Jason Trost, chief executive of betting platform Smarkets, doesn't get meme stocks.
"I don’t know if it's showing my age but I think it’s absolute madness that that stuff is happening," the chief executive of Smarkets tells Yahoo Finance UK over Zoom.
Trost was a stock trader before setting up London-based gambling exchange Smarkets in 2008. He spotted an opportunity to bring the financial technology of the stock market to betting.
The rise of meme stocks — Reddit traders ramping retro names like GameStop (GME), AMC (AMC), and BlackBerry (BB) — is arguably the Smarkets thesis in reverse. People who usually turn to sports for entertainment have instead sought excitement in the stock market. Cheering the demise of hedge funds has replaced chanting from the stands in the era of lockdowns.
Trost can certainly see the parallels.
"Speculation has always been part of any investment portfolio and gambling is in essence a speculation — I’m trying to put money down and get money back in return," he said. "It’s always been quite natural that there’s crossover.
"I think as technology improves, the line between trading and challenger banks and event trading and crypto — I mean they’re all kind of different branches of the same tree at the end of the day. Who knows, probably we’ll want to augment Smarkets with those products as well because why not?
"At the end of the day, it’s all money moving between different sources and roughly the same thing."
Regulators may shudder — but for now, they needn't worry. Trost is just daydreaming. He's much more focused on a more immediate opportunity: the US.
Our chat is ostensibly to discuss Smarkets' first investment round since 2013. The cash— the exact sum has not been disclosed — will be used to fund a push into the rapidly deregulating US sports betting market.
Smarkets is one of many players trying to grab a slice of the pie and the market has the feel of a gold rush. Established Las Vegas casinos are scrambling to set up their own sportsbooks and international operators are rushing to get a foot in the door. Everyone has dollar signs in their eyes.
"The American market, by virtue of the fact that America’s a much bigger country, it’s — I don’t know — five, six, seven times as big as the UK market?" Trost says. "So there’s no question that the economic revenue opportunity is much larger in the States."
Trost is bullish on Smarkets' prospects, saying he sees a path to the company becoming one of the biggest operators in the US market. Of course, any chief executive would say that. His company's track record in the UK suggests achieving that goal may be tougher than he thinks.
Smarkets, which operates a betting exchange and a sportsbook, saw over £3.7bn wagered on its platform last year but rival Bet365 did around twenty times that. Smarkets made a pre-tax loss of £672,000 on revenues of £19.2m in 2019, the most recent year audited accounts are available for. That same year, the chief executive of Bet365 paid herself over £300m out of the business's £800m profit.
For all of Smarkets' talk about taking on the big boys, it remains a minnow in Britain's sports betting market.
Trost likes to argue that Smarkets isn't in the same business as the likes of Bet365, which memorably advertised itself with the disembodied floating head of actor Ray Winston.
"At the end of the day we don’t see ourselves as an entertainment company," he says. "Culturally, we see ourselves facilitating people trading whatever they want to trade on."
This pitch may work better in the US, where far more people are accustomed to playing the stock market due to 401Ks and where sports fans have long been obsessed with stats.
Still, it may not hurt to get some help. Many of Smarkets UK rivals have gone down the route of partnerships when it comes to cracking America. Others, like William Hill, have simply sold up.
Smarkets partnered with US casino operator Full House Resorts to launch its SBK app in the US and Trost doesn't rule out further deals, but says the ones cut by rivals are "lipstick on a pig".
"Our competitors are good at top-line spending and they are good at the branding partnership but I think at its core, their products are inferior," he says. "They have to spend this money on marketing and they have to have these partnerships because their products are basically grids with a logo on top of them."
Trost is hoping that what he believes is a superior product and more competitive pricing will help Smarkets ultimately win out.
"We’re trying to take an 8% margin product to a 1% margin product," Trost says. "That’s the part we’re super excited about.
"It’s hard for the consumer to see that because when they see the odds on the TV screen or the odds on the Ladbrokes billboard, you don’t see the margin without getting out a calculator. But there’s huge margin in there.
"Our mission is basically to eradicate that margin. That’s where we spent most of our cycles, not trying to think of exotic new different things for people to bet on."
The government could give them a leg-up. The UK Gambling Commission is currently in the midst of a much-anticipated review of the market, which hasn't been audited since Tony Blair ushered in a wave of deregulation in 2005.
"One of the things that could be quite interesting is to make the operators be transparent about the margin they’re charging the customer," Trost says. "I would like to see more energy and time devoted to that side of things because obviously the bigger the margin, the faster an uneducated bettor is going to lose their money because they’re paying more margin."
Whether this suggestion makes the cut remains to be seen but the market looks ripe for reform. The general consensus is that rules are no longer fit for an era of smartphones, which give every Brit a bookie in their pockets. Concerns have been growing about problem gambling. There's talk of a cigarette-style ban on advertising gambling in sports.
Trost is sympathetic, saying regulators are coming from a "noble place". Ultimately, he hopes reform can help clean up gambling's image both in the UK and abroad.
"The reason why sports betting is considered so different is it kind of came from that illegal background," he says. "It’s always been off to the side of polite society. I think that’s changing as America’s opening up and it’s getting normalised."
In the end, all roads lead to the US.
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