Save for retirement or just put it all on red?

Let’s say you have a hunch. Tesla shares will soar in August. Gold prices will drop next week. The New York Yankees game on Thursday will be a slugfest. US gasoline will be $5 a gallon on July 31.

Are these grounds for a financial investment or a bar wager? These days, it’s hard to tell. You can put money on petrol prices at both an online bookie and the Nymex options market.

CME Group, which owns Nymex, wants to make speculation even simpler. Starting in September, it plans to sell “events contracts”, allowing individual investors “to trade their views on daily up or down price moves” of the S&P 500 stock index, gold or crude oil.

Investors who have strong feelings about Tesla can always buy its stock. But US retail customers this week got a new way to juice their exposure to a big rise or fall in the share price. Several companies will offer exchange traded products (ETPs) that mimic and multiply the daily movements — or the inverse — of individual stocks.

As for baseball, a Philadelphia fintech with backing from exchange giant Nasdaq hopes to disrupt online betting with a US sports futures market by the end of the summer. Sporttrade and New Jersey gambling regulators are testing an app that matches traders who want to buy and sell sporting positions — who will win a particular game, how many points will be scored — before and during an event. “Stop betting and start trading” the company’s website crows.

Professional investors have long had the ability to place complicated wagers in the financial markets through short selling, margin trading and derivatives contracts. But retail customers traditionally had fewer options.

That gradually changed as game-like trading apps and complex ETPs encouraged small bets on the price changes of indices and commodities in addition to making it easier to buy shares. The rise of cryptocurrencies, the enforced boredom of pandemic lockdowns and the 2021 meme stock craze all drew in new participants. Some were seeking to invest for the long term, others simply hoped to make a quick buck.

Though retail trading volumes subsided as lockdowns eased and equity and crypto prices fell, financial firms are still scrambling to introduce new products that might tempt customers back into the market. At the same time, online gambling is growing fast, as legalised sports betting spreads across the US in the wake of a 2018 Supreme Court ruling that struck down a federal ban. Zion Market Research predicts that the global market will nearly double to $114bn by 2028.

Watchdogs and consumer groups have long worried about the convergence of gambling and finance because there is ample evidence that rapid trading and speculative bets can wreak havoc on long-term results.

In 2019, UK and European regulators banned local brokers from offering “binary options” — simple up or down bets on the price of a currency, commodity or index as “gambling products dressed up as financial instruments”. The Gamban app that blocks addicts from accessing online gambling last year added crypto, forex and options platforms to its list of banned sites.

Rapid inflows into leveraged and inverse ETPs based on indices and this week’s arrival of the single stock variety have also raised concerns at the US Securities and Exchange Commission. The SEC particularly worries that investors do not understand that the daily pricing mechanism can make complex ETP results diverge significantly from the underlying stock or benchmark over time.

“The more complex the product, and the more opaque the structure, the harder it is for investors to price the risks,” warns commissioner Caroline Crenshaw, who this week called on her colleagues to update the rules.

Backers of the latest products argue that they are better for small investors than the alternatives. The CME distinguishes its “events contracts” from binary options by pointing out that they are sold on exchange, which forces providers to compete on price. Leverage Shares, which already sells single stock ETPs in Europe, argues that the worst thing that can happen to its customers is the loss of their initial investment while margin loans and options could leave them in debt.

Sporttrade CEO Alex Kane makes even bigger claims for sports futures: not only will the market cut the cost of betting but it could also channel retail speculation into less dangerous channels. “Americans have this very distinct appetite for event day trading on micro-movements . . . but day trading on your phone is not a long-term strategy and it’s not the way to maximise returns,” he says. “It’s not an activity that’s [good] for investing. It’s for entertainment.”

A recent Swiss Finance Institute study found that investors who added cryptocurrency wallets to their stock portfolios actually traded stocks less often and got better results. But other studies suggest the opposite. US casino openings are linked to increased portfolio risk among nearby residents, and problem gamblers reported more frequent stock trades.

It would be grand if what academics call the “gamblification” of financial markets allowed investors to get their volatility thrills from side bets on baseball scores or the price of gas, while leaving their retirement savings to grow in peace. Sadly, the opposite is more likely to be true.

Follow Brooke Masters with myFT and on Twitter


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