Thursday, 12 November 2015

Will the New York State Attorney General ban stock trading next?

This week the New York State Attorney General, Eric Schneiderman , has ordered DraftKings and FanDuel to cease and desist their operations in New York .  The reason given was that daily fantasy sports (DFS) are in essence illegal gambling under state law.
Is it really gambling?  According to Joe Asher, the US CEO of William Hill, one of the largest betting and gambling companies it is gambling as players are “risking money on something of an uncertain outcome” http://www.usatoday.com/story/sports/fantasy/2015/01/11/fantasy-sports-gambling-debate-fan-duel/21612771.
Based on this criterion, investing in stocks  is gambling too and thus should face a similar sanction by Schneiderman. Let us see: Risking money, Check! Uncertain outcome, Check! Thus, all of the people who read this blog should face legal action soon. As matter of fact, as I argue below, there is more in common between DFS and  securities market than between DFS and the gambling industry.
There is no question that the growth of DFS has threatened the gambling industry.  Eilers Research estimated that “fans will wager over a quarter of a billion dollars on the outcome of eSports events in 2015 - a number that we project will exceed $23bn by 2020”(http://eilersresearch.com/wp-content/uploads/2015/08/eSports-Press-Release.pdf
An article in the Business Insider has estimated that”… the  number of entries at DraftKings this week increased from 3.75 million to 4.14 million, a 10.4% increase, while FanDuel's entries jumped 6.3%, from 3.18 million to 3.38 million”  This growth came after the insider trading scandal where employees of DraftKings were using their information to make millions on FanDuel.  http://www.businessinsider.com/draftkings-revenue-daily-fantasy-sports-2015-10.  The growth in this industry is evident when we look at the prize pools of the two largest companies. 






At the same time, the casino industry is declining.  For example, gaming revenues in Nevada fell for the third straight month in August this year (http://www.reviewjournal.com/business/casinos-gaming/gaming-revenue-tumbles-nevada-strip-third-straight-month).  The only casinos that have done well recently did so due to their presence in Macau (e.g., LVS and Wynn).  Unfortunately, it seems that even this tide has turned.   In September this year, analysts estimated that Macau casino revenues fell 19% per day that week (http://www.bloomberg.com/news/articles/2015-09-23/macau-casinos-decline-as-analyst-says-gaming-fell-19-last-week)
Furthermore, at the same month the same market suffered 15th straight monthly decline (http://www.reviewjournal.com/business/casinos-gaming/macau-casino-market-suffers-15th-straight-monthly-decline)
The tremendous growth in DFS, coupled with the decline in the casinos and gambling industry, has undoubtedly led the latter to fight DFS. To large extent, this campaign is the result of the successful campaign that the industry led to ban internet gambling. On the other hand, DFS has some serious backers who undoubtedly will fight for keeping DFS legal.  The NHL, for example, is an investor in DraftKings, as is MLB, while the NBA has an equity stake in FanDuel, as are NBC and Turner Sports. 

Is DFS gambling? I doubt that anybody would look at slot machines, card games, roulette and so on as anything even close to DFS.  The serious DFS players, just like serious stock investors, research the sport that they are in, looking at fundamental valuation and intrinsic value of players vs their pricing and, based on their analysis, make decision on picking players.  Just like the stock market DFS players can see the results of their decisions at the end of any trading day. In many respects they are a combination of value investors and day traders.    
This does not mean that DFS should not be regulated.  DFS now in my opinion should be viewed as a stock market in a pre-regulation state.  The Wall Street Crash of 1929, aka Black Tuesday, is widely viewed as the trigger to the establishment of the SEC. The insider trading scandal that rocked the DFS industry could similarly be the trigger for the regulation of DFS. What is sad about the DFS insider trading scandal is that it stems from the industry’s failure to regulate itself , followed by greed, which in turn,  led to DraftKings employees using inside information to reap huge payoffs at the expense of other players. This is am much insider trading as any stock market insider trading. The difference, however, is that, in the absence of  regulation, the DrafKings employees that traded on their private information, did not do  really any illegal thing, which is very bad for such an industry in formation.  As such, there is no question in my mind that DFS should be regulated.  At the same time, it should not be done using the same regulation that governs the gambling industry but more similar to securities regulation as there is much more in common with DFS and security regulation. The whole idea of security regulation is to make the capital market more equitable to investors, as should be the aim of any DFS regulation.

Note: I have never played DFS in my life but follow it with interest.

1 comment:

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