◼ FINANCE Bloomberg Businessweek November 2, 2020Could Funds B e t
On the Election?
25DATA:
PREDICTIT THEallowBOTTOMpoliticalbetting,LINE Financialin partbecauseregulatorstheyin thedon’tU.S.seemostlyhowit candon’t
helpanyonehedgerisk.
WiththeonsetofanhistoricU.S.presidential
election,a quantitativetradingfirmhasbeentrying
topiquehedgefunds’interestincastingbigbetsin
political-predictionmarkets.
SusquehannaInternationalGroup,basedin
BalaCynwyd,Pa.,isa bigplayerinoptionsand
theexchange-tradedfundmarket,butitsfound-
ershavelonghadaninterestinthestatisticalside
ofgambling.Thefirmrunsitsownblogongaming
andpokerstrategytipsandhasbeenbuildingup
a sports-bettingoperationinIreland.It’srecently
gaugedfunds’interestinbetsonelectionoutcomes.
Althoughfewhavegotteninvolved,Susquehannais
willingtotaketheothersideofwagersonthepres-
identialraceforupto$100millionperbet,saysa
personfamiliarwiththefirm,speakingonthecondi-
tionofanonymitybecausetheplansarenotpublic.
Fundswouldn’tbeabletoplacebetsfromthe
U.S.,wherethepracticeis bannedinmostcases,
andwouldhavetoconsulttheirlawyerstoensure
they’reintheclear.Susquehannaisn’toffering
a bettingserviceorproduct:Fundswouldplace
wagersatlicensedbettingplatformsintheU.K.,
whichwouldlookfora counterpartytotakethem
up.Susquehanna’sDublinaffiliatecouldthenstep
in,essentiallyactingasa behind-the-scenesmarket
makerforthebets.
Investorsalreadyexpressviewsonpolitical
outcomesinthesecuritiestheybuy.Strategistsat
JPMorganChase& Co.,forexample,havecreated
a “Trumpbasket”anda “Bidenbasket”ofstocks
expectedtodowellundereachfutureadminis-
tration.Buttradersareoftenwrongaboutwhat
electionsreallymeanforstocks.In 2016 futurescon-
tractsonU.S.stockindexesplummetedonelection
nightasDonaldTrump’svictorybecameclear.The
nextdaytheS&P500 rallied. So if you want to make
a bet, why not just wager directly on the outcome
of the election? “It’s just another thing to add to the
portfolio,” says Paul Krishnamurty, a professional
gambler and freelance political markets analyst for
Betfair, a prediction exchange with headquarters in
London. “It’s just another hedge.”
A trickier question is what risk you’d actually be
hedging. If it’s hard to predict how an election will
affect markets, then it’s not clear how a winning
political bet might offset a loss elsewhere. That’sone reason the U.S. Commodity Futures Trading
Commissionin 2012 stoppeda companyfromlisting
derivativescontractstiedtoelections.TheCFTCalso
saidsuchmarketscoulddamagetheintegrity of elec-
tions,forexamplebygivingpeoplea directfinan-
cialinterestinvotingfora candidatetheywouldn’t
otherwise support.
Political betting also faces more mundane objec-
tions: Even where it’s legal, fees are often high, and
markets tend to be thinly traded, without much
opportunity to rake in big winnings—at least in Wall
Street terms. Betfair has matched about $266 mil-
lion in trades on who will win the presidential race.
Markets to bet on U.S. presidential elections oper-
ated from 1868 to 1940, according to research by Paul
Rhode of the University of Michigan and Koleman
Strumpf at Wake Forest University. New York was a
hub for it, especially the informal Curb Exchange,
which later became the American Stock Exchange.
Sometimes, for brief periods, betting on politics
would exceed stock and bond trading. Political mar-
kets faded as scientific polling ascended and other
types of gambling became more accessible.
An online market called PredictIt has carved out
a legal niche in the U.S., getting an exemption from
the CFTC to run a political-betting exchange for aca-
demic research purposes. (Iowa Electronic Markets
received a similar exemption.) The agreement caps
the size of any individual bet on PredictIt to $850.
Participants buy “shares” in possible election out-
comes, so prices reflect their predictions. PredictIt
hasalsoofferedmarketsonhowmanytimesTrump
wouldtweetina week,andis takingbetsonwhen
theelection’sresultwillbecalled.Nov.4—the day
after Election Day—is in the lead.
Thomas Miller, faculty director of the data sci-
ence program at Northwestern University, says
prediction markets may pick up information polls
miss. They’re faster, and people may be more honest
about what they think. Miller created a prediction
engine based on betting that runs a million hypo-
theticals on the presidential election every hour.
On Oct. 28 it showed Biden with a 76% chance of
winning. �Annie Massa● A trading firm floats the idea, but it’s not clear
why investors would want to do it▼ PredictIt prices as
of Oct. 28 for bets on
when the election will be
called. Wins pay $1
Nov. 3Nov. 4Nov. 5Nov. 6 or 7Nov. 8 or 9Nov. 10 to 16Nov. 17 to 23Nov. 24 to 30Dec. 1 to 14After Dec. 1431¢35767125444