Illegal sports betting was mainstreamed into fantasy sports, which gave way to legalized state sports betting, which paved the way for prediction markets. And now, those prediction markets, like Kalshi, Polymarket and Novig, have deals with sports leagues, just like the gambling companies.

The simple truth is people like spending money to show how much they think they know about sports, for better or worse.

So, what’s next in this evolution?

Two Australian traders have figured out a way to combine the rush of a trading floor and their love of sports.

Rhett Dinsdale and Leigh Taylforth’s company, FutureSports, has partnered with the CME Group to launch FutureSports Performance Indexes (FSPI), which turns sports teams’ statistics (and eventually athletes’) into “rules-based, benchmark financial indexes.” These indexes rise and fall over the course of a season based on the teams’ stats and performance. CME Group will provide the exchange to trade futures of the indexes.

Soon, you’ll be able to go long on your favorite team and short your biggest rival. Or, if you’re the fan of a bad team, hedge your emotional trauma.

“I’d really love to short the Mets as a Mets fan,” Tim McCourt, the senior managing director and global head of Equity, FX and Alternative Products at CME Group, said in a recent conversation with FutureSports and The Athletic.

FutureSports is starting its business with the National Hockey League. It’s aiming for a Sept. 28 launch, pending regulatory review.

More than point spreads

A recent Bloomberg story claimed that a large chunk of Gen Z investors see sports betting as a viable strategy to make money.

Good luck with that. But those kinds of dreamers aren’t the customers FutureSports is looking for. Dummies bet parlays. FutureSports is targeting “sophisticated retail investors,” the kind of people who know their way around derivatives, instead of just point spreads. But it’s all connected.

“The growth of prediction markets demonstrates genuine demand for exposure linked to sporting events, and we read that as evidence of investor interest,” Taylforth said in a recent interview with Structured Retail Products.

Financial indexes and futures trading are a little more complex than sports betting or prediction markets. But since this is The Athletic and not Structured Retail Products, how would a retail investor take part?

“A consumer can jump on and open a brokerage account,” Taylforth said, naming companies like early investor Robinhood, Plus500, Webull or NinjaTrader. “They have to understand how to trade derivatives. That’s a prerequisite because they’re complicated financial instruments, so you’ve got to have trading history here. But yeah, you can go long or short a team as you see fit.”

Every team starts the season with a base index value of 7,500. After years of backtesting, FutureSports created a valuation table that will cause the value of the asset to fluctuate based on individual and team statistical performances. Different statistics are weighted based on scarcity, positively and negatively. In terms of in-season trading, customers can buy or sell contracts that expire monthly or quarterly. CME will offer standard (10 times the value of the FSPI index) and micro-sized (1/10th the size) contracts and round-the-clock trading.

In the NHL, for example, according to a FutureSports document, there are (after pre-launch backtesting) 48 constituents that go into the mix: 24 in-game (10 positive and 14 negative), nine end-of-game, six monthly, eight end-of-season and one postseason.

“For example, a hat trick in hockey is not necessarily super scarce; it might be one a month, a couple of months, something like that,” Dinsdale said. “But it is scarce enough to attract a fairly high points value.”

At the end of the season, winning the Stanley Cup is worth 750 points, and finishing last in the conference is minus-250.

“Our indexes are over 90 percent correlated with other performance measures, win-loss being one,” Taylforth said. “So it’ll pass the sniff test. You’re not going to see a team win the championship or a team go on a deep playoff run and their indexes traded negatively throughout the year.”

In the offseason, you can trade futures for each index.

“So if there were trade deals, injuries, maybe new investment commitments, either to the upside or downside for management, and those were done prior (to the season), you could still use futures to manage some of that exposure,” McCourt said. “You need not be in season.”

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Dealing with the leagues

The deal with the NHL involves access to intellectual property and statistics, but the league has no role beyond providing access to official numbers.

