Making a Bet on the Future of Betting

Summary

Thoughts on the Market: Making a Bet on the Future of Betting

Podcast Information:

• Title: Thoughts on the Market
• Host/Author: Morgan Stanley
• Episode: Making a Bet on the Future of Betting
• Release Date: March 19, 2025

---

Introduction

In the March 19, 2025 episode of Thoughts on the Market, hosted by Morgan Stanley, Mike Cypress and Stephen Grambling delve into the evolving landscape of the US sports betting industry. Titled "Making a Bet on the Future of Betting," the episode explores the significant growth of sports betting following its legalization, the emergence of betting exchanges, and the disruptive potential of prediction markets within the industry.

Evolution of US Sports Betting

Mike Cypress opens the discussion by highlighting the transformative shift in the US sports betting market post-2018. "Sports betting used to be against the law in most of America outside of Nevada. That changed in 2018 when the U.S. Supreme Court declared a federal ban on sports betting to be unconstitutional," he explains (00:10 ). This landmark decision led to a rapid expansion, with 38 states, along with Washington D.C. and Puerto Rico, legalizing some form of sports betting.

Stephen Grambling adds context to the current organizational and regulatory framework. "[...] each state forms its own framework across taxes, what sports can or can't bet on and regulations around advertising," he states (00:56). This decentralized approach has contributed to the industry's substantial growth, with revenues soaring from $11 billion in 2023 to a record $13.7 billion in the previous year, according to the American Gaming Association.

Betting Exchanges: An Overview

The conversation shifts to betting exchanges, a pivotal component of the modern sports betting ecosystem. Grambling defines betting exchanges as platforms where individuals can place bets directly against each other rather than against traditional bookmakers. "These exchanges match opposing bets and then take a commission on the winnings and typically offer better odds by eliminating traditional bookmaker margins," he explains (01:55).

Betting exchanges are noted for their competitive edge, offering commissions between 2% to 5%, compared to the 5% to 6% spread seen in traditional single bets. However, their market presence remains relatively modest, with single bets accounting for approximately $900 million in legalized states and an additional $800 million in states where sports betting hasn't been legislated (01:55).

Prediction Markets and Their Potential

Mike Cypress broadens the discussion by introducing prediction markets beyond traditional sports betting. "Prediction markets are a type of marketplace where event contracts trade. Sometimes they're called forecast markets or even information markets," he explains (03:30). These markets allow participants to trade contracts on various events, ranging from political outcomes to economic indicators, with the price of each contract serving as a probabilistic forecast.

Grambling acknowledges the versatility of prediction markets, noting their historical presence in areas like weather forecasting on exchanges dating back over 25 years. Recent technological advancements, mobile trading platforms, and increased retail investor participation are driving renewed interest and growth. "The 2024 election sparked people's interest in event contracts and that's persisting post-election," Mike observes (04:33).

Legal Landscape and Regulatory Considerations

While prediction markets have a well-established presence in certain sectors, their application to sports betting introduces new regulatory challenges. Cypress points out, "One area of open debate though is around the legality of sports event contracts, where we expect regulators to provide some clarity around that in the months ahead" (05:45). The episode underscores the need for clear regulatory guidelines to facilitate the seamless integration of prediction markets into the sports betting framework.

Impact on the Sports Betting Industry

The potential disruption caused by prediction markets is a focal point of the discussion. Grambling outlines a dual perspective: existing sports betting operators may face increased competition from prediction markets, but there is also significant upside potential. "A new regulatory framework could also open up new states. So the states that I referenced before that are still out there, that haven't been legalized all of a sudden become fair game given the size of these new states," he notes (06:32).

The sheer economic scale of remaining large markets like California, Texas, and Florida presents substantial growth opportunities. Morgan Stanley analysts estimate that the introduction of prediction markets could contribute "potentially in the hundreds of millions of dollars in incremental EBITDA" for incumbents navigating this evolving landscape (07:16).

Conclusions and Future Outlook

As the episode concludes, both Cypress and Grambling emphasize the transformative potential of prediction markets within the sports betting industry and beyond. Cypress envisions a future where prediction markets not only disrupt traditional betting but also offer valuable information insights for both retail and institutional investors. "I do think that's going to require participation from both retail as well as institutional investors that can help fuel a robust and liquid marketplace," he remarks (05:56).

