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Daily fantasy sports boom spawns virtual stock-picking games. But why?

Michael Santoli
Michael Santoli

If it works for jocks, how about stocks?

Daily fantasy sports leagues are booming because they allow fans to “day trade” athletes as if they were stocks. So then why -- when there’s actual day trading of stocks -- would the world need a make-believe stock-trading game that mimics daily fantasy sports?

Whether necessary or not, daily-fantasy stock market contests are here.

Stock Battle is a new site that allows players to compete for cash prizes based on the one-day returns of a virtual stock portfolio. Competitors pay a small entry fee and then select a group of stocks they believe will outperform those of other players on a given day.

A few years ago, a site called Invoost began offering similar games and got some notice for the novelty of it.

“The space is certainly gaining attention,” says Tom Peterson, CEO of Social Leverage, the venture capital-firm that backed Invoost. He says Invoost still owns the technology used for the contests, and it may restart operations before long.

These efforts seek to capture some of the excitement and the eager cash surrounding such burgeoning fantasy-sports forums as DraftKings and FanDuel, which pioneered the real-money fantasy sports business and have each reportedly been valued at more than $1 billion in private fundraising rounds. ESPN owner Walt Disney Co. (DIS) is taking a stake in DraftKings, CBS Inc.’s (CBS) CBSsports.com runs a real-money fantasy platform and Yahoo Finance parent Yahoo Inc. (YHOO) last month announced it would enter the daily-fantasy sports arena this summer.

“While those platforms reach a far bigger pool of participants, we still believe there is room for a lean, well-funded stock game,” Peterson says. Several are, indeed, in development, according to entrepreneurs in the social finance arena.

Daily-fantasy sports as model

Stock Battle, with about 1,000 users so far during its beta-release phase, was started by brothers Lee and William Lowden, one a recent graduate of Wake Forest University and the other finishing his senior year there.

The company explicitly cites daily-fantasy sports as a model and has been busily following both stock-trading accounts and fantasy-sports sources on Twitter. Lee Lowden hinted in an email that the company was exploring a link-up with a financial-media site. (He also said the company is about to pivot to a more powerful web hosting service, so its current servers might not be able to handle a sudden rush of traffic; be warned.)

On the surface, it’s easy to see why sports and stock trading are rich sources of fantasy fodder. Both produce an abundance of fresh data in hard-to-predict patterns every day. Fans and observers often have opinions about teams and stocks that are far stronger than their predictive powers. And each “game” holds appeal for those who like the immediate gratification and bragging rights that come with a clear separation of winners from losers by day’s end.

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But unlike pro sports -- which are hard to bet on legally outside of a Las Vegas sports book lounge -- anyone can put real money on the line all day and every day in the stock market.

No doubt the emergence of fantasy-stock games will stir plenty of declarations that this is frothy activity that signals the bull market has entered a speculative phase. Maybe, but that’s a tough social dynamic to identify and predict.

So why bother with a fantasy-trading site and virtual stock portfolios when the real thing is a click away?

Because it’s cheap, mostly. While the Robinhood app offers free stock trading via smartphone, a typical real-life trader must have a brokerage account that might charge $7 per trade. And the average price of a single share of a listed stock today is above $50. Many younger, undercapitalized players lack the cash for daily trading in those increments.

Lee Lowden says the typical Stock Battle player loads $20 on to his or her account. The average entry fee for a daily game is $5 and some are as low as $2. Players can choose among trading styles (long, short or long/short), contest duration (one to 25 trading days) and entry fee ($1 to $550).

Prizes listed among its available contests were running from around $10 for a $2 game to $135 for a $10 one, though sample contests on its site show payouts up to $450.

A good bet for founders

Trading cheap is not the same as trading well, of course. Innumerable studies show that individuals who trade individual stocks do worse than those who simply own the broad market, and average return tends to fall as the amount of trading rises. The only reason daily fantasy games are a good business opportunity for founders is because customers, in aggregate, lose money.

In this sense, this is simple gambling economics. Which raises the obvious question: Why is this legal?

The same law that outlawed online gambling such as Internet poker, the Unlawful Internet Gambling Enforcement Act of 2006, explicitly allowed fantasy-sports games that met certain criteria.

Specifically, the contests must award prizes for skill rather than pure chance, and players must compete based on statistics produced by virtual teams of individual players rather than on the results of any real team or the games themselves. In daily-fantasy sports, the contestant assembles a virtual team of players and aggregates their performance stats.

At Stock Battle, real stocks are named but no money is invested in any security, and no single stock can make up more than 25% of a virtual portfolio.

Of course, securities law has long banned so-called “bucket shops” from allowing individuals to merely bet on the direction of individual stocks without investing in them. But Lowden says Stock Battle solicited a legal opinion that asserts its contests steer clear of these prohibitions. An SEC spokeswoman declined to comment on the agency’s view on such games. The vague fear that regulators might turn hostile on this area continues to hang over the business.

The Stock Battle marketing pitch also mentions the educational benefits of acquainting inexperienced investors with the ways of the market.

With this idea it is keeping company with the big players in retail stock trading, who have embraced the “gamification” of their educational materials and investing tools.

E*Trade Group Inc. (ETFC) advertises its mobile app as a fun way to research companies by scanning the barcodes of hot-selling products.

Fidelity Investments’ Fidelity Labs research shop has developed, as pilot projects, a virtual-reality investing interface called Stock City, and teaching games called Beat the Benchmark and In the Cards that turn investing topics into online mock competitions.

Sean Belka, director of Fidelity Labs, says the idea is to “meet people where they are” by delivering financial content “in an engaging way.” For millenials, in particular, “gaming is the way they’re used to gaining information.”

It’s not for nothing that investing has long been known as the money game.