Traditional Gambling Giants Enter Prediction Markets, Aiming to Outmaneuver Wall Street

This article is from: Sportico

Compiled by | Odaily (@OdailyChina); Translator | Azuma (@azuma_eth)

As prediction markets explode, two distinct groups are circling — one from Wall Street and the other from Morton Street (the headquarters of sportsbook Fanatics). On one side are professional financial trading firms, and on the other are traditional sportsbook operators, both believing they possess the capabilities to become top predators.

Sportsbooks Enter the Market-Making Arena

Three traditional sports betting operators — DraftKings, Fanatics, and FanDuel — have all ventured into prediction markets to counter the threat this emerging sector poses to their core businesses. After a period of cooling investor sentiment, these companies are accelerating their efforts, viewing their deep experience in the gambling industry as a potential competitive advantage.

DraftKings, Fanatics, and FanDuel have all started or intend to offer "odds" on their prediction market apps through affiliated market makers. This is similar to their operations in traditional sports betting, but the key difference is that in prediction markets, they must compete with third parties who can also place orders.

Based on conversations Sportico had with executives from relevant companies and industry analysts, there is no consensus that sportsbooks directly engaging in market-making can achieve higher returns than professional financial trading firms, but the sportsbooks are confident in the profit potential of market-making.

Peter Jackson, CEO of Flutter Entertainment, FanDuel's parent company, stated during the Q3 earnings call in November: "The core competency required for a market maker is the ability to accurately price complex and interconnected outcomes. This is exactly what our core business does every day."

Fanatics already has an active affiliated market maker named Morton St. Market Maker LLC — the name comes from the New York City street where its parent company is located, within walking distance of some of its Wall Street rivals. Morton St. Market Maker provides odds for both buying and selling contracts on Crypto.com, the underlying prediction market platform integrated by Fanatics.

Meanwhile, both DraftKings and FanDuel have hinted at the existence of affiliated market-making teams that would trade against their clients, but it remains unclear whether DraftKings or FanDuel have formally established such entities.

To ensure all users can quickly enter and exit positions at near-fair prices, market makers typically need to provide liquidity on both the "YES" and "NO" sides during specific periods, profiting from the small spread between the "buy now" and "sell now" quotes. For example, if a user buys a contract for the New York Mets to win at $0.50, and the market maker previously acquired that contract via a limit order at $0.47, the market maker earns $0.03.

Wall Street's Wolves Counter-Encircle

On the other side of the sportsbooks are professional trading institutions from Wall Street.

Although Wall Street firms like Susquehanna International Group have extensive experience in financial derivatives market-making, some industry insiders interviewed by Sportico noted that Wall Street is indeed less adept than traditional sportsbooks at setting odds for sporting events.

Alfonso Straffon, who has worked in market-making for both Wall Street junk bonds and sports betting, said: "I would caution those Wall Street firms not to underestimate the competition; sports betting is a long-established ecosystem."

Sporting events present more complex risk management challenges for market makers, especially during live games where any development — such as an injury, weather change, or coaching decision — can drastically alter the true value of a bet. "Parlays" introduce additional risk, where a single mistake can lead to massive losses. This risk is further amplified if the exchange supports leveraged trading.

Advanced data models and the ability to access information ahead of the public — these are the advantages of traditional sportsbooks — are crucial for mitigating risk.

However, this doesn't guarantee sportsbooks an easy victory in prediction markets. Another sports betting company founder leans towards the view that, with deeper capital and experience adapting to different financial markets, Wall Street will ultimately achieve higher returns.

Wall Street firms like Susquehanna and Jump Trading, which lack long-term sports experience, are racing to hire market makers specialized in sports. Prediction markets like Crypto.com and Polymarket have also posted related recruitment ads for their affiliated trading desks in recent months; Robinhood's Rothera mentions an active affiliated market maker (sources suggest it might be Susquehanna) in its rulebook; and according to a Bloomberg report this week, Jump Trading is investing in both Kalshi and Polymarket.

Sportico previously reported details about Kalshi Trading (Kalshi's affiliated market-making entity), which is also striving to compensate for its lack of sports experience — Kalshi co-founder Luana Lopes Lara stated on X that Kalshi Trading was not profitable on sports and that sports accounted for "less than 6% of its market-making volume" in November.

Competitive Advantages May Gradually Converge

Market-making is not a high-margin business. Multiple companies competing to price the same prediction market naturally compresses profitable spreads. In other words, the more market makers in a prediction market, the less profit can be made per individual bet.

However, while prediction markets with affiliated market makers might wish to limit their number, operational reality is far more complex. A lack of institutional capital support could lead to insufficient overall market liquidity, directly impacting user experience unless the affiliated market maker injects massive capital (and assumes the corresponding risk) to fill the gap.

This means sportsbooks will inevitably compete on the same field as financial institutions, vying for order flow from retail bettors.

Ultimately, as Wall Street institutions hire talent with professional sports backgrounds (and vice versa), the competitive advantages of both sides may gradually converge. But at least for now, the sportsbooks entering prediction markets are brimming with confidence in their chances of success.