Grambling remains optimistic, highlighting the balance between competitive risks and substantial growth opportunities. The collaboration between technological innovation and regulatory evolution will be critical in shaping the future of betting in the United States.

---

Notable Quotes

• Mike Cypress (00:10): "Sports betting used to be against the law in most of America outside of Nevada. That changed in 2018 when the U.S. Supreme Court declared a federal ban on sports betting to be unconstitutional."

• Stephen Grambling (00:56): "Each state forms its own framework across taxes, what sports can or can't bet on and regulations around advertising."

• Stephen Grambling (01:55): "These exchanges match opposing bets and then take a commission on the winnings and typically offer better odds by eliminating traditional bookmaker margins."

• Mike Cypress (03:30): "Prediction markets are a type of marketplace where event contracts trade. Sometimes they're called forecast markets or even information markets."

• Mike Cypress (04:33): "The 2024 election sparked people's interest in event contracts and that's persisting post-election."

• Mike Cypress (05:45): "One area of open debate though is around the legality of sports event contracts, where we expect regulators to provide some clarity around that in the months ahead."

• Stephen Grambling (06:32): "The potential upside opportunity, we think actually outweighs the competitive risks and we quantify this as being potentially in the hundreds of millions of dollars in incremental EBITDA."

• Mike Cypress (05:56): "I do think that's going to require participation from both retail as well as institutional investors that can help fuel a robust and liquid marketplace."

---

Final Thoughts

This episode of Thoughts on the Market provides a comprehensive analysis of the current state and future prospects of the US sports betting industry, with a particular focus on the disruptive role of prediction markets. By intertwining regulatory insights, market data, and expert opinions, Morgan Stanley offers listeners a nuanced understanding of the opportunities and challenges ahead in the ever-evolving landscape of betting.

Transcript

[Mike Cypress]

Welcome to Thoughts on the Market. I'm Mike Cypress, Warren Stanley's head of US Brokers, Asset Managers and Exchanges Research.

[Stephen Grambling]

And I'm Stephen Grambling, head of US Gaming, Lodging and Leisure.

[Mike Cypress]

Today we'll talk about sports betting and how prediction markets can disrupt it. It's Wednesday, March 19th at 10:00am in New York. Sports betting used to be against the law in most of America outside of Nevada. That changed in 2018 when the U.S. supreme Court declared a federal ban on sports betting to be unconstitutional. As a result, many American states legalize sports betting. Over the last seven years, it's become even more popular and profitable. The American sports betting industry posted a record $13.7 billion of revenues last year. That's up from 2023's record of $11 billion, according to the American Gaming Association. Now prediction markets are set to potentially disrupt this industry. Stephen, to set the stage, how is the US Sports betting industry currently organized and regulated?

[Stephen Grambling]

Well, as you mentioned, Mike, with the overturning of the Professional Amateur Sports Protection act in 2018, legalization of sports betting turned to the states. The path to legislation varies by state, with different constituents to consider beyond even the local government, Senate and Congress, but also tribal casinos, commercial casinos, sports teams, leagues, et cetera. We now have 38 states plus D.C. and Puerto Rico offering legal sports betting in some format, collecting billions of doll dollars in taxes in aggregate. At this point, the big states that remaining are really only Texas, Florida, Georgia and California. Each state forms its own framework across taxes, what sports can or can't bet on and regulations around advertising. This means a separate commission for each state regulates the industry in conjunction with state lawmakers.

[Mike Cypress]

I see. And what exactly are betting exchanges and how do they fit within the US Sports betting market?

[Stephen Grambling]

Betting exchanges have existed for a long time in markets around the world. These are really exchanges and are platforms where individuals can bet directly against each other on an event outcome rather than against a bookmaker. These exchanges match opposing bets and then take a commission on the winnings and typically offer better odds by eliminating traditional bookmaker margins. That said, the all in commission can range at 2 to 5%, whereas the spread on a traditional singles bet is about 5 to 6%. So it's relatively small. This is also known as the vigorous or the vague or what the book gets to keep due to the need to be perfectly balanced as an exchange. These platforms, which operate in various markets, as I said around the world, are generally more akin to premarket single bets. So single bet, or sometimes people call them straight bets, are really just Betting on the outcome of a match or the over under. They don't typically impact things like multi leg bets, also known as parlays, since there's less of a consistent betting pool because the type of bets are more limited than what a sportsbook offers. These exchanges somewhat plateaued in popularity in markets like the UK for frame of reference. We estimate these singles bets are about $900 million in markets where it's legal for sports betting and roughly another $800 million in states without legislation. Again, this is really just the market for people who only bet on that type of bet that don't do both singles bets and parlays or parlays alone. Mike, maybe turning it back to you. Sports betting is a type of prediction market. But from where you sit, how would you define prediction markets more broadly? And can you give some examples?

