(Dec 19): DraftKings Inc is releasing a new app on Friday that will allow customers to trade contracts on sports and financial events through prediction markets.
The app, DraftKings Predictions, will supplement the company’s current sports betting products, and underscores the rapid expansion of prediction markets into the legal grey zone between finance and gambling. DraftKings said it plans to later expand from sports and financial contracts into other categories including culture, entertainment, and crypto.
To deal with the regulatory uncertainty around the nascent industry, the app is being rolled out in only 38 states, with sports trading allowed in 17 of those. Sports will be available in several large states where online gambling is not currently legal, including California, Texas, and Georgia. But it will not offer them in jurisdictions where it already operates as a betting company.
Prediction exchanges are regulated by the Commodity Futures Trading Commission (CFTC), the federal agency that oversees derivatives markets. Gaming regulators in some states where sports betting is legal have said that sports gambling companies could lose their licenses if they also offer prediction markets.
“These products are federally regulated, so theoretically we could offer them in all 50 states,” said Jeanine Hightower-Sellitto, senior vice president and general manager for prediction markets at DraftKings, “But we’re very mindful of our regulators and the relationships that we carry with those state regulators.”
DraftKings will initially route customer trades through a regulated prediction market exchange that was recently created by the derivatives giant CME Group Inc, which also has a partnership with DraftKings’ rival, FanDuel, a unit of Flutter Entertainment plc.
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In October, DraftKings acquired Railbird Technologies Inc, a CFTC-registered exchange. DraftKings said it plans to roll out trading through Railbird in the coming months.
While prediction markets initially emerged as a way to bet on political and economic outcomes, the most visible exchange, Kalshi Inc, began offering contracts tied to sports games at the beginning of this year and those contracts now account for a majority of all trading.
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From August to November, shares of both DraftKings and Flutter dropped as investors focused on the possibility that prediction market startups like Kalshi and its rival Polymarket, and more traditional financial exchanges entering the industry, will offer direct competition to existing gambling companies.
In the weeks since DraftKings announced its intention to go into the business, its stock has risen around 25% from a low in early November. On Friday, the shares rose as much as 1.9%, before giving up some of those gains.
Hightower-Sellitto said they have not seen prediction markets eat into their business in states where they operate sportsbooks. But, she said, “we do see a really big opportunity in states where we currently don’t offer sports betting to expand our overall business”.
The entry of prediction markets companies into sports betting has drawn the ire of some gaming regulators, who see the exchanges as unlicensed gambling operators. Ten states have issued cease-and-desist orders to Kalshi and other exchanges, demanding that they stop offering sports contracts. At least eight states have also warned sports betting operators that offering events contracts would constitute illegal sports betting and violate the terms of their licenses, according to research by Bloomberg Intelligence.
Customers seeking to trade on DraftKings prediction markets, said Hightower-Sellitto, will need to submit to a residency check and be physically present in a state where it’s offered.
The spread of prediction markets has also been a source of concern for sports leagues, including the NBA and MLB, which are already dealing with the fallout from a pair of high-profile betting scandals. The CFTC, leagues have said, does not require the same safeguards as state regulators when it comes to monitoring and enforcement for insider trading and manipulation.
DraftKings is relying on CME to monitor trades, Hightower-Sellitto said.
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“It’s a great partner for us in terms of having a sterling reputation for being able to surveil and maintain the integrity of their markets,” she said.
Leagues have also complained that prediction markets allow betting without the consumer protections required by gaming regulators.
DraftKings said it plans to bring a variety of best practices from its responsible gaming program to its prediction markets platform by allowing customers to set deposit limits, take cool-offs or self-exclude.
“We do have a responsible trading programme that will be rolling out along with the launch of DraftKings Predictions,” said Hightower-Sellitto, “It allows for customers to take the same actions as they would in the sportsbook business to prevent themselves from engaging in behaviors that they may not want to be.”
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