992 (PAPSA). PAPSA was in force until the Supreme Court struck it down in Murphy v. NCAA on the grounds that it commandeered power from the states, giving states the individual authority to legalize sports betting. The Court in Murphy acknowledged that Congress could regulate sports gambling directly, but not prohibit states from authorizing it. After Murphy, members of Congress like Senator Schumer have proposed a federal framework to regulate sports gambling, but there has been no federal action yet.
Financialization of gambling
While many in the financial industry find comparisons between stock speculation and gambling trite and pejorative, gambling and finance have a history of intermingling. In the late nineteenth century, not long after the establishment of the Chicago Board of Trade and the beginnings of the futures market, a phenomena of “bucket shops” began popping up to create gambling dens out of stocks and commodities exchanges in New York and Chicago. The bucket shops intentionally blurred the lines between gambling and stock speculation for profit, and long haunted the legitimacy of commodity futures markets. It was not until the 1920s that Congress successfully curtailed the bucket shops through the Grain Futures Act, and later the Commodity Exchange Act (CEA). Congress would later create the Commodity Futures Trading Commission (CFTC) as a federal agency to enforce the Commodity Exchange Act and preserve the integrity of the futures markets.
In the case of bucket shops, gambling followed the creation of sophisticated financial markets. After Murphy in the twenty-first century, sophisticated financial markets are following gambling through the legalization of sports betting. The Dodd-Frank Act amended the CEA to allow the CFTC to prohibit agreements, contracts or transactions that are contrary to the public interest as they relate to gaming. Testing the limits of this, in December 2020, Eris Exchange LLC (ErisX) asked the CFTC permission to list “RSBIX NFL Futures Contracts” (NFL Contracts), which would have created futures contracts based on the moneyline, the point spread, and the total points for NFL games. While ErisX ultimately withdrew its proposal in March 2021 after receiving strong headwinds, CFTC Commissioner Berkovitrz subsequently suggested there could be a path for sports-based financial derivatives to be approved.
The spectre of binary-options prohibitions
Beyond the specific example of ErisX, there is a lot of gray area in what DraftKings and its competitors are seeking to do with their gaming platforms. Off-exchange Binary-options trades are prohibited in US markets, and that’s a prohibition that the SEC and CFTC take seriously. Yet there is little daylight between a binary-option and daily fantasy sports contests — some of which match users in a head-to-head all or nothing game. Binary-options are essentially options predicting whether specific events would occur, giving purchasers the ability to bet on a “yes” or a “no” for win-or-lose payout.
The CFTC has a history of pursuing these binary-options outside of the traditional finance space as well, most notably as it charged the Trade Exchange Network Limited (TEN) and its Intrade The Prediction Market Limited (Intrade) for offering binary-options on, amongst other things, political events. This is in contrast to PredictIt, the political prediction market of Victoria University, which operates pursuant to a No-Action letter it received from the CFTC in 2014. Recently, the CFTC sent a cease-and-desist to crypto-prediction-market Polymarket, who later settled with the CFTC for $1.4 million and the cessation of its binary-option activity. There has not been any direct action against a sports betting website regarding these activities yet.
How to regulate sports betting
While sports betting does not invoke securities regulations, the CFTC has a strong case to make that the head-to-head contests on daily fantasy sports websites fall within its jurisdiction both as a futures contract and an options contract – especially with Dodd-Frank language that captures gaming event contracts. And as such, even though it may not be politically comfortable, it’s possible that much of the sports betting industry could be brought within a derivatives regulatory framework without any need for additional legislation. That the CFTC has not claimed jurisdiction, however, suggests that they either intend to see how the industry matures or are awaiting on potential federal action.
In the meantime, state by state regulation has generally turned to self-regulation by the big companies. However there have been notable scandals such as an employee of DraftKings using inside information to win $350,000 on FanDuel — a concern of inside trading, which has clear parallels to the frauds addressed by the CEA and Securities Exchange Act. And others still have raised concerns about the potential of match-fixing that has scandalized professional sports in the past, and how that can truly be monitored without government oversight. Without even beginning a discussion of gambling addictions, there is a clear need for federal regulations to add clarity to the industry.