Will Insider Trading Sideline Fantasy Sports?

The field of fantasy sports is faced with a fresh set of legal questions, following this week’s allegations of insider trading on DraftKings and FanDuel, which have drawn the attention of officials and raised a flurry of penalty flags.

Having been validated by their skill component, fantasy sports have spilled across state lines and even into the world of collegiate athletics, a realm that has been closed to other forms of gambling. It’s all because fantasy sports players rely on hard stats and tangible results, rather than the luck of the draw and an arbitrary string of numbers.

Contestants “draft” athletes from a given league onto their teams, and then pit their lineups against others. As they log stats during real games, players in a fantasy lineup contribute to their team’s overall score, and the team with the most points wins.

With the reports of alleged insider trading within the two top daily fantasy sports operations, questions about their legality and their need for oversight once again have surfaced.

Points for the Privy

Reports surfaced last weekend that a DraftKings employee earlier in the week mistakenly released lineup data before the day’s matchups began. That same employee joined a contest on rival FanDuel and won a US$350,000 payout.

Whether the employee’s access to the data contributed to his win is unknown.

Previously, employees of fantasy sports sites and platforms generally were not allowed to play on their own sites, but they weren’t restricted from playing elsewhere, according to LegalSportsReport.

Now, state and federal legislators have begun to probe the level of oversight in fantasy sports and the potential for insider trading. While its hard to forecast the effect this might have on the future of fantasy sports, with the rulemakers pondering new rules, Chris Grove, editor at LegalSportsReport, said the DraftKings incident could have a negative effect on the games.

“I think in the short term you may see a reduction in casual interest in DFS, as news of the allegations may dissuade some from trying DFS or continuing to play if they’re already signed up,” he told the E-Commerce Times, “but the industry is likely strong enough at this point to continue to grow even in the face of that impact.”

Despite the mistrust and negative press the insider-trading allegations have drawn, there’s a hope that the scandal has gotten the attention of the DFS industry and has helped the major players in the sector to recognize the need for external oversight.

The Legal Challenge

External oversight is needed for any part of a business that “touches game integrity,” said Derrick Morton, CEO of FlowPlay, and the fantasy sports industry should seize that opportunity.

“Whenever you have billions of dollars up for grabs within the context of low visibility and accountability, the potential for fraud is endemic,” he told the E-Commerce Times. “The apparent inability or unwillingness of the industry to appreciate that basic law of fraud is unfortunate.”

Though the fantasy sports industry has leveraged its foundation on skill to skirt laws banning gambling — online or off — the daily games could be in trouble, Morton suggested. The weekly format of fantasy sports appears to be safer than the DFS format, which is based on risking funds.

The effort to bring traditional online gambling into the U.S. serves as a solid case study for DFS, said Morton. Though DFS can make a stronger case for remaining legal than pure games of chance, companies pushing the daily format nevertheless are staring down the road at a long and costly battle to keep operating.

“Online gambling was actually legal for a time in the U.S. but was banned more a decade ago,” Morton recalled. “Now, as many organizations push to make online gambling legal — over the last five or so years — only a few select states have been able to make any traction in bringing online gambling back.”

The biggest challenge to the legality of fantasy sports will come through the combined efforts of the traditional casino industry and regulators, which will force operators to fight for their legal status, Morton told the E-Commerce Times in an earlier interview, prior to the eruption of the current scandal.

Legality Aside

Beyond the legal issues and related challenges is the question of DFS’ sustainability, Morton said.

“McKinsey recently released a report which concluded that recreational players are essentially being pushed out by highly skilled sharks,” he noted, “but as much as the McKinsey report showcases the uphill battle that DFS operators have to stay afloat — especially with swelling user acquisition costs — it also shows why, fundamentally, DFS remains legal in the U.S.”

Along with the challenge of keeping casual gamers interested in pools steadily filling with sharks, fantasy platforms routinely have been plagued by load issues, observed David Jones, performance expert at Dynatrace.

“The top fantasy football sites regularly experience major traffic spikes,” he told the E-Commerce Times. “Whether you are a daily or a weekly site, typically your site will experience a major spike every Sunday, as users log on to check how their teams are doing during the weekend games.”

Such sharp upticks in traffic can expose significant issues seen only during peak load times, which highlights the importance of advance testing from an end-user perspective, said Jones. It’s an ever present problem that even some of the top sites must address, considering how often fantasy platforms update their features and content delivery mechanisms to stay on top.

“A performance management solution that provides real insight into the entire user journey gives you an actual idea of what your users go through,” said Jones. “Without this, it’s very hard to provide a top-notch digital experience.”