How the Fine Print in a Recent Deal Reveals a Growing Threat to IBs
By: Renato Mariotti, Holly Campbell, and Maggie DePoy
The explosion of prediction markets, such as Kalshi and Crypto.com, has brought sports wagering to CFTC-regulated DCMs in the form of event contracts, which are regulated as swaps pursuant to the Commodity Exchange Act. The deal between Kalshi and Robinhood—as well as the more recent deal between Crypto.com and Underdog—have drawn widespread attention.
But those two deals are very different, and the difference between them has significant implications for IBs. Robinhood is an FCM, and the relationship between Kalshi and Robinhood resembles the relationship between FCMs and DCMs in other contexts. Like Kalshi, NADEX (d/b/a Crypto.com) is a CFTC-regulated DCM. But unlike Robinhood, Underdog—a leading daily fantasy sports platform—is not an FCM. It is not regulated by the CFTC at all.
So what is Underdog’s relationship with NADEX? It is a mere “technology service provider” pursuant to Rule 2.11 in NADEX’s rulebook. NADEX and Underdog are taking the position that Underdog doesn’t need to be registered as an FCM. They appear to be relying on dated CFTC no-action letters that permit software companies that “place orders for trades through the Platform without having to open a separate application” to operate without registering as an FCM or IB.
Through this arrangement, Underdog will offer prediction markets on its app by essentially acting as a portal for NADEX. Users become customers of NADEX, not Underdog, and all financial transactions are processed through NADEX’s regulated platform.
The implications of this model are obvious—DCMs are increasingly cutting out FCMs, which would ultimately relegate IBs to become little more than marketing partners of DCMs. IBs benefit from the competition between FCMs, which allows IBs to negotiate with different FCMs for favorable terms that benefit their business.
Unfortunately for IBs and FCMs, the Crypto.com deal is part of a growing trend. CME’s partnership with FanDuel, a leading sports gambling company, includes the creation of an FCM jointly operated by CME Group and FanDuel that will provide access to new CME prediction markets. Like the Underdog deal, the CME/FanDuel partnership reduces competition among FCMs and thus reduces the choices available to IBs. The implications of this trend should concern you.
