Interactive Brokers Has a Plan to Lure Sports Bettors to Investing -- The Motley Fool

Though we investors may not like to admit it, stock investing isn't so different from sports gambling. Of course, over the long-term, betting on stocks has much better odds, as the overall market tends to go up over time. But many elements of the activities are the same: In each case, the investor or sports bettor assesses players in a competitive game, along with the odds (or valuations), then places a wager on what's going to happen.

Tech-oriented discount broker Interactive Brokers Group Inc (NYSEMKT:IBKR) just unveiled a product called "Bet. Learn. Win." that aims to take advantage of this link in a more explicit way. Brokers are in fierce competition to win your business, and some brokerages have even dropped their commissions to zero, so any sort of creative way to win new business could pay off.

Additionally, last year, the Supreme Court struck down the Professional and Amateur Sports Protection Act, which banned sports betting outside of Nevada. Since then, nine states have already legalized sports betting, with another eight likely on the way in 2019. Could this be an entree into the online sports betting business for Interactive Brokers?

"Bet. Learn. Win." isn't real gambling just yet, of course. When you sign up, you get $1,000 in virtual currency. The exchange is fairly straightforward for the non-investor, and operates like a market. All games pay $100, and it's up to the market to set the price for each bet, complete with a bid-ask spread; the price of the bet moves with the game as the odds change.

For instance, as I write this article, there's an Oakland A's-Minnesota Twins baseball game going on. The bid-ask spread for a "bet" on the Oakland A's is $40.90-$44.70, and a bet on the Twins has a spread of $55.30-$59.10. The odds are with the Twins at the moment, but should the A's have a big inning and move into the lead, the price of a bet on the A's winning will go up and a price of a bet on the Twins will go down. Customers of "Bet. Learn. Win." will have the opportunity to covert up to $1,000 in winnings into real money if they start a brokerage account with Interactive Brokers.

The inspiration for the idea seems to have come directly from founder and chairman Thomas Peterffy himself. When asked about the inspiration for the idea on the second-quarter conference call with analysts, he said:

I started my career in the securities business by going down through the American Stock Exchange as a market maker. And I was absolutely stunned that all these professional traders on the floor, all they talked about whole day long were the games. They didn't talk about the stocks. They were talking about the games and what game they are going to? And they were, of course, betting in a big way. Even though they were betting, according to my book, with the stocks and options all the time...

So does Peterffy believe this could really be a potent customer-acquisition tool? Apparently so, as Peterffy went on to say (emphasis mine): "I would be speculating if I told you of what I expect. But I know that I expect a very, very substantial take up of this. I mean, I'm talking in the millions of customers in due course."

Considering Interactive Brokers only had 645,000 accounts as of the end of last quarter -- up 19% from the prior year -- that would be a very substantial boost indeed. Of course, these would be relatively small individual accounts, not the big-dollar accounts from hedge funds or investment advisors, but a million individual accounts could definitely make a difference. According to management, "Bet. Learn. Win." will only cost Interactive Brokers in the "single-digit million" dollar range to run and support. That's really just a drop in the bucket for Interactive Brokers, which pulled in $302 million in pre-tax income (before special items) for its brokerage last quarter alone. 

There was also a question on the call as to whether Interactive Brokers might get into legal sports betting, given the recent Supreme Court ruling. To that effect, Peterffy said, "Driving new brokerage accounts is the primary purpose. I don't want to speculate about what we may or may not do with sometime down the road. So, right now our focus is to perfect the bet for and drive new brokerage accounts."

That comment seems to have shot down the prospect for now, but it certainly appears to leave the door open to Interactive Brokers expanding into some sort of online gambling in the future. The American Gaming Association put the global sports betting market as $150 billion, though some have disputed that number as being far too high. Still, even a figure in the tens of billions could present an opportunity for Interactive Brokers, which earned $473 million in revenue in its brokerage segment last quarter.

And don't forget that Interactive Brokers actually started as an options market-maker in the 1970s before evolving into electronic brokerage, which is now the company's main business. So who knows what this could evolve into?

For now, "Bet. Learn. Win." probably won't have too much of an effect on this year's results. However, it could add meaningful individual accounts in the medium-term, and could potentially enable Interactive Brokers to innovate into sports betting in the long-term.

Source: Fool.com

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