Avengers Assemble

Financial Times: Fantasy Sports: Rule-playing games

Goooooooood morning Newcastle! In today’s rant of the week, I welcome you to a scandal which has erupted in the industry of fantasy sports, an online and apparent ‘regulated’ market. Sports enthusiasts build and assemble their elite avengers ahead of the national football league season, evidentially the busiest time of the year for fantasy sports.

In the last few weeks, the industry has attracted the interest from many law firms and government officials regarding its inefficient market over the controversy of a DraftKings employee winning $350,000 playing on its rival site FanDuel. This has led to the suspicion of misusing insider information for personal gain. A question that comes to mind - how and why are employees of the two companies allowed to participate in a pay to play league with the general public? Questionable corporate culture if you ask me. If more rules were in place and employee involvement was banned, the market would certainly be more efficient and this idea of ‘insider trading’ wouldn’t exist (perhaps). Moreover, if there was a separate area where employees from both DraftKings and FanDuel could compete with one another, this would allow the use of insider trading, just not against the public. Then again, what’s to stop employees from playing on other people’s accounts (say a friend)?

 “The single greatest threat to the daily fantasy sports industry is the misuse of insider information,” (New York Times).  

This industry is under real scrutiny unless real safeguards are put into position to make it more market efficient for investors of the industry. I myself as a huge fantasy enthusiast ponder on the idea of insider trading, especially when my own money is at risk. Withholding information from the public is unacceptable; again, questionable corporate culture. After all, the two companies are built on a shaky legal foundation, declaring their games “100% legal”. But an interesting question, if online-gambling is ‘illegal’ in America, what exempts fantasy sports, which is a form of online-gambling?

The Efficient Market hypothesis states that a market is ‘informationally efficient’, which means that it is good at pricing assets based on the information that is currently available. I’m going to look at the concept of EMH from a different angle, applying it to fantasy sports. In this scenario, NFL drafts are the market, although a market that trades in players instead of companies. For example, NFL franchises, like investors, have a strong financial stake in ensuring their valuations are as accurate as possible. Similar to investors, NFL franchises are gorgers for information, seeking information that might be relevant to a player’s future to make informed decisions. Furthermore, while investors might not be perfect at pricing the assets, the NFL draft involves an open competition between different agents who are looking to buy players when their price falls, or sell players if another team is willing to pay more than they’re worth. I believe that this market shares common characteristics with the stock market for this reason.

My questions to you, the reader, just like the stock market, how can we be sure the NFL draft is an efficient market?  Unlike the stock market, which is heavily regulated, fantasy sports have loopholes which need filling. If the NFL draft was an inefficient market, you would expect individuals would outperform the market consistently, compiling many strong drafts against a few weak over a long time period. If it was an efficient market however, despite recent successes, they’d perform no better.  This relates to this idea of a ‘random walk’.

In regards to my question, considering no individual is capable of judging a player at a rate that outperforms the market consensus, i’d like to say the market is efficient. Just like there is a weak form, a semi-strong form and a strong form in finance, I believe this can be related to the NFL draft, or fantasy sports.