Professional sports could be about to acquire a new dimension as a financial asset class, with CME Group preparing to launch the first exchange-traded futures contracts based on the performance of National Hockey League (NHL) teams.
The derivatives exchange plans to launch standard and micro-sized Hockey futures on September 28, pending regulatory review. The contracts will track CME FutureSports Performance Indexes (FSPI), constructed by FutureSports using official, real-time NHL statistics, and will trade around the clock with central clearing through CME.The launch follows an exclusive agreement between FutureSports and the NHL under which the league will provide the company with the real-time statistics used to create indexes covering team and player performance.
Behind the initiative is an attempt to apply familiar financial-market infrastructure – benchmarks, market data, futures, clearing and liquidity provision – to an economic ecosystem where revenues are increasingly substantial but exposure to sporting performance has historically been difficult to hedge.
“This was born out of our experience in derivatives and wanting to help sports and the ecosystem evolve out of this binary entertainment realm and into sophisticated risk mitigation,” says Rhett Dinsdale, Co-Founder of FutureSports, in conversation with TradingTech Insight.
From sports statistics to financial benchmarks
At the heart of the proposition is the conversion of live sporting events into rules-based financial benchmarks.
FutureSports takes official play-by-play statistics directly from sports leagues and assigns values to events according to systematic methodologies. Positive actions add points to an index while negative plays or setbacks subtract from it, creating continuously changing measures of performance during games.
The indexes are independently administered by FutureSports, with governance, oversight and methodology-change procedures designed to align with the IOSCO Principles for Financial Benchmarks. Although the NHL supplies the underlying statistics, it is not involved in determining, calculating or governing the indexes, which is an important distinction if sports indexes are to move beyond entertainment or betting applications and become credible underlyings for institutional financial products.For FutureSports Co-Founder Leigh Taylforth, the need for that infrastructure reflects the changing economics of professional sport.
“More money is coming in, we’re seeing new leagues start, bigger valuations than ever, bigger broadcast deals, and stadiums are becoming precincts. All of this money begets the necessity for an institutional piece of infrastructure.”
The founders’ backgrounds are firmly rooted in financial rather than sports markets. Both have spent more than two decades trading derivatives, with Dinsdale specialising in index market making and arbitrage and Taylforth in market making and proprietary trading across equities and FX.
“For us, it was a very natural jump from trading indexes across other asset classes to creating one for sports,” says Taylforth. “Being able to measure performance and have a lit price for performance in sports is a key part of building out sports as an asset class.”
Creating a market for performance risk
The potential application extends beyond investors wanting to take a view on whether a hockey team will perform well.
A sizeable commercial ecosystem has financial exposure to sporting performance. CME and FutureSports identify sponsors, broadcasters, third-party arena operators, retailers, food and beverage vendors, insurers and apparel manufacturers among potential users of the new instruments.
A successful team, for example, may play more games, attract larger audiences and generate greater commercial activity. Poor performance can have the opposite effect. Futures linked to team performance potentially provide companies exposed to those fluctuations with a mechanism for managing some of that risk.
The other side of the market could include hedge funds, proprietary trading firms, asset managers and other professional investors. This creates the possibility of a more conventional market structure in which commercial hedging flows interact with investors and market makers seeking trading opportunities.
“If a major commercial user needs to put a large hedge on, that might put pricing pressure on a team or collection of team indexes,” explains Dinsdale. “If it moves below where a quant team or professional trader sees fair value, we’d expect them to come in on the other side.”
CME’s role gives the concept an established institutional distribution and trading framework. The exchange will initially offer cash-settled standard contracts valued at ten times the underlying CME FSPI NHL index and micro contracts at one-tenth of the index value. FutureSports expects Delta One futures to be followed eventually by options on futures.
The proposition will nevertheless depend on whether sufficient liquidity develops around what is an entirely new type of underlying. FutureSports is targeting both sides of that equation: working through leagues and teams to identify commercial exposures while engaging with brokers, trading firms and other financial institutions that could provide liquidity and investment demand.
A new source of trading data
There is also a potentially significant data story behind the derivatives.
The information needed to calculate a financial benchmark represents only a subset of the increasingly detailed datasets generated by professional sports. FutureSports has built technology capabilities to ingest league data and transform it into formats suitable for financial-market applications, opening the possibility of distributing additional datasets alongside the indexes themselves.
For quantitative firms in particular, those datasets could ultimately become inputs into models designed to value and trade the new instruments.
“Our indexes are really just the tip of the iceberg in terms of how sports and data interact,” says Dinsdale. “We use about five to 10% of the data that we stream directly out of the leagues to build our indexes, and our goal is to be able to provide the trading community with that additional auxiliary data for their own predictive analytics and a richer trading experience.”
The NHL contracts will therefore provide an early test of a much broader proposition. Rather than simply creating another way to speculate on sporting outcomes, FutureSports and CME are attempting to establish the components of a conventional financial market around sports performance: authoritative underlying data, independently governed benchmarks, exchange-traded derivatives, central clearing and an ecosystem of commercial hedgers and professional liquidity providers.
Whether that develops into a genuinely liquid new asset class remains to be seen. But if the model works, the significance of the NHL launch could extend well beyond hockey.
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