• Susquehanna, a trading firm, is dipping its toe into sports gambling.
• The space has exploded in the US as dozens of states have legalized online gambling.
• Just as quant traders have changed equity markets, sports betting might be next.

Quants and gambling have been intertwined from the start.

Ed Thorp, a math professor and first-generation quant trader, first rose to fame because he laid out the blueprint for counting cards in blackjack in his 1962 book, “Beat the Dealer.” A typical night for Jim Simons, the late founder of Renaissance Technologies, when he was an undergrad at MIT included long-running poker games with his classmates. A now well-known charity poker tournament in 2006 had some of the biggest names in hedge funds competing, including Citadel’s Ken Griffin, AQR’s Cliff Asness, and PDT’s Peter Muller, who came out on top.

But they all knew the real money was in the markets, not poker pots. While some quant types have made their fortunes gambling — such as Bill Benter, the man who “cracked” horse racing — the most ambitious chased basis points, not parlays.

Until now.

The trading giant Susquehanna has built out a 15-person unit in Dublin focused on sports gambling and plans to expand into the US. The number of “well-informed, deep-pocketed users” is growing on Novig, a sports-betting exchange, the startup’s cofounder Kelechi Ukah told Business Insider.

With sports gambling exploding in popularity in the US thanks to dozens of states allowing online betting, these traders — known to use copious amounts of data and sophisticated programs to trade securities in markets around the world — are diving in to search for serious profits in a nascent space.

The increased presence of top-level quant firms is going to cut into the wins of the average gambler even more, said Jacek Dmochowski, a professor at the City College of New York who has studied how to optimally gamble on sports.

Sports gambling in the US is no longer a business done under the table with a shady bookie or on a Las Vegas bachelor-party trip. Every night, millions are betting on college and professional games, some to the point of no return — a study from UCLA found that states that legalized gambling had seen a 28% increase in bankruptcies compared with those that didn’t.

Through the second quarter of this year, the online-gambling site FanDuel averaged 3.3 million bettors each month. Flutter Entertainment, the owner of the Irish gambling company Paddy Power and the US’s DraftKings, made more than $7 billion in revenue across its different units in the first half of the year. Executives at MGM spoke on their earnings call at the end of July about timing product releases for the start of football season.

While the limits for many of these online platforms are relatively small compared with the trades the world’s smartest quants typically make, the space is growing rapidly.

“Sportsbooks will have to basically alter their lines in response” to large wagers from trading firms, Dmochowski said.

“That’s going to make it harder for the betting public to make a profit,” he added.

Easy wins are already vanishing

The trading firms that are slow to move have already missed out on low-hanging fruit.

“It’s a very similar dynamic to the electronification of securities marketplaces in the ’70s and ’80s,” Ukah, a onetime Jane Street intern, said.

Just as stock trading evolved from a phone call with a broker who would charge a commission to discount online brokerages like E-Trade to algorithmic trading shops, sports betting has gone from a personal relationship with a bookie to platforms like FanDuel.

“The final stage is the algorithmic-execution phase,” he said.

Already, the smartest Novig users are sanding away the easiest returns. Novig, which pulls in odds from different sportsbooks, has now seen arbitrages between different sportsbooks’ odds disappear after a few seconds. Two years ago, it was several minutes, Ukah said.

“Everyone is much tighter,” Ukah said.

Dmochowski said he predicted an “algorithm arms race” between traders and sportsbooks to find “the optimal price.”

There’s demand from Novig users for the exchange to release software that would allow traders to program a bot to trade for them. Ukah said that there’s no timeline at the moment to release this but that the portion of the gambling market growing the quickest was from institutions.

“It’s an uncorrelated, high-volatility asset class,” Ukah said.

In other words, exactly what trading shops are looking for.

Correction: October 29, 2024 — An earlier version of this story misspelled the surname of a famed horse-racing gambler. It’s Benter, not Bentley.