Colorados sports betting may expand to include exchange wagering

A new form of online sports betting that bypasses traditional oddsmakers and allows gamblers to wager against each other could be coming to Colorado by late summer if approved by the state’s regulatory board on Thursday.

The Colorado Limited Gaming Control Commission will consider new rules at its monthly meeting that would govern exchange wagering, a form of online sports betting. Exchange wagering, for now, is only offered in New Jersey, and Colorado would become the second state in the country where exchanges operate.

If the rules are approved by the gaming commission, the first exchange wagering companies could be in business in the state before the Denver Broncos’ home opener on Sept. 10, said Brett Buckingham, the Colorado Department of Revenue’s agent in charge of sports betting and fantasy sports.

Under exchange wagering, gamblers can set their own odds on a game in hopes that another gambler takes them up on the bet. Odds are not set by in-house mathematicians and analysts, so gamblers are playing against each other and not the house, Buckingham said.

The exchange wagering operator makes money by keeping a commission from the bets, which is typically 2% or 2.5%, Buckingham said.

“The exchange itself, which we are still going to consider as an internet sports betting operator, really is kind of a clearinghouse for it,” he said. “They’re like the NASDAQ for it.”

Exchange wagering is often compared to the stock market because the people who place bets can sell shares to other gamblers. So a bettor who put $1,000 on the Denver Nuggets to win the NBA Finals could offer a chance to others who want to buy into the offer, and other gamblers can buy in and out of various positions as the odds fluctuate.

“Exchanges allow customers to enter their own odds, which informs the odds other players see,” said Alex Kane, the chief executive officer of Sporttrade, an exchange wagering platform hoping to enter the Colorado market. “On an exchange, anyone can partake in helping set the pricing.”

Gamblers also are allowed to back out of their bets before a sporting event takes place.

The company that runs the exchange accepts the money placed on the bets, holds it until the event is over and then pays winners, Kane said.

The company also is responsible for following all of Colorado’s gambling laws such as withholding taxes and setting up anti-money laundering measures like any traditional sportsbook. The exchanges would only allow bets on sports that are approved for betting in Colorado, Buckingham said.

However, not everyone who watches Colorado’s gambling industry is sure exchange wagering is the right bet for the state.

At a recent stakeholders meeting, Peggy Brown with the Problem Gambling Coalition of Colorado said she didn’t completely understand how an exchange works and she didn’t agree with a rush to stand up a new form of betting in the state. Brown she was speaking for herself, not the coalition, during the meeting.

“I think something this big needs a little more consideration,” she said.

It’s unclear how popular exchange wagering would be in Colorado since it is an unfamiliar way to place sports bets, Buckingham said.

An exchange’s app or website looks similar to a traditional sportsbook like FanDuel or DraftKings, he said. And betting rules are the same, with plus/minus point spreads, over/unders and parlays listed as options for wagering.

But experts expect the exchanges to cater more to advanced sports bettors.

“The odds typically are bigger on the exchanges so the payoffs could be bigger,” Buckingham said.

Betting exchanges were created in the United Kingdom around the turn of the millennium. But they have been slow to take off in the United States, in part because it wasn’t until 2018 that the U.S. Supreme Court issued a ruling that determined states could establish their own sports betting laws.

Since then, online sports betting has taken off across the country, including in Colorado, where gamblers have bet more than $12 billion on sports in the three years it has been legal, according to an April 2023 report from the state’s revenue department.

Prophet Exchange became the first exchange in the United States when it launched in August in New Jersey. Kane’s company, Sporttrade, also does business there.

Colorado has earned a reputation as a state willing to try new concepts, and it’s the first state where regulators want to create specific rules for exchanges.

Nevada opened the doors for a similar betting scheme in 2015 called entity wagering. A person could start up a company and then accept money from people who trusted them to place bets with their money — sort of like a stockbroker making investments into a mutual fund.

But the concept never really caught on and the Securities and Exchange Commission began investigating companies, which led to one firm being charged with fraud and with selling unregulated securities. That scared off players and investors.

Colorado’s exchange wagering will be different, though, because the exchange operators would not be placing the bets on behalf of investors.

Startup online gambling companies want to give it a go, in part because it’s hard to break into due to the amount of money needed and how licensing works. If a sportsbook company is licensed in just one or two states, the risk of losing a big chunk of money is much higher. The company wouldn’t have finances coming from gamblers in other states to absorb a big hit.

But an exchange earns off a commission, and the companies that run them don’t have to make huge payouts to winners.

“Colorado is an interesting state for us,” Kane said. “For us, it made a lot of sense because it’s a competitive market and our product would be a compelling product for our customers.”

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