Robinhood Goes Big on Sports Betting

(Dreamstime)

Robinhood Markets is expanding its prediction markets offering for customers, giving them more ways to wager on sporting events—and just in time for the NFL playoffs.

Investors initially appeared to like the news, bidding up shares of the stock 2.4% Wednesday morning. But the stock fell later in the day, closing down 3%. The S&P 500 fell 1.2%. Bitcoin dropped 2.2%.

The brokerage firm’s prediction markets offering, which is barely a year old, has become Robinhood’s fastest-growing product line by revenue in the history of the company. Prediction markets allow investors to bet on the outcome of events using yes/no contracts, with sports among the most popular categories.

On Tuesday, Robinhood said that it has begun allowing customers to trade what it calls “preset combos” for individual professional football games. The combos—which resemble parlay bets in traditional gambling—combine multiple event contracts and only pay out if each event within the combination resolves correctly. The company says the preset combos give investors “another way to turn their nuanced sports knowledge into an investing opportunity.” Robinhood also said that it will allow customers to create their own custom combos, a feature the company expects to launch early next year.

Also starting Tuesday, Robinhood is introducing player contracts, which will allow customers to track and trade the performance of individual pro football players using statistics such as passing yards and receiving yards. Player contracts for other sports are forthcoming, according to Robinhood.

“Expanding our prediction markets is an important step forward in our goal to enable anyone to trade, invest, or hold any financial asset and conduct any financial transaction through Robinhood,” the company said.

Robinhood began offering prediction markets during last year’s presidential election. It expanded into sports this year. Robinhood CEO Vlad Tenev has said he wants to be an early mover with regard to what he calls a new asset class.

Growing Fast

Since the end of last year, 11 billion contracts have been traded by more than one million Robinhood customers, according to the company, which says it has listed thousands of live events across economics, politics, sports, culture, and other categories. Robinhood charges a penny commission per contract bought or sold on top of an exchange fee which is typically an additional penny.

Proponents of prediction markets say they can allow investors to identify and hedge against risks. Investors can trade a range of event contracts, from the direction of interest rates to who will be the first person to leave President Donald Trump’s cabinet.

“Prediction markets help you make sense of the world and see where the wisdom of crowds stands on any given issue,” Tenev said Tuesday night during an event unveiling Robinhood’s expansion of sports event contracts.

Citizens analyst Devin Ryan writes in a Dec. 14 research note that event contract trade volumes have accelerated at an exponential pace this year. But there’s still room for substantial growth. “Volumes are still insignificant at just $10 billion a month compared to more than $10 trillion in U.S. equities, for context, but we see conditions forming and use cases that will drive institutions into the market as liquidity matures,” he writes.

During his speech, Tenev said prediction markets may be able to help investors price all kinds of risks and suggested they could eventually replace traditional homeowner’s insurance. He told attendees to expect the number of event contracts available to trade to expand rapidly. “What this means is that you will be able to hedge and trade pretty much anything,” he said.

For now at least, athletic competitions are among the most traded events on prediction market exchanges. And Robinhood’s deeper push into sports-related contracts comes in time for both the NFL playoffs and the Super Bowl, which is set for Feb. 8. Next year also brings two global sporting events that could be big draws for prediction markets: the Winter Olympics in February and the FIFA World Cup in June and July.

A New Landscape

Robinhood’s expansion of sports-related contracts presents a fresh challenge to traditional sports-betting and gambling companies, such as DraftKings and Flutter’s FanDuel. Prediction markets are regulated by the Commodity Futures Trading Commission and can operate in states where sports betting is otherwise banned. Shares of both companies have tumbled this year with DraftKings down 4.9% and Flutter down 14%. Both companies have indicated plans to launch their own prediction markets offering.

In contrast, shares of Robinhood are up more than 220% this year as the company strives to win more wallet share with its roughly 27 million customers. To do so, the company has been adding more products and services, such as a robo-advisor and custody services for financial advisors via the acquisition of TradePMR. It continues to attract active traders, a highly desirable customer demographic because they tend to trade more and use more of a brokerage firm’s services.

AI Investing

On Tuesday, the Menlo Park, Calif.-based company also unveiled new features for its brokerage platform, including updates to Robinhood Cortex, its artificial-intelligence powered investing assistant. Oren Naim, general manager of platforms at Robinhood, says updates to Cortex are making it more accurate and responsive to investors’ needs.

Customers can use Cortex to help identify trading and investing opportunities. For example, a user could ask it to help them identify large-cap stocks that are down considerably over the past month, and then buy one or more of those stocks within Cortex. “It’s actionable insights,” Naim says. “It’s not just research.”

Write to Andrew Welsch at andrew.welsch@barrons.com