This article is from: Sportico
Compiled by | Odaily Planet Daily (@OdailyChina); Translator | Azuma (@azuma_eth)
As prediction markets explode, two groups are closely watching—one from Wall Street and the other from Morton Street (the headquarters of gaming company Fanatics). On one side are professional financial trading firms, and on the other are traditional gambling service providers. Both believe they have what it takes to become top predators.
Gambling Companies Enter Market Making
Three traditional sports betting service providers—DraftKings, Fanatics, and FanDuel—have all ventured into prediction markets to counter the threat this emerging trend poses to their core businesses. After experiencing a shift in investor sentiment, these companies are accelerating their efforts and view their extensive experience in the gambling industry as a potential competitive advantage.
DraftKings, Fanatics, and FanDuel have all started or plan to offer "odds" through affiliated market makers on their prediction market platforms. This is similar to their traditional sports betting operations, but with a key difference: in prediction markets, they must compete with third parties who can also place orders.
Based on Sportico's discussions with executives and industry analysts, there is no consensus yet that gambling companies directly engaging in market making can achieve higher returns than professional financial trading firms. However, gambling companies are confident in the profit potential of market making.
Peter Jackson, CEO of FanDuel’s parent company Flutter Entertainment, stated during the Q3 earnings call in November: "The core capability required for market makers 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 called Morton St. Market Maker LLC—named after the street in New York City where its parent company is located, within walking distance of some Wall Street competitors. Morton St. Market Maker provides odds for both buying and selling contracts on Crypto.com, the underlying prediction market platform integrated by Fanatics.
Meanwhile, DraftKings and FanDuel have both hinted at having affiliated market-making teams that trade against their clients, though it is unclear whether DraftKings or FanDuel has 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. Their profits come from the small spreads between "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 the contract via a limit order at $0.47, the market maker earns $0.03.
Wall Street’s Counter-Encirclement
On the other side of the gambling companies 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 at setting odds for sports events compared to traditional gambling companies.
Alfonso Straffon, who has worked in market making for both Wall Street junk bonds and sports betting, said: "I would caution Wall Street firms not to underestimate their opponents. The sports betting ecosystem has been around for a long time."
Sports events present more complex risk management challenges for market makers, especially during games, where any development—such as injuries, weather changes, or coaching decisions—can drastically alter the true value of bets. "Parlays" introduce additional risks, and a single mistake can lead to significant losses. If exchanges leverage trading, this risk will be further amplified.
Advanced data models and the ability to access information before the public—these are the advantages of traditional gambling companies—are crucial for mitigating risks.
However, this does not mean gambling companies are guaranteed to win in prediction markets. Another sports betting company founder believes 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-making specialists with sports expertise. Prediction markets like Crypto.com and Polymarket have also posted related job openings for their affiliated trading departments in recent months. Rothera, owned by Robinhood, mentioned an active affiliated market maker in its rulebook (sources suggest it might be Susquehanna). According to a Bloomberg report this week, Jump Trading is simultaneously investing in Kalshi and Polymarket.
Sportico previously reported details about Kalshi Trading (Kalshi’s affiliated market-making arm), which is also working to弥补 its lack of sports experience. Kalshi co-founder Luana Lopes Lara stated on X that Kalshi Trading was not profitable in 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. Having multiple companies compete on pricing in the same prediction market naturally compresses profitable spreads. In other words, the more market makers there are in a prediction market, the less profit can be made per bet.
However, although prediction markets with affiliated market makers might prefer to limit the number of market makers,实际操作中情况远非如此简单。Without institutional capital support, overall market liquidity could suffer. Unless affiliated market makers inject significant capital (and assume corresponding risks) to fill the gap, user experience will be directly affected.
This means gambling companies will inevitably compete with financial institutions on the same field, vying for order flow from retail bettors.
Ultimately, as Wall Street institutions hire professionals with sports expertise (and vice versa), the competitive advantages of both sides may gradually converge. But for now, at least, gambling companies entering prediction markets are confident in their chances of success.
