All I do is win, win, win, no matter what: Wednesday night’s NFL opener between the Seahawks and the Patriots delivered a favorable result for the market makers standing behind prediction market brokers and exchanges. Yet one industry insider has warned that the division of those winnings is unsustainable.

• Brokers are acquiring and retaining customers but surrendering most of their losses to external liquidity providers.

Got money on my mind, I can never get enough: Wednesday night was a case in point. The game was “very, very, very good for market makers, or should we call them sportsbooks,” one prediction market insider source told E+M.

• Seahawks quarterback Sam Darnold left the game, scoring was low and most of the prominent touchdown selections failed to land.
• “None of the big touchdown scorers scored except for Jaxon Smith-Njigba,” the source said. “It was a very, very, very good game for market makers.”

Slice of the pie: For brokers, however, the result exposed a potentially fundamental weakness in the current prediction market model. “Last night there were brokers that routed to the venues that we were on where 90% of what the customer lost did not get retained by the broker,” the source said. “It was a disaster zone.”

• The insider noted that the current model of prediction markets sees most of the economics flow through the exchange to the market maker that took the other side.
• “It’s all about the proverbial pie,” they added. “What does the exchange get, what does the brokerage get and what does the market maker get.”
• “And I can tell you that for RFQs specifically [on Wednesday] night, the answer was about 75%-80% for the market maker, 5%-10% for the exchange and 10%-15% for the broker.”

Shake your moneymaker: Davis Catlin, principal partner at Discerning Capital, has reached a similar conclusion after examining investments across the prediction market value chain. “We’ve looked at most of these deals, and the only people making any money today are the market makers,” he told E+M.

• “It’s unbelievable how much money some of them are making, people like DL Trading, Jump, Susquehanna and Tony Bloom,” Catlin added.

Please quote me: That imbalance could become more pronounced as request-for-quote products, or RFQs, increase the volume and complexity of NFL trading. An RFQ allows a customer to combine several selections, including correlated outcomes within the same game, and invite multiple market makers to compete for the trade.

• Rather than accepting a sportsbook’s displayed odds, a customer might request a price on a team winning, covering the spread and a named player scoring.
• The request is transmitted to the market makers, which calculate and return bespoke prices.
• “This RFQ is the new thing that’s going on this season,” said Sebastien Sabic, co-founder at market maker Moon Intelligence. “That’s quite big already.”
• RFQs transplant one of the sportsbook industry’s most valuable products – accumulators and same-game parlays – into a competitive exchange structure.
• They also place the external market maker, rather than the broker, directly opposite the customer.

Smart markets: The industry insider argued that the economics ultimately need to be reversed. In their preferred model, the customer might lose 10 units on the same set of RFQs, but the broker would retain eight. That would mean better pricing and a lower loss rate for the customer, while allowing the broker to reinvest in product, marketing and retention.

• The market maker would receive a smaller return per trade but benefit from a healthier and longer-lived ecosystem.
• Smart market makers, the source said, face a choice: “They can win 33% for half an NFL season, or they can win 2% for the next 10 years.”

You ain’t got no backbone: Jefferies described market makers as the “liquidity backbone” of the ecosystem, continuously posting prices, absorbing one-sided customer flow and managing exposure across potentially thousands of contracts.

• Their returns come from bid-ask spreads, exchange rebates, liquidity incentives and trading gains.
• Sabic said professional market makers already sit opposite retail customers in most sports transactions. “For 80%, 90% of the trade, it would be a market maker that is systematically making a market, offering two sides,” he said.
• On the other side is generally “a retail [customer] who is taking a smaller bet.”
• But the arrival of more capital will increase competition. Sabic said traditional hedge funds had opened sports desks and might be overestimating the amount of retail flow available.
• “There might be an oversupply of market makers at this stage,” he admitted.

Winning too often: RFQs also introduce adverse-selection and collateral risks. Some firms appear to use sportsbook odds as the starting point for their quotes. If DraftKings offers a combination at 50/1, competing market makers might respond with 55/1, 60/1 or 70/1.

• But a market maker routinely quoting 70/1 risks winning the combinations that should have been priced at 50/1 while losing the trades that could safely have been offered at 90/1.
• “If you’re a bad market maker, you just give 70 all the time,” Sabic said. “You’ll only get matched when it should have been 50.”
• Market makers must also fully collateralize their positions. Sabic gave the example of accepting a $1,000 combination at 100/1, requiring $100,000 to be posted.
• Another $100,000 might be required for a second ticket even when the two combinations cannot both win. “You can’t lose both, but you have to post $200,000,” he said.
• One market making group is understood to have explored raising more than $500m to support combination trades.

Falling through the gaps: The insider source argued that routing customer losses overwhelmingly to market makers will eventually leave brokers questioning the value of the business. “I’m a sieve,” he said, describing the realization awaiting some brokers. “I’m acquiring these users and they’re losing.”

• His conclusion was simple: “Brokers hold the key.” They control the customer relationship and decide where to route the flow.
• The NFL season will therefore test more than consumer demand for prediction markets or RFQs.
• It will test whether brokers use that leverage to rebalance the economics before the market makers win too much, too quickly.

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