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    The Betting on the Presidential Election Has Begun

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    While two leading prediction markets are fighting regulatory restrictions in court, wagers on politics and economics are still being made.Financial journalists love Wall Street aphorisms. I use them whenever I can.“Don’t fight the Fed” has been handy this year. “The stock market climbs a wall of worry” is useful whenever investors are fretting.Here’s one I’ve never been able to drop into an article — not yet, anyway: “It is an old axiom in the financial district that Wall Street betting odds are ‘never wrong.’”But nearly a century ago, on Sept. 28, 1924, one of my anonymous predecessors at The New York Times (bylines were uncommon then) used it. That hallowed saying could be repurposed today, except for a formidable problem. It refers to the betting on elections that took place on Wall Street, which was commonplace back then — and covered extensively in The Times and other major newspapers, as an important source of information about national, state and local political contests.Today, except for indirect and elaborate financial hedges on the policy implications of election outcomes, outright betting on elections is no longer a core part of American finance.Legal battles are underway to change that, however. And in the meantime, three prediction markets — PredictIt, Kalshi and the Iowa Electronic Markets — continue to operate and generate compelling insights. With any of them, it’s possible to make bets on who will win the 2024 presidential election and on a host of other consequential matters.Markets Versus PollsI’ve used prediction markets for years, especially during election season, much as my predecessors presumably used the Wall Street election betting markets — not to place bets but to obtain information.I don’t depend on these markets, and don’t buy the notion that they are superior to other means of obtaining information — or that they have the ability to reliably predict the future or change the world.Even so, they are illuminating. Some studies have found prediction markets to compare favorably with polls, especially when you are weeks or months away from voting. And when an issue or an election is important, one can never have enough data.Right now, for instance.The latest New York Times/Siena College poll shows that for the 2024 election, President Biden is trailing former President Donald J. Trump in five of six swing states. Both PredictIt and the Iowa market indicate, however, that most people placing wagers on those sites believe that in the end Mr. Biden will win.Which Question?John Aristotle Phillips, who runs the PredictIt market on behalf of