Will Fantasy Sports be Sidelined by Insider Trading?

Fantasy Sports is faced with new legal questions after the recent allegations of insider trading on FanDuel and DraftKings. This has gotten the attention of officials and also raised a spate of penalty flags.

Fantasy Sports has been validated by their skill components. They have spread across many state lines and also into the world of collegiate athletics, an area that has been closed to most forms of gambling. This is because players of fantasy sports rely on tangible results and hard stats, instead of luck of the draw and a various string of numbers.

Contestants will "draft" athletes from a particular league into their teams, and then they pit their line-ups against other teams. They then log the stats during real games. Therefore, players who are in a fantasy line-up will contribute towards their team's overall score. In the end it's the team with the most points that wins.

Reports of the allegations of insider trading within the top two Fantasy Sports Operators mean questions are being asked about the legality and the need for oversight.

Points to ponder

Recent reports detail a DraftKings employee who had mistakenly released the lineup data prior to the day's match-ups. Then it emerged that the same employee joined a contest on DraftKings' rival FanDuel where he won a $350,000 payout.

It is unknown if the employee had access to the data and if it contributed to his win.

Employees of Fantasy Sports and their platforms are not generally allowed to play on their employers' sites, but there were no restrictions from playing on other fantasy sports sites, according to a report on LegalSport.

This has now prompted federal and state legislators to probe the level of oversight of Fantasy Sports and the potential for insider trading. It's hard to forecast what effect this might have on Fantasy Sports' future. When we see that the lawmakers are pondering new rules, there is a possibility of it having a negative effect on the games.

Over the short term we could see a reduction of casual interest in the DFS, because news of the allegations could dissuade some people from trying DFS, or regulars continuing to play. However, the industry is strong enough to continue to grow despite this impact.

Despite the negative press and mistrust these allegations of insider trading have caused, there is hope that this scandal has got the attention of the DFS industry and will help major players in the sector to be able to recognize the necessity for external oversight.

The Legal Challenge

External oversight is required for any part of business that "touches on game integrity," said Mr. Derrick Morton, who is CEO of FlowPlay, and that fantasy sports industry should seize the opportunity. He continued that whenever there is billions of dollars to be had, within the context of accountability and low visibility, then there is potential for fraud. The fact that the industry is unwilling or unable to appreciate this basic law of fraud is unfortunate, he said.

Mr Morton suggests that although Fantasy Sports has rendered its foundation upon games of skill to skirt the laws banning gambling whether online or offline, these daily games could be in trouble. The weekly format of Fantasy Sports seems to be safer than the DFS format. The DFS is based on taking risks with funds.

The efforts of bringing traditional gambling online in the USA serve a case to study for the DFS, Mr. Morton said, and continued to say that DFS can make a strong case for remaining legal compared to pure games of chance. Companies that push the daily format will be looking at a long road that could possibly prove to be costly to continue operating.

Mr Morton said that the largest challenge to face Fantasy Sports would come through the combined effort of the traditional casino industry and the regulators with regards to the legality of Fantasy Sports. This will force the operators to fight for a legal status.

Legality Aside

Besides the legality issues and the various challenges, Mr. Morton said that we need to question the sustainability of DFS. A report was recently released by McKinsey that concluded that recreational players were essentially pushed out by skilled sharks, and that although it showcased what an uphill battle it is, DFS operators need to stay afloat especially with increasing user acquisition costs. It also showed why DFS remained legal in the USA.

Together with the challenges to keep casual gamers interested in pools that were steadily filling up with sharks, Fantasy Sports platforms also have been plagued with load issues, said performance expert David Jones of Dynatrace.

He said that top Fantasy Football sites experienced major traffic spikes regularly. Regardless if you are a regular daily gamer or weekly gamer, the sites will experience a major spike on Sundays because users will log on to check on their teams and how they are doing on the weekend games.

Mr. Jones said that the sharp upticks in the traffic can expose substantial issues that are only seen during peak load times. This highlights the importance of doing advance testing from an end-user's perspective. This problem is ever present, and some of the top sites need to address it. How often Fantasy platforms should update their features and delivery of content mechanism to be able to stay on top remains to be seen.