What Ve­gas can learn from Wall Street

The Pak Banker - - OPINION - Joe Peta

Fo­cused Hedge Funds" and ar­range pre­sen­ta­tions by lawyers, ac­coun­tants and oth­ers who could ex­plain the lo­gis­tics. In other words: Fa­cil­i­tate the cre­ation of an­a­lyt­ics-based hedge funds, and then pro­vide those funds fee-based ser­vices.

Look at what hap­pened with poker over the past decade. Un­like ev­ery other game on a casino floor, poker doesn't re­sult in the house play­ing against the cus­tomer. In poker rooms, the casino merely col­lects rent from play­ers com­pet­ing against one an­other. Be­cause that's a lower-mar­gin busi­ness than op­er­at­ing a roulette wheel or craps ta­ble, run­ning a poker room looks like a less at­trac­tive busi­ness. Yet casi­nos all over Las Ve­gas tore out slot machines (!) to ex­pand their poker rooms.

Thou­sands of young, in­tel­li­gent gam­blers -- in­clud­ing Nate Sil­ver, now a New York Times blog­ger and statis­ti­cian -- left sta­ble jobs to play poker full time, and a sig­nif­i­cant per­cent­age moved to Las Ve­gas to do it. Why? Be­cause they were drawn to a pur­suit in which they could make money with their minds through care­ful anal­y­sis and crit­i­cal rea­son­ing.

Thanks to the rise in sports an­a­lyt­ics, sports books now of­fer the same op­por­tu­nity for growth and rev­enue ex­pan­sion -- only on a much larger scale than poker did a decade ago.

As an in­vest­ment strat­egy, what I was do­ing was more than straight­for­ward gam­bling. I was pur­su­ing an edge in a mis­priced se­cu­rity just like any hedge fund. Only I was find­ing it in daily shares of a base­ball team in­stead of a listed se­cu­rity. Las Ve­gas book­mak­ers post an im­plied win prob­a­bil­ity for ev­ery team, each game. My model sim­ply did the same -and, if it found an op­por­tu­nity, placed an ap­pro­pri­ately sized bet, as if I were cre­at­ing a stock port­fo­lio.

That dif­fer­ence wasn't triv­ial, though. In fact, to my in­vestors it was vi­tally im­por­tant. They al­ready had in­vest­ments tied to stocks, bonds, real es­tate and so on. Pri­vate-eq­uity in­vestors, ven­ture cap­i­tal­ists and oth­ers who in­vest in alternative as­sets search for this ev­ery day: a new in­vest­ment whose re­turn is un­re­lated to ex­ist­ing hold­ings.

Poker play­ers typ­i­cally came to Ve­gas with a stake in the range of -- to quote Matt Da­mon's char­ac­ter in "Rounders" -- "three stacks of high so­ci­ety" (i.e. $30,000). Lured by the at­trac­tion of un­cor­re­lated re­turns, how­ever, my in­vestors looked at model-based bet­ting as an alternative in­vest­ment as­set, and I ar­rived in Las Ve­gas with $1 mil­lion.

The com­bi­na­tion of will­ing in­vestors, will­ing par­tic­i­pants and an ex­plo­sion of avail­able data -- at web­sites such as Fan­Graphs for base­ball, Foot­ball Out­siders for the NFL and 82games for pro­fes­sional bas­ket­ball, among many oth­ers -cre­ates a golden op­por­tu­nity for book­mak­ers.

But they will need to make some ad­just­ments to take full ad­van­tage of it, and that's where adopt­ing Wall Street's best prac­tices comes in.

First, they'll need to stop wor­ry­ing about be­ing out­smarted. A trader in charge of biotech­nol­ogy stocks at even the big­gest in­vest­ment bank has med­i­cally cre­den­tialed port­fo­lio man­agers for cus­tomers. Although this puts traders at a per­ma­nent in­for­ma­tional dis­ad­van­tage, the best ones over­come this by fa­cil­i­tat­ing the buy­ing and sell­ing of large amounts of stock be­tween highly so­phis­ti­cated cus­tomers. Las Ve­gas has never ap­proached its cus­tomers this way. Like Wall Street mar­ket mak­ers, casi­nos should em­brace the con­cept of match­ing deep- pock­eted cus­tomer or­ders rather than trad­ing against them.

Sec­ond, based on my ex­pe­ri­ence, casi­nos need to stop be­ing hos­tile to large in­vestors. I was need­lessly treated like an en­emy de­spite mak­ing daily bets to­tal­ing more than $1 mil­lion a month.

No sports book ever proac­tively asked me about my in­ten­tions. An in­vest­ment bank in­creases mar­ket share on the trad­ing floor by know­ing its cus­tomers; if a sports book had made any ef­fort to know me, I would have worked with them to place big­ger bets.

Fi­nally, an­a­lyt­ics-based models like mine don't all ar­rive at the same con­clu­sion. As with the poker boom, Las Ve­gas casi­nos are go­ing to see more of this new breed of sports gam­blers with so­phis­ti­cated risk-anal­y­sis skills backed by pro­fes­sional in­vestors. With a lit­tle bit of fi­nesse, the casi­nos can get them all play­ing at the same ta­bles. They will then be in a po­si­tion to match cus­tomer or­ders -- thereby cre­at­ing the elu­sive risk­less and prof­itable trade for the book­maker. They'll have at­tracted more as­sets un­der man­age­ment and en­cour­aged more turnover, reap­ing more in­come in the process. So the next time some­one ac­cuses Wall Street of look­ing like a casino, the gam­bling man­agers in Las Ve­gas should sit back and say, "Right -- and we're do­ing ev­ery­thing we can to keep it that way."

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