US-based DFS Industry Staggered by ‘Insider Trading’ Allegations

The United States’ daily fantasy sports (DFS) industry has staggered in recent days under a flood of allegations and mainstream-media reports inquiring about possible “insider” knowledge possibly used by company employees in building their own DFS lineups for wagering use on competing sites.  The furor currently surrounds the twin market leaders in the DFS space, DraftKings and Fanduel, both of which have seen company employees identified as prominent winners on each others’ sites in the alternative sports-wagering format.

draft-kingsIn addition to the market upset the recent revelations have caused in North America, the ongoing clamor over the industry leaders’ business practices may serve as slight pause as both firms prepare their formal launches into the European betting space.  DraftKings, for example, has been planning a formal UK launch this month, with new punters the firm acquires destined to join a global player pool the company already enjoys.

How quickly the rest of the world follows the US’s DFS lead, however, has always been an open question, and the ongoing maybe-scandals aren’t likely to make European punters more enthusiastic about abandoning traditional sports-betting options.

So what’s the big deal, you ask?  It’s become a two-part story.

Part the first deals with data security in the new DFS industry, in particular at DraftKings and FanDuel, the US’s (and the world’s) two largest DFS sites.  A little over a week ago, a written content manager at DraftKings, Ethan Haskell, accidentally linked a spreadsheet showing the percentages of how often certain NFL players were being drafted as part of customers for their teams.  The data in question is very useful in a DFS “metagame” sense, because one of the keys to big paydays in DFS is not only assembling lineups of players who then go on to have big statistical days, but also assembling such lineups that are built mostly from players that most other entrants have overlooked.

The idea behind the second half is that by somehow “drafting” lineups of less-popular players, one’s statistically successful lineup then has a much higher chance of winning the very biggest prizes, because it differs from a lot of lineups which often cluster with over-drafted players.

As fate would have it, Haskell published DraftKings’ Week 3 players-drafted percentages on a fan site either 45 minutes or an hour-and-forty-five-minutes before that Sunday’s action began.  And as fate often adds in, for extra spice, Haskell himself won a second-place prize in rival site Fanduel’s largest NFL contest that very same NFL week — to the tune of US $350,000.

While DraftKings’ bosses rushed to point out that the actual leak that Haskell was responsible for occurred after lineups were locked in the FanDuel contest where he won the $350,000, evidence subsequently emerged on DFS users that Haskell and at least one other employee of a major DFS site, Fanduel’s Matthew Boccio, had both put up enviable strings of big-money paydays.

The obvious question, then: Were employees of the two sites using “insider” data to assemble optimal lineups of under-drafted players, which they were then submitting on rival sites?

That question hasn’t been really answered to date, though the sites in question have done quite a bit of back-pedaling throughout this past week.  By Monday, both sites had announced a temporary ban on their own employees playing DFS on rival sites; by later in the week, both sites had made that a permanent ban.  However, such a fix is still cosmetic in nature; it doesn’t preclude the possibility that such information could be transmitted to third parties outside the companies for exactly the same wagering purposes.

That’s a part of why the new and largely unregulated DFS has come under such a harsh spotlight.  At DraftKings in particular, the control over such user data appears to have been very lax, and in conjunction with other elements of DFS’s increased presence in the States, a whole of public officials are asking questions.  State-level attorney generals in several capitals across the country have launched official investigations, and a US Congressman has issued repeated calls for the legality of DFS to be reexamined.  The whole industry exists as a loophole of sorts in the US’s 2006 UIGEA (Unlawful Internet Gambling Enforcement Act), which contains a carveout for “fantasy” sports, although what that law envisioned was the sort of season-long, group-of-friends betting that sports fans around the globe have done for decades.

The global DFS industry, with well over 90% of its revenue generated from the US, is estimated to take in $2.5 billion annually.  And it’s all sprung to life since about 2009, in direct response to that 2006 law’s legal loophole.

And all that brings us to part the second.  The US has been inundated with ads over the past two months from exactly two DFS firms — you guessed it — DraftKings and FanDuel.  Both firms enjoyed major private-equity investments within the past year, and both have gambled on major advertising spends in an attempt to expand DFS rapidly into the “casual sports fan” market.  Except that the gambling form the two sites have been selling isn’t really what DFS is all about.

DFS is a high-intensity, heavy-stats, time-consuming endeavor.  As it exists today at the two largest sites, the entire revenue machine is powered by an enthusiastic core of essentially full-time participants, who submit hundreds or even thousands of DFS lineups on several different sites on a daily basis.  They do this with the assistance of advanced statistical analysis (and a whole bunch of computing power), and often have to resort to “script” programs, third-party software offerings that allow them to manage ongoing changes to all those lineups on the fly.

There may be a lot of “skill” involved, at least in the final choice of setting one’s lineups.  However, the reliance on pure processing power and the ability to purchase more of it as needed isn’t “skill” at all; to paraphrase a classic phrase, a billion monkeys crunching stats at a billion computers for eternity would eventually replicate the same results.  The biggest farce of the DraftKings/Fanduel ad blitz is the pretension that DFS has anything to do with casual sports fandom at all.

A whole lot of this week’s media focus has shifted from the possible “insider” shenanigans of the company’s employees to this larger concern over DFS’s long-term viability.  When an iconic pop-culture outlet such as Rolling Stone takes time to rip DFS a new one, you know the industry’s got an image problem.  DFS isn’t for most casual sports fans, and it never was.  As American sports commentator Norman Chad (who European poker fans may recognize from his long-running gig as ESPN’s WSOP poker commentator) noted in a recent Washington Post editorial, daily fantasy sports aren’t just gambling or sports betting, they’re actually “sports betting on steroids.”

Lots of people are realizing this all at once, which means the road ahead is very bumpy for the two companies.  It’s also important to note that not all DFS sites have followed DraftKings’ and Fanduel’s twin lead in catering to the high-volume, dedicated user.  PokerStars, for instance,recently bought into the space by buying the DFS site Victiv and rebranding it as StarsDraft, which it is in the process of launching in several global markets.  One StarsDraft difference: They have banned the use of third-party scripts, effectively putting the highest of the high-volume scripting practices out of business.

Such changes might benefit DraftKings and FanDuel as well, but those sites are trapped by their own advertising commitments and the need to find lots of new customers in a hurry.

It’s a tough situation for sure.  Whether or not the world eventually accepts daily fantasy sports as a viable sports wagering alternative isn’t a question that’s getting easier.  DFS itself has a large number of hurdles to overcome, and because of recent events, it’s facing several of those hurdles at once.

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