Cincinnati Bengals quarterback Andy Dalton looks to pass against the Seattle Seahawks in Cincinnati on Sunday, Oct. 11.Mark Zerof
Fantasy football – much like picking stocks – is a fun leisure activity, not a sound investment strategy.
This is why I run a small point-spread pool named after obscure Toronto Argonauts quarterback and touchdown dance specialist Kerwin Bell, and I do not deposit my paycheque directly into the sports book at the Bellagio. In both financial markets and sports betting, the reason for this is simple – the markets are efficient enough that undervalued assets require substantial effort to find, and most of us don't have the time, training or proclivity to find those assets. Have a side portfolio for fun, but it probably makes sense to store most of your wealth in a diversified market portfolio.
That is, unless you have an informational advantage that isn't available to anyone else.
In sports betting and financial markets, information is money. Take the recent scandal around the daily fantasy-football websites FanDuel and DraftKings – the duopolistic companies behind games of "skill" in which participants "draft" NFL players and compete for fun and profit. Wins are based on the statistical performance of the players you draft. Participants don't know opponents' lineups until all lineups are "locked" and can't be changed.
Believe it or not, this is a billion-dollar industry with tournament prizes running in the millions.
About two weeks ago, an employee of DraftKings won $350,000 in a FanDuel tournament on the same weekend that he inadvertently let slip, by way of an accidental Internet post, that he had possession of data about the lineups that DraftKings participants had picked that weekend. Those data represent a massive informational advantage. If you know the players other competitors have picked, you can pick up undervalued assets – Bengals quarterback Andy Dalton, for example, was drafted by only 2 per cent of teams despite being one of the league's top players this year – and compose a roster that is both relatively unique and likely to be high-scoring. Because DraftKings and FanDuel have similar scoring systems, information about roster data on one site is informative about the other. It's possibly a bigger informational advantage than videotaping your opponent's practice.
Does this sound unfair? It does to many people, including New York Attorney-General Eric Schneiderman, who is investigating the matter. Really, it looks a lot like insider trading (even if daily fantasy websites aren't yet regulated by the U.S. Securities and Exchange Commission). In particular, it looks like the Capital One insider-trading case from earlier this year, in which Capital One employees used credit card purchase data to pick winning stocks.
Under U.S. securities laws, the Capital One employees were guilty of insider trading because they traded in violation of a duty to Capital One. But in the DraftKings case, the employee had no duty – contractual or otherwise – to not use his information. Moreover, under Canadian rules, the employee was not in a special relationship with FanDuel, nor was DraftKings in a special relationship with FanDuel. So even if daily fantasy contests were regulated as a security – which they are not – none of this meets the legal definition of insider trading in Canada or the United States.
The daily fantasy sports scandal also looks a bit like superslow, high-frequency trading. One common HFT strategy is to take advantage of price differences between stock markets by trading milliseconds before such price information is posted. Similarly, the DraftKings employee is alleged to have used information from one market to take advantage of conditions in another market, before lineup data were unlocked. The principle – using information about one market to gain an advantage in another before it becomes public – is the same. As we all know, unlike insider trading, high-frequency trading is not illegal.
But none of this answers the initial question – not whether this should be illegal, but whether this is fair. And, to be honest, I'm not sure that it matters. Unlike the NFL, in which moralistic commissioner Roger Goodell dispenses Old Testament justice to Bill Belichick and Gisele's husband for deflating footballs by a couple of pounds a square inch, markets are not particularly interested in fair or unfair; markets are about the efficient allocation of things.
In fact, the best argument against insider trading is based on efficiency, not ethics. Insider trading chases good analysts out of the market because they can't compete with insiders. Fewer good analysts leads to poor pricing, and poor pricing means that capital doesn't get properly allocated across the economy. This hurts growth.
Similarly, the arguments for and against HFTs are, at their best, arguments about market quality. Proponents believe that HFTs equalize prices across markets, increase liquidity and lower spreads. They believe they help capital allocation. Critics allege HFTs create phantom liquidity, market instability and discourage fundamental analysis, all things that lead to less stable, less accurate pricing.
Fairness in markets is a difficult thing to define. Analysts get access to management, the clients of analysts get access to proprietary reports, and superfast computers trade thousands of times before you can trade once. Is any of that fair?
It's easier to think about what kind of information flow we should protect and prohibit, because that has a clear positive goal: creating markets that correctly allocate resources.
Which brings us back to FanDuel and DraftKings. Barring consumer fraud, there's not much of a basis for prohibiting this kind of behaviour as a public matter.
FanDuel and DraftKings have a tremendous incentive to do so through their own employment contracts and internal policies, however. If their customers think the games are rigged against them, they'll stop playing, and FanDuel and DraftKings will stop making money. Or, perhaps the companies will discover that people will keep playing, and that it's a better form of bonus compensation for your own employees – this past weekend was the biggest daily fantasy weekend ever, and it was recently reported that some daily fantasy employees made more money playing rival sites than they earn at their jobs. Regardless, this isn't a question of fairness or legality; it's a business question.
In the end, the best regulators of FanDuel and DraftKings may very well be FanDuel and DraftKings themselves.
Adrian Myers