Political betting markets aren’t new, but Wall Street investors are turning to the changing odds offered by betting platforms for help because of the close, high-stakes presidential race and their doubts about traditional polls.
These platforms make it more likely that Donald Trump, the Republican nominee and past president, will win over Kamala Harris, the Democratic nominee and vice president. Analysts say that investors have responded in the expected way. The data has led to bets on the stock market and certain sectors, while it has also fuelled a selloff in bonds that has caused Treasury yields to rise in October. People have also said that changing odds played a role in the U.S. dollar’s October rise.
Should buyers do that?
Some economists at Barnard College, Rajiv Sethi, who has been following the markets very closely, says it’s too early to tell, but the 2024 election will be a good test of how well the markets do both compared to polls and against each other.
Along with other experts, Sethi did a “profitability test” to see how traders would have done in the 2020 presidential election and the 2022 midterm congressional elections if they chose to trade based on polling-based election models or a prediction market.
He said that the results showed that the virtual investor came out slightly ahead by trading based on the betting markets, but it was close and came down to the outcomes in three states with close races.
In a phone conversation with MarketWatch, Sethi said, “I would say the jury is still out” on whether betting markets are a better way to predict the future than polling-based models.
Recent polls show that more people now back Donald Trump over Kamala Harris for vice president. However, national and key battleground state polls are still very close. In betting markets, on the other hand, people are becoming more and more sure that Trump will win, and the odds of Republicans taking over both the House and the Senate are also going up.
This year, RealClearPolitics watched eight platforms. On Smarket, Trump’s chances of winning were 57%, and on Polymarket, they were 62%. Harris was far ahead in most markets by the end of September.
The site’s average of national polls, on the other hand, showed that Trump and Harris tied with 48.4% in each. A website called 538 made an election model based on polls that also showed a close race. If you run the model 100 times, Trump wins 53 times and Harris wins 47 times.
At the same time, Polymarket, a cryptocurrency-based betting market that doesn’t let U.S. investors in, has been the centre of debate. It shows that Trump has a 62% chance of winning. Many people had thought, and Polymarket confirmed on Thursday, that one person was behind a number of very big bets on a Trump victory. Polymarket said the dealer was French and was placing bets based on what they thought was right. The platform had not found any signs of manipulation.
People in the United States can bet on prediction markets through the prediction market startup Kalshi and the well-known investing tool Interactive Brokers IBKR -0.70%. In September, the court made it possible.
Skeptics have argued that betting-market participants are often overwhelmingly male, Republican-leaning or, in the case of Polymarket and some other platforms, not even U.S. residents, and so don’t reflect the broader electorate, meaning the signal should be viewed with suspicion. On the opposite side, some proponents argue that markets are clearly superior, reacting more quickly to developments than polls while providing a clear-eyed, unemotional assessment of the state of the race in the pure pursuit of profit.
Sethi said that neither side’s case is strong. In the meantime, the election in 2024 will show what kind of market system works best. There are different rules for each business. Predictit, for example, limits individual traders to $850 wagers on any question, perhaps making it less prone to accusations of individual traders attempting to manipulate the market.
Frustrated poll watchers have learned to rely more on averages of surveys, such as those compiled by RealClearPolitics, the Economist and 538, in hopes that the collective weight will help cancel out biases and other distortions in individual polls.
Sethi cautions against using the same approach when it comes to betting markets.
While results from one poll won’t influence another survey, betting markets offer traders the opportunity to arbitrage anomalies away. For example, a trader could buy a cheaper Harris contract on one exchange and sell a more expensive Harris contract on another. As a result, when one market moves sharply, it tends to pull the other markets along with it. As a result, markets “are somewhat aggregating each other,” he said.
Betting on elections and other events is an age-old past time. U.S. elections have long been a popular wagering topic overseas. The Iowa Electronic Markets, an academic platform, opened in 1988.
In a 2008 paper, economists Paul W. Rhode of the University of Arizona and Koleman Strumpf of the University of Kansas noted that political betting markets were a feature of U.S. presidential elections from just after the Civil War until the 1940s.
Meanwhile, some analysts caution that the influence of the betting markets on asset prices may be overstated.
Tom Essaye, founder of Sevens Report Research, argued in a note earlier this week that it made little sense to tie the bulk of an October run-up in Treasury yields to concerns a Trump presidency would lead to a relatively larger fiscal deficit than a Harris presidency.
While Trump’s plans are seen increasing the government’s deficit, both candidates are seen significantly adding to the nation’s debt load if their policy proposals are implemented.
“My point here is that neither candidate has a plan to address the deficit so while Trump could be worse for the deficit, it’s unclear why the bond market would suddenly care so much about his deficit but not Harris’s,” he wrote.
Instead, it’s much more likely the 10-year yield TMUBMUSD10Y
4.246% has risen from around 3.6% in mid-September to over 4.2% because economic growth and inflation have been stronger than expected, Essaye argued.
The S&P 500 SPX -0.03% and Dow Jones Industrial Average DJIA -0.61%
snapped a streak of six straight weekly gains on Friday, though the Nasdaq Composite COMP 0.56% managed a seventh straight weekly rise. Stocks have largely defied pre-election seasonality.
Long-term investors will and probably should look past near-term election noise, analysts say. As far as the signal from the betting markets, investors can take their choice.
As BourseWatch reported earlier this week, Fundstrat’s Tom Lee argued in a note that the important thing is that “it seems like the betting market movements are impacting equity markets. And in this sense, it probably makes sense for investors to pay heed on this.”
It’s possible that betting markets are biased, he acknowledged. “This could be true, and as such, if one believes this is the case, then one can simply bet the opposite whether in equity markets, or on the betting markets themselves,” he said.
