Prediction markets using the HHR model to develop casino products
by Bob Duff
Historic horse racing (HHR) machines are providing a significant lifeline to the sport in jurisdictions where they have been approved. They’ve been a massive success story in Kentucky, for instance.
Last year, HHR machines generated a total handle of $12.2 billion, leading to $1.02 billion in gross gaming revenue. Those funds have significantly boosted purses for live racing and added hundreds of millions of dollars to the state economy in tax revenue.
Others are taking notice of the effectiveness of the HHR machines. Prediction markets, which have infiltrated the U.S. sports betting market by taking advantage of legal loopholes, are seeing the HHR model as another potential door opener to get their product a piece of the massive casino industry pie.
Prediction market companies like Kalshi and Polymarket utilize sports event contracts, where players back one outcome or another relating to an event, to do an end run around state sports betting regulators. Prediction market sites are federally regulated by the Commodities Futures Trading Commission (CFTC).
These sites argue, and are backed by the CFTC in their opinion, that as a federally regulated operation, they are not governed by state laws. Further, they slink into a gray area by citing their products as derivative trading. Since the odds on the outcome are generated by the competing sides of the event rather than from a betting line set by the house, they further assert that their products are not sports betting.
The issue is before the courts in several states, and the CFTC has taken the unusual position of filing suit against state Attorneys General on behalf of the prediction markets.
On the horizon could be another battle over a gray area operation that would be evolving from the use of the HHR model to create casino-style prediction markets. According to a prominent gaming attorney, this plan has moved beyond the hypothetical stage and into development.
“This is something I am sure people are talking about and thinking about right now,” Stephen Piepgrass, a gaming regulatory attorney and partner at Troutman Pepper Locke, told the website DeFi Rate. “The HHR model is one that I think could be very readily translated into the prediction market space, and I would anticipate there are businesses that are thinking about how to do that right now.”
HHR FOUND A LOOPHOLE TO GAIN APPROVAL
HHR machines took a similar path to existence. Currently operating in 12 U.S. states, HHR machines use past race results to power slot-like games. Players make pari-mutuel wagers on actual past races, and the specific information of that race they are wagering on isn’t revealed until the bet is down.
Since pari-mutuel wagering is legal and regulated in the states that offer HHR machines, no casino license is required to operate HHR machines.
Prediction market contracts could take advantage of the same loophole. Evidently, the model under consideration would be a casino-style offering that would be layered atop a range of legitimate federal derivatives. By utilizing legal and regulated CFTC-listed event contracts to create these games, there would be no need to acquire a casino license to operate the games. Similar to sports event contracts, prediction market sites would have the backing of a federal regulating agency, enabling them to offer these casino-style games in all 50 U.S. states. Since only seven U.S. states currently allow legal and regulated online casino gambling, this could be a massive money maker for the prediction market sites.
Piepgrass is confident that once again, the prediction market companies have unearthed a foolproof method for doing an end run on state gambling laws.
“I don’t see the current legislation being the type of framework that would address this,” Piepgrass said.
And again, like the sports event contracts that now account for approximately 70 per cent of the prediction market revenue, these casino-style games would be making money hand over fist.
“I think it would take off very quickly as soon as the first one comes out,” Piepgrass said. “I think before we know it, everyone’s going to be doing it.”
That revenue would keep rolling while state regulators chase their tails, engaged in protracted court battles, desperately seeking to close the legal loophole.
“I think the window is narrower than what it’s been in the past for operating in this zone, but I do think there’s a lot of money that could be made in a small window,” Piepgrass said.
From a horse racing standpoint, the irony of this outcome is beyond frustrating. In HHR machines, the horse racing industry developed a business model that’s proven massively successful and profitable. It’s been a boon to the sport.
Now, one of horse racing’s rivals for the betting dollar is going to take that business model and create a similar product, one with the potential to dwarf the revenue generated by HHR machines.
