Traditional gambling giants enter the prediction market, aiming to strike a blow to Wall Street through dimensionality reduction

This article is from Sportico.

Translation by Odaily Planet Daily (@OdailyChina); Translator: Azuma (@azuma_eth)

As prediction markets explode, two groups are watching closely — they come from Wall Street and Morton Street (home to the headquarters of betting company Fanatics). One consists of professional financial trading firms, and the other of traditional betting service providers. Both believe they have the potential to become top predators.

Bookmakers Enter Market Making

Three traditional sports betting service providers — DraftKings, Fanatics, and FanDuel — have all entered prediction markets to counter the threat this emerging sector poses to their core businesses. After investor sentiment cooled, these companies are accelerating their efforts and view their extensive experience in the betting industry as a potential competitive advantage.

DraftKings, Fanatics, and FanDuel have begun or are considering providing “odds” through affiliated market makers in their prediction market applications. This is similar to their operations in traditional sports betting, but the main difference is — in prediction markets, they need to compete with third parties who can also place orders.

According to exchanges with Sportico, company executives, and industry analysts, there is currently no consensus that direct market making by bookmakers can yield higher returns than professional financial trading firms. However, bookmakers are confident in the profit potential of market making.

FanDuel’s parent company, Flutter Entertainment, CEO Peter Jackson, stated during the Q3 earnings call in November: “The core ability of a market maker is to accurately price complex and interrelated outcomes. That’s exactly what we do every day in our core business.”

Fanatics already has an active affiliated market maker called Morton St. Market Maker LLC — named after its New York City office street, Morton Street, which is within walking distance of some Wall Street competitors’ turf. Morton St. Market Maker provides odds for buy and sell contracts on Crypto.com, which is also the underlying prediction market platform integrated by Fanatics.

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

To ensure all users can quickly enter and exit positions at prices close to fair value, market makers typically provide liquidity on both “YES / NO” sides during specific periods. Their profits come from the tiny spreads between “immediate buy” and “immediate sell” quotes. For example, if a user buys a contract predicting the New York Mets will 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 Wolf Encircles from the Reverse Side

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

Although firms like Susquehanna International Group have extensive experience in derivatives market making, some industry insiders interviewed by Sportico say that Wall Street is indeed less experienced than traditional bookmakers when it comes to setting odds for sports events.

Alfonso Straffon, who has worked in market making for junk bonds and sports betting on Wall Street, said: “I would remind those Wall Street firms not to underestimate this — sports betting is an ecosystem that has been around for a long time.”

Sports events pose more complex risk management challenges for market makers, especially during ongoing matches, where any development — such as injuries, weather changes, or coaching decisions — can dramatically alter the true value of bets. “Straddle trading” adds additional risks, and a single mistake can lead to huge losses. Once exchanges support leveraged trading, these risks are further amplified.

Advanced data models and the ability to access information ahead of the public are advantages of traditional betting companies — and are crucial for risk reduction.

However, this does not mean bookmakers can dominate prediction markets. Another sports betting founder tends to believe that, with deeper capital reserves and experience adapting to different financial markets, Wall Street will ultimately achieve higher returns.

Susquehanna, Jump Trading, and other Wall Street firms lacking long-term sports experience are actively recruiting sports-specialized market makers. Prediction markets like Crypto.com and Polymarket have recently posted related job openings for their affiliated trading departments; Robinhood’s Rothera mentions an active affiliated market maker (rumored to be Susquehanna) in their rulebook. Bloomberg reported this week that Jump Trading is investing in Kalshi and Polymarket simultaneously.

Previously, Sportico reported details about Kalshi Trading (Kalshi’s affiliated market maker), which is also working to bridge its sports experience gap — Kalshi co-founder Luana Lopes Lara stated on X that Kalshi Trading’s sports volume accounts for less than 6% of its market-making volume in November, and the company is not profitable in sports.

Competitive Advantages May Converge

Market making is not a highly profitable business. When multiple companies compete on the same prediction market, the resulting price competition naturally compresses profit margins. In other words, the more market makers there are in a prediction market, the less profit can be earned per bet.

However, even if prediction markets with affiliated market makers aim to limit the number of market makers, the reality is far more complex. Without institutional capital support, overall market liquidity may suffer. Unless affiliated market makers invest large amounts of capital (and assume corresponding risks) to fill the gap, user experience could be directly impacted.

This means bookmakers will inevitably compete with financial institutions for order flow from retail bettors.

Ultimately, as Wall Street firms hire sports-savvy talent (and vice versa), their competitive advantages may gradually converge. But at least for now, bookmakers entering prediction markets remain confident in their chances of success.