[Mike Cypress]

Sure. So prediction markets are a type of marketplace where event contracts trade. Sometimes they're called forecast markets or even information markets. A core feature here is trading an outcome of events such as the November election, economic indicators, or even corporate events. But unlike futures contracts, event contracts have a defined risk and defined reward. Generally they're structured as binary options which can be easily understood. For instance, a contract could pay a dollar if the Consumer price index or CPI exceeds say 3% in March. If an investor buys that contract for 75 cents, they could generate a 25% potential return if CPI comes in over 3% and they collect a dollar on that contract. Now the counterparty on the other side of that trade is is the investor who sold that contract collected the 75 cents and they would stand to lose 25 cents potentially if they held onto that contract, paid out the full dollar in the event that CPI came in hot. What's interesting is the price of that contract becomes the best forecast of that event happening. And so this can provide a lot of information value.

[Stephen Grambling]

So it sounds like you could bet on just about anything. So are these prediction markets legal?

[Mike Cypress]

Not only are they legal, they've been around for some time. Though perhaps more esoteric in nature in terms of where we have seen contracts and types of events traded on marketplaces, they've been geared more towards end users and farmers. For example, event contracts on the weather have been listed on a Chicago derivative Exchange for over 25 years. What's new and interesting is that we're seeing new exchange upstarts enter the space. They're innovating, they're broadening access to retail investors, and they're benefiting from the confluence of a number of different trends around Technology improvements with mobile trading in recent years, the speed and access to information, the ease of account opening broadly, retail investors coming into the marketplace in the pure simplicity and intuitive nature of event contracts. The 2024 election sparked people's interest in event contracts and that's persisting post election. In the coming months, we do expect a large retail brokerage platform in the US to really help potentially mainstream event contracts. Coming back to your legality point and question, one area of open debate though is around the legality of sports event contracts, where we expect regulators to provide some clarity around that in the months ahead.

[Stephen Grambling]

Interesting. So some have also argued that the prediction markets are not just the future of trading, but for information in general. Do you think prediction markets can be a disruptive force in finance then over time?

[Mike Cypress]

Potentially yes. I do think that's going to require participation from both retail as well as institutional investors that can help fuel a robust and liquid marketplace. The sheer simplicity is helpful in terms of driving retail adoption, but for institutional investors and corporates, they could look to prediction markets as a valuable hedging tool with insurance like properties, not to mention the information value that can be derived Steven, given our discussion of prediction markets and their relevance for sports betting, how are you framing the potential for risk and opportunity for the sports betting industry from the application of prediction market models?

[Stephen Grambling]

There's a bit of a put and take where in existing sports betting markets, that's where it's legal. The industry may face new competition, so the incumbents will face new competition from these prediction markets being opened up. On the other hand, a new regulatory framework could also open up new states. So the states that I referenced before that are still out there, that haven't been legalized all of a sudden become fair game given the size of these new states. As I mentioned, folks like California, Texas, Florida, these are enormous economies and they're roughly equal to the size of the existing markets. So the potential upside opportunity, we think actually outweighs the competitive risks and we quantify this as being potentially in the hundreds of millions of dollars in incremental ebitda. To some of the incumbents that operate.

[Mike Cypress]

In the space, that's fascinating. Stephen, thanks for taking the time to talk.

[Stephen Grambling]

Great speaking with you, Mike.

[Mike Cypress]

Thanks for listening. If you enjoy thoughts on the market, please leave us a review Wherever you listen and share the podcast with a friend or colleague today.

[C]

The preceding content is informational only and based on information available when created. It is not an offer or solicitation, nor is it tax or legal advice. It does not consider your financial circumstances and objectives and may not be suitable for.