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Financial journalists love Wall Street aphorisms. I use them whenever I can.
“Don’t fight the Fed” has come in handy this year. “The stock market is climbing a wall of worry” is useful when investors are worried.
Here’s one that I’ve never been able to put into an article – not yet, anyway: “It’s an old axiom in the Financial District that Wall Street bets are ‘never wrong’.”
But almost a century ago, on September 28, 1924, one of my anonymous predecessors at The New York Times (bylines were unusual then) used it. This sacred saying could be used again today, barring a formidable problem. It refers to the election betting that took place on Wall Street, which was common at the time – and covered extensively in The Times and other major newspapers, as a major source of information on national, state and local political contests.
Today, outright betting on elections, beyond indirect and extensive financial hedges on the policy implications of election results, is no longer a core part of American finance.
However, legal battles are underway to change that. And in the meantime, three prediction markets – PredictIt, Kalshi and the Iowa Electronic Markets – remain active and generating compelling insights. With them it is possible to make bets on who will win the 2024 presidential elections and on a large number of other resulting matters.
Markets versus polls
I have been using prediction markets for years, especially during election season, just as my predecessors probably used the election betting markets on Wall Street – not to place bets, but to obtain information.
I am not dependent on these markets, and do not believe in the idea that they are superior to other ways of obtaining information – or that they have the ability to reliably predict the future or change the world.
Yet they are enlightening. Some research has found that prediction markets compare favorably with polls, especially if you are weeks or months away from the vote. And when an issue or election is important, you can never have enough data.
For example, right now.
The latest New York Times/Siena College poll shows President Biden trailing former President Donald J. Trump in five of six swing states ahead of the 2024 election. However, both PredictIt and the Iowa market indicate that most people placing bets on those sites believe Mr. Biden will ultimately win.
Which question?
John Aristotle Phillips, who runs the PredictIt market on behalf of the Victoria University of Wellington, a New Zealand institution, said in an interview that there were often large differences between the findings of the polls and the prediction markets. That’s completely normal, he said. “Opinion polls and prediction markets ask different questions.”
A poll asks who you would currently prefer as a candidate. But a functioning market that charges real money for a transaction demands something else, he said, “not who you are.” want to to win, but who you think will win.”
As a sports fan, I understand the difference. If you asked me what baseball team I… popular to win, I would always pick the Mets. But for decades, they’ve mostly disappointed me. So if I had to put down money, I would never bet on them.
What am I really thinking? It depends what question you ask.
The state of affairs
Kalshi, PredictIt, and the Iowa market operate legally, but operate under specific restrictions.
A common problem is that “no state allows gambling on political events and, if it were allowed, it would be on a state-by-state basis,” said Cait DeBaun, vice president of the American Gaming Association, which represents the gambling industry. . If you’re watching a game on television in most major markets, you can’t avoid the temptation to bet on sports, but you won’t see ads for betting on politics. They are not allowed.
But both PredictIt and the Iowa market openly offer political betting under academic exemptions granted by the Commodity Futures Trading Commission.
The Iowa market, which started in 1988, is the most purely academic of the three. It is completely dedicated to research and education, but is open to anyone who wants to take a chance.
PredictIt also operates under an academic exemption, but has had to fight to keep it. The CFTC revoked its permission in August 2022 and ordered the site closed, saying it had strayed from its academic mission. But PredictIt has won a court order allowing the company to continue operating, and it is suing the CFTC, seeking permanent authority to govern its market.
There are currently 19 contracts in progress, but Mr Phillips said he expected to offer “hundreds” soon. “We’re not going anywhere,” he said. “We remain active.”
Kalshi, the largest of the three sites, currently has the most restrictions when it comes to betting on politics. As a commercial derivatives market, it can accept transactions worth tens of millions of dollars.
It already runs prediction markets on inflation, unemployment, oil prices, Federal Reserve policy, government shutdowns, the temperature in Austin, which will win an Oscar, and President Biden’s approval rating. The consensus forecasts are often accurate and extremely useful.
But what Kalshi has not been able to do is run a market by predicting which political party will control Congress. The Commodity Futures Trading Commission rejected it, saying it would violate the election contract ban implied by the Dodd-Frank Act of 2010. That’s why Kalshi sued the CFTC this month.
In an interview, Tarek Mansour, founder of Kalshi, said he would eventually like to start markets for presidential elections and a range of other contests. “Election betting is as old as the United States,” he said, adding that if that betting doesn’t happen through a careful marketplace like his, it will happen somewhere else anyway.
He already pointed out that sophisticated and well-financed investors can hedge against the risks of election results through tailor-made derivative contracts entered into by investment banks. “Why should we limit these transactions to the very wealthy?” he asked. “We want to make this type of hedging available to the average investor.”
I said I would call these “trades” bets.
He said, “I don’t disagree with that.”
Betting on American elections takes place abroad. Betfair in Britain has a robust market. And unregulated offshore betting runs on Polymarket, which uses cryptocurrency and was fined $1.4 million by the CFTC for violating its rules. Then there’s FTX, the failed cryptocurrency exchange run by Sam Bankman-Fried, who was convicted this month of seven counts of fraud and conspiracy. It operated an unregulated, offshore prediction market during the 2020 election cycle.
“It doesn’t make sense for me to take these markets offshore,” Mr. Mansour said.
I leave these legal issues for the courts and regulatory authorities to decide.
But like my journalistic predecessors, I welcome the wealth of data that election betting provides. I hope that the entrepreneurs who run prediction markets will keep the information flowing so that we can truly test the truth of the old adage, “Wall Street betting odds are never wrong.”