FutureSports is expected to launch a college football index, where it will work out a deal for access to statistics and avoid using any IP, such as logos or nicknames.

The company is working on deals with the other major sports leagues in the U.S. Three of the company’s early strategic partners are affiliated with baseball teams: Elysian Ventures (Los Angeles Dodgers), Marquee Ventures (Chicago Cubs) and the John and Linda Henry Family Foundation (Boston Red Sox, Fenway Sports Group). CME is the jersey patch sponsor for the Chicago White Sox.

“We went out specifically in this (funding) round to tie in strategic partners like CME Ventures and CME Group, as well as the Cubs, the Dodgers and John Henry, which is effectively (the) Red Sox,” Dinsdale said. “Three of the most powerful clubs in the MLB. So, that’s strategic for us to get our deal done.”

The key to this idea is that institutional traders and companies invested in sports will use the FSPI to hedge risk. One example would be a major sponsor for a disappointing team like, say, the Chicago Bulls. Motorola is the team’s jersey sponsor.

“They would talk to their institutional broker, let’s say Goldman Sachs, Morgan Stanley, JP Morgan, for example, and they’d say, ‘This is our exposure this season,’” Dinsdale said. “‘We’ve given the Bulls $20 million to be a jersey sponsor. We’re concerned that the performance won’t be there, and less people are going to see that, (and) we’re going to get a lower return on it.’”

FutureSports and CME also see hedging possibilities for individuals.

“One example we use is season ticket holders,” Dinsdale said. “If you’re out there and you’re buying Cubs season tickets and they’re having a good run right now, perhaps performance starts to drop off a bit and you aren’t going to get face value for your ticket prices anymore.”

Added McCourt: “There’s individual proprietors or business owners, so think restaurants, vendors, parking lot operators, commercial real estate, all of these have natural exposure to the performance of that team. And they don’t at present have the ability to hedge in any of that or participate in additional upside, other than how they may be able to monetize their individual offering as it relates to that team or venue.”

This all might sound a little complicated, but when FutureSports presented this idea to McCourt and CME Ventures, the venture capital arm of CME, it caught on quickly.

“If you look at the CME Group’s history, I mean, this is what we do,” McCourt said. “When I saw this opportunity come across my desk, it did not take me very long to be like, ‘This makes sense, and I am in.’”

If all goes according to their plan, professional athlete indexes come next. But they’d only list the biggest athletes, not the players at the end of the bench. Prop bet manipulation has been a major story in the NBA, but the way the indexes are set up nullifies that risk.

“We will move to athletes at some stage — not within the collegiate space; professional space only,” Taylforth said. “And once the leagues and CME are both comfortable, then we will look to at least only top athletes. Our rule of thumb here is to follow the money. So we’re looking for people to have utility to be able to hedge, say, sponsorship or endorsement deals. So we’ll lead with teams, but we envision getting to athletes at some stage.”

Rules and regulations

If you’re immediately thinking about how team employees could game the system, regulations are in place. An NHL spokesperson told the Chicago Sun-Times that players, coaches and staff won’t be allowed to trade.

“There will be prohibited lists in the same way that there are sanctions lists, and every broker needs to check before they onboard a customer,” Taylforth said.

Once FutureSports gets deals done with the leagues, brokers can start experimenting with different products with the indexes for ETFs (exchange-traded funds) and OTCs (over-the-counter trading).

“We’ve heard some fairly creative and exotic ideas around ETF products,” Taylforth said.

For instance, if they had deals with the leagues right now, you could do a Chicago ETF with the city’s teams. The Bears, Cubs and White Sox are playoff contenders, and the Blackhawks and Bulls are in rebuild stages.

So you could go long on Chicago sports.

“We’re hoping that that kind of vernacular comes in,” said Taylforth, who, like Dinsdale, moved his family to Chicago to launch the business. “Like, ‘I’m long on Chicago.’ That would be pretty cool.”