Consolidation Within Gaming Space Creates New Opportunities for Nasdaq

JohnWallStreet

Most know Nasdaq for its stock market exchange, but it is the company’s market technology division - which provides financial market software to third parties - that stands as the fastest growing part of the nearly 50-year-old business (now responsible for 13% of total revenues). Global trading & market data services still represent the majority of corporate income, but with more than one-hundred partner-owned marketplaces using Nasdaq trading, clearing or surveillance software - in addition to the thirty exchanges that the company owns and operates - the Wall Street establishment has morphed into a technology provider. Over the last three years, the publicly traded entity has begun applying software built for the capital markets to other industries, including; sports & gaming. Illiquidity associated with pool betting and rampant consolidation within the gaming space (since PASPA was struck down in May '18) have created previously unforeseen business opportunities. 

Howie Long-Short: Nasdaq’s sports & gaming efforts began in 2016 with the acquisition of the options exchange ISE and the company’s sports betting application Longitude, a parimutuel calculation methodology developed to hedge against the release of economic statistics and one that could be used to potentially trade illiquid financial products. Head of new markets, Scott Shechtman, said that the identification of “parallels” between Longitude technology and a horse racing business that too is based on pool betting and is parimutuel from a mathematical standpoint sparked a re-engineering of the code. The problem with the traditional parimutuel horse racing framework is that as new bets are introduced, the number of small pools - which fail to provide gamblers with the value sought - increases. Nasdaq technology permits racing operators to offer a small number of very large liquid pools, so that gamblers can avoid betting against themselves. The Hong Kong Jockey Club and Tabcorp, the largest gaming operator in Australia, are among the company’s more prominent clients.

Back in July, the market technology division announced a partnership with a U.K. betting platform entitled ‘Football Index’ to support a product more closely aligned with Nasdaq’s core trading business. The company operates a matching engine that facilitates the purchase and sale of individual athletes, and issues dividends or returns based on their performance over a three-year period. Shechtman explained that “when a market business exceeds a certain scale, it becomes very challenging to manage the buying and selling manually; it’s difficult to even find software that does it really well and really quickly. [Nasdaq] technology ensures [the exchange] will be able to handle a larger volume of transactions, in shorter periods of time.

There will eventually be opportunities for Nasdaq to impact the U.S. sports betting landscape. Aside from replicating the model it uses in China and Australia with American horse racing businesses, Shechtman believes the company can serve gaming operators in need of help processing and monitoring transactions. “With the rise of in-play and mobile betting and consolidation trending in the industry (as discussed earlier this week), there are so many more transactions flowing through so many fewer platforms and [those that remain] are experiencing performance issues during peak times. [Nasdaq is] really good at managing a large volume of transactions without choking on them and [the company is] by far the leading provider of market surveillance software in the exchange space.

Fan Marino: Speaking of market surveillance, there are multiple ways to apply Nasdaq software designed to detect insider trading or market manipulation patterns to the sports gaming sector. Conversations with regulators and a “major foreign governing body” indicated that the company’s transactional data to could be used to identify unusual activity, as opposed to the price level monitoring currently offered by companies like SportRadar and Genius Sports. 

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