A new kind of stock market lets fans invest in LeBron James and Tom Brady rather than Facebook, Apple or Microsoft.
U.S. investors are up in arms because they can't buy shares in Facebook, but the sports-minded among them do have an interesting alternative: A new kind of stock market lets them invest in LeBron James and Tom Brady.
StarStreet.com, founded by a 24-year-old graduate of Syracuse University, lets investors buy shares of any player they want and get paid out at the end of the season when the stock in the player "retires."
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The market is still in its beta period (founder Jeremy Levine calls it "preseason"), but has already offered numerous IPOs (initial player offerings) that have been snapped up by a new kind of investor with more experience in fantasy sports than Wall Street stock trading.
StarStreet works much like NASDAQ or NYSE, but with at least one key difference: While player values can go up and down each day, the total value of the market remains stable. Just like a real stock market, though, prices are determined based on supply and demand, rather than by the player statistics used in fantasy sports leagues.
"You're trading, but it's for the players you know, rather than the companies you don't," says Levine, who's been building his sports stock market since graduating with a degree in entrepreneurship in May 2009. Levine is full-time and has just one employee, but says he's made some money by charging a 4% commission on player sales.
"It's completely real money, and it's a zero-sum comparison market," Levine explained Saturday at the MIT Sloan Sports Analytics Conference in Boston, where he was exhibiting his trading system. (Levine is based in nearby Cambridge). "The total value of the assets is equal to what's been invested in them and every single dollar that comes into them through an IPO is eventually paid off through a retirement. At the end of seasons, we're retiring shares of players and their values get paid out. From a trader's perspective its completely a 50-50 game, minus a small commission."
StarStreet began with a play-money World Cup market, then started trading in real dollars during the NFL season. An NBA market is now trading and an IPO for Major League Baseball players starts in a few days.
"The way an IPO is done, it's a blind Yankee auction," Levine says. "Tomorrow at 7, we're issuing 100 shares of LeBron James, and the top 100 bids get the share for the price they bid." The shares are inserted into the market and can be bought and sold just like shares in players already on StarStreet.
Levine has 265 traders with a total market value of about $2,400. The numbers are small, but Levine says the market is operating efficiently despite the size.
The first NFL market "worked really well," he said. "There was enough liquidity, definitely not a ton, but enough that players' prices were moving right after games."
Cowboys wide receiver Dez Bryant's stock moved up more than 8% after his breakthrough, for example, while Tom Brady's stock jumped 43% over the course of the season and Chad Ochocinco lost 30% of his value.
Although stock value is based on supply and demand, rather than stats, the prices "mimicked what people saw during the season," Levine said. As the market gets bigger, Levine will be able to raise the maximum amount people can invest. The deposit cap was initially just $25 per investor, but that's been raised to $200.
The idea of sports stock markets and sports prediction markets received some skepticism at the Sports Analytics Conference. Mark Cuban, one of the speakers, proposed a sports betting hedge fund several years ago, and at least one such fund now exists in London.
Predictions markets are used successfully to predict outcomes in various businesses, but as speaker Michael Konik said, "The wisdom of crowds applies to every facet of life except for sports betting" in which "investors" are too emotional to make rational decisions.
Konik, a gambler and author, also doubted whether a Wall Street-type sports exchange would work because of political objections from sports leagues and the NCAA, which don't want "the taint of gambling to sully their very pure athletic product."
Legal issues aren't a problem, however, according to Jeff Ma. "Sports betting is illegal [in most U.S. states] but creating an exchange around sports isn't illegal," said Ma, who was a member of the so-called MIT Blackjack Team and co-founder of ProTrade, a now-defunct sports stock market that used play money.
StarStreet isn't the first sports stock market using real money. A site called OneSeason tried it, but the market crashed because there was an unlimited supply of player shares, Levine says. "They were venture-funded, burned through at $3.5 million in 10 months," Levine says.
StarStreet has a better shot at success, Levine believes, because as a zero-sum market supply and demand is tightly controlled.
Levine said he has "raised some funding," and is working on improving the site interface. He's not sure when he'll be ready to leave the beta or "preseason" phase, but Levine thinks StarStreet will appeal to sports fans, particularly those who are turned off by fantasy baseball or football because of the constant lineup changes and player-tracking required to be successful.
By comparison, StarStreet is easy -- just buy shares in a player. Ideally, investors will make decisions rationally based on statistics and future potential, but it will be hard to separate the sports fan from the sports investor. You may not even be a sports nut, but as Levine says, "Who doesn't love at least one player?"