Future of sports betting: The bettors

November 2, 2016, 9:25 AM

— -- Editor's note: Part 1 of ESPN's future of sports betting series focused on the paths to legalization in the United States and what the resulting marketplace could look like. Part 2 focuses on the bettors in this future landscape.

There is an ongoing arms race between elite sports betting syndicates.

Each group is doing whatever it takes to stay one step ahead of the other. They're constantly developing and improving predictive models for all aspects of sports betting. The ultimate goal is to solve the equation.

"Sports wagering is just a math problem," said a high-level bettor, who is active in the global market and spoke with ESPN on the condition of anonymity. "Most syndicates are already using various forms of machine learning."

In the future, the most-sophisticated bettors won't be human -- they'll be robots.

These betting bots, used by elite betting groups, will be fast, powerful and have terabytes of data flowing through them. If an NFL point spread gets off-kilter or a live scout transmits the result of an obscure, low-level tennis match before the books know it, the bots can unleash a firestorm of bets all over the world. Soon, they'll be able to outsmart humans.

The whole idea of thinking computers conjures up movie images of Hal 9000 from "2001: A Space Odyssey," WOPR from "War Games" or Ava from "Ex Machina." Whether described as artificial intelligence, neural networks or machine learning, the applications to advanced sports betting are obvious.

In a nutshell, here's how the robots operate: Sophisticated forecasting models convert event probabilities into prices (i.e. The Green Bay Packers as a -150 favorite have an implied win probability of 60 percent). If the market price differs from the model price enough to withstand the vig or commission, the difference represents an opportunity. And the opportunity is pursued almost instantaneously through the use elaborate trading software that accommodates both speed and volume.

Professor Adam Kucharski, a London mathematician who researched scientific approaches to betting in his new book, "The Perfect Bet: How Science and Math Are Taking the Luck out of Gambling," says high-tech bettors primarily take two different approaches with their bots.

"The first involves hooking up robots directly to the betting exchange servers. This means bettors can jump on any mispriced odds almost instantly," Kucharski said. "The second approach is to carefully develop scientific predictions, then place a traditional bet in the market. This is hard, given limits on betting. If you have a small edge, you need to put down a lot of money to make it worthwhile. That is why many syndicates opt for the big Asian markets, where people are happy to take large bets."

"Some bots," Kucharski added, "are helping gamblers sneak bets into the market without their competitors discovering what they're doing. A good analogy is to poker, where intelligent bots have taught themselves how to bluff and deceive opponents. Sports betting robots are going to get better at outwitting humans, too."

That's bad news for Joe Public: In the future, the average recreational sports bettor will be up against it.

"Robots made and funded by professionals are made for profit," said Robin Hanson, an economics professor at George Mason University and author of "The Age of Em: Work, Love and Life When Robots Rule the Earth."

"Sports betting is a zero-sum game, so there must be winners and losers, and professionals win on average," Hanson said. "Most nonprofessionals are humans, who lose."

The next-gen data being fed to the robots will be streaming from motion-tracking cameras located in stadiums and arenas and microchips placed in uniforms and equipment, like helmets and footballs. Athlete bodies will be a data source, too.

Kristy Gale, CEO of Hypergolic, an Arizona-based technology and biometric data rights company, told ESPN that ingestible, injectable and implantable technologies -- from sensors to diagnostic to therapeutic devices -- will increasingly make their way into athlete bodies and will be used to monitor an athlete's movement, field position and acceleration rate, among other things. She said the athlete biometric data, called ABD for short, may be used as a commodity sold to fantasy sports providers and sportsbooks. Or offered directly to consumers as exclusive gaming options.

"As ABD is found to be a strong predictor of performance, it will be extremely valuable to bookmakers," said Gale, who is also a lawyer and wrote an academic article on the topic for the Arizona State Sports and Entertainment Law Journal. "These data will certainly be in demand and monetized in the sports wagering industry."

Sports trading, not sports betting

"Don't gamble. Invest."

That was President Barack Obama's advice to Americans in a wide-ranging June 2016 interview with Bloomberg Businessweek.

But when it comes to sports wagering, there is profound blurring of the two: The more the sports betting market grows, the more financial trading strategies increasingly bleed into it.

And while many of the sharpest bettors in the future may not be human, the vast majority will be. Instead of investing in the stock market or betting themselves, much like choosing to invest money in a mutual fund in the stock market, some people will prefer to put their hard-earned money in the hands of professionals.

Brendan Poots, a former professional bookmaker, is the CEO of Priomha Capital, a global sports trading fund with offices in Melbourne, Australia, Las Vegas and Gibraltar. His company issues annual reports and a prospectus, just like any other open-to-the-public hedge fund, and with every trade he makes, he leaves an electronic fingerprint with every bet he makes.

"Every trade we make is traceable, down to time, size and type," Poots said.

He believes this is the future of sports betting in the U.S.

In a 2004 blog post, Dallas Mavericks owner Mark Cuban proposed a "fund that only placed bets...[a] gambling hedge fund."

Cuban's idea never materialized, but 12 years later, his blog post seems remarkably prescient. Nevada has approved "entity betting" for sports, where regulated hedge fund-like groups, like Priomha Capital, are allowed to accept out-of-state money from "investors" to use at any participating sportsbook.

Entity betting hasn't taken off yet in Nevada, and only one of the state's regulated books -- CG Technology -- is participating in it. But Poots still believes this is the future of sports betting in the U.S.

"We are hoping that we can continue to pioneer the development of entity wagering," said Poots in a summer email interview with ESPN. "With the BREXIT and the market crashing, as well as the long-term uncertainty that will pervade the global markets, a non-correlated asset class immune to traditional market risks is attractive."

As the gambling market starts to look more like already-recognized financial markets, some experts suggest that sports gambling may provide the "Holy Grail," so to speak, in investing -- an uncorrelated, alternative asset class, which allows for diversification and protection against any sector-specific downward trends in a well-balanced investment portfolio.

Think of a Venn diagram with two circles that overlap considerably in the middle. One circle is sports gambling as it is traditionally construed. The other circle is general principles of investments, trading, hedging, arbitrage and asset allocation. Researchers have studied the overlap between these two circles.

In an academic paper released this year by a pair of quantitative research analysts, Lovjit Thukral and Pedro Vergel Eleuterio found that "sports trading can provide an attractive option to investors as an alternative asset to generate excess returns which are uncorrelated to their existing portfolio."

Tobias Moskowitz, a finance professor at Yale and author of the forthcoming academic paper titled "Asset Pricing and Sports Betting," said he uses sports betting as a laboratory to test certain pricing theories, ruling out some while confirming others.

However, the current U.S. sports betting market has a long way to go before meriting serious consideration from hedge funds and institutional investors.

"The sports wagering market just isn't liquid enough for large investors to spend their time," Moskowitz said. "Also, the vig is so high in sports gambling, and particularly daily fantasy sports, the trading costs are incredibly high compared to financial markets."

The overlap between sports betting and Wall Street investing is not lost on experts.

"Let me put it this way," John Avello, a Vegas veteran and executive director of Wynn race and sports, told ESPN. "If the stock market started today, it would probably be looked at as gambling."

Maybe the legal tag will improve sports betting's reputation and help the market grow to a point where the business-savvy investors of Wall Street will start to see it as an opportunity. After all, they already know how to do it.

"We analyze data, we build algorithms, we predict what will happen and then we make a trade," said Poots.

Is he gambling or investing?

"It's not unusual to hear people refer to trading stocks as no different than going to Vegas," Cuban wrote in 2004. "They are right."

Future outlook not all rosy for casual bettors

Opinions differ as to whether nationwide legalized sports gambling will result in a net increase in the overall number of bettors and volume. Some experts cite a substitution effect, where bettors currently using illegal bookmakers will simply transition to regulated ones. Others in the industry think legalization will create a whole new class of bettors, with a mass of people who previously avoided sports betting because of its illegality now entering the market.

These potential new bettors (and existing ones), depending on the state they live in, may be able to get bets down at new sportsbooks, gas stations and even kiosks in their local sports bar. Eventually, bettors will likely be able to legally place bets on their phone from the comfort of their couches. Or while seated courtside at an NBA game.

Bottom line: If a casual person wants to place a bet, he or she will have a variety of options.

But these increased options for bettors -- whether human or otherwise -- won't arrive immediately. There will be bumps in the road, especially if bettors' concerns are not addressed. Veteran Vegas pro Alan Denkenson doesn't have high hopes.

"Limits will be too small or they'll charge too much vig or only do parlays," Denkenson said.

Denkenson, a former New York City bookie who was portrayed by Bruce Willis in the movie "Lay the Favorite," has seen all sides of the industry. He struggles to envision a future with a successful legal sports betting market in the U.S.

"It's going to be a mess," he said.

Coming in Part 3 on Friday: What are the pitfalls of expanded legalized sports betting in the U.S.?