New York State Attorney General Eric Schneiderman Tuesday ordered DraftKings and FanDuel, the biggest daily fantasy sites, to stop accepting bets from New Yorkers. Schneiderman said the activity was gambling rather than a skill-based game and therefore illegal under New York law.

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The cease-and-desist is a major blow to the young industry that allows users to pay for fantasy sports on a weekly basis. Schneiderman’s office has for about a month been investigating the sites to see whether insiders were using proprietary information for personal gain.

“It is clear that DraftKings and FanDuel are the leaders of a massive, multibillion-dollar scheme intended to evade the law and fleece sports fans across the country,” Schneiderman said. “Today we have sent a clear message: not in New York, and not on my watch.”

The operators of daily fantasy sports sites have been arguing that their products are skill-based games, not gambling. But that hasn’t quieted all the controversy — and recent government scrutiny. Fantasy sports are legal — for now — because laws in most of the country has it defined as a skill game. If it gets treated as gambling, then immediately it’s illegal in almost every state.

So what is it? A skill game? Gambling? Can it be both? One way of measuring this is to consider how well a random average participant would fare in daily fantasy, contrasted to the huge but largely illegal game of online poker.

Pro poker player Andy Frankenberger believes daily fantasy is much more like gambling than online poker.

“A daily fantasy pro’s competitive edge over a beginner is nothing compared to the edge of a poker pro versus a first-time poker player. Your decisions in daily fantasy can’t be that bad when players’ prices are efficiently set by the sites,” he said.

Frankenberger spent 14 years on Wall Street trading equity derivatives before becoming a two-time World Series of Poker champion and World Poker Tour player of the year. “It’s similar to how there’s no bad pick in sports betting if the lines are set efficiently,” he said. “But in poker, players assign their own values to each hand, and as such, the skilled player stands to gain from making better decisions.” In addition to poker, he’s played fantasy sports since the 1980s, and daily fantasy for several years.

“It’s a joke that between online poker and daily fantasy, poker is the one that’s widely prohibited in this country,” said Frankenberger. “Anyone who thinks poker is not a game of skill probably hasn’t played much poker.”

Poker chips gambling

Michael Fernahl | E+ | Getty Images

Frankenberger concedes that a pro who enters a daily fantasy tournament has some edge over a nonpro, but that edge is far less than in poker. The reason pros currently dominate daily fantasy is because they submit hundreds — or thousands — of entries. “Any single entry from a top daily fantasy pro is only marginally likely to beat a nonskilled player,” he said. “But when they submit hundreds of entries, of course they are more likely to win, just as a person who buys 200 lottery tickets is more likely to win than someone who buys just one.”

But why are the pros submitting so many entries? “Right now people are taking advantage of the overlay.” In daily fantasy tournaments today, prize guarantees often exceed the total funds collected. That means each entry is actually worth more than the price paid. As long as each entry has positive expected value, it’s in a deep-pocketed pro’s best interest to submit as many entries as possible, especially if they feel they have a competitive edge in drafting their teams.

The overlays are a sign of the times: start-ups focused on gaining market share over profitability. “It’s like Lyft or Gett offering $5 or $10 rides anywhere in Manhattan, even though they lose money on each ride,” said Frankenberger. “It reminds me of the Internet boom in 2000 when companies like provided a free one-hour delivery service that seemed too good to be true. We all know how that ended.”

But if daily fantasy continues to grow as it has, it will be well worth the money they’re giving away in overlays today. “At some point the overlays will turn into cash surpluses as tournaments fill up and the overlays are a thing of the past,” said Frankenberger. “That is, if they don’t run into legal hurdles.” In the meantime, Frankenberger is convinced daily fantasy requires less skill for an average player than online poker.

Ed Miller, an independent games consultant, recently published a dataset showing how the profits of daily fantasy games are soaked up by sharks — the professionals who are the biggest players. Notice that the absolute biggest sharks only have a 7 percent return on investment. The next biggest group of sharks actually saw a higher return, while betting fewer total dollars.

Miller pointed out a very interesting fact about why so many professional poker players have moved over to daily fantasy. “There’s an army of smart 18-year-old kids in Siberia doing nothing all winter but getting better at poker. It’s hard to squeak out a profit these days because the level of competition is very hard.” Those players who used to spend time on poker have moved over to daily fantasy in huge quantities.

As a financial example, think about a newly emerging market — where pioneering traders can jump in and take advantage of big spreads, mispricing, and information asymmetry. Eventually the markets mature, spreads tighten, profits shrink — and the traders move on to something else that’s hot. It was online poker a decade ago, and it’s daily fantasy right now.
[“source -pcworld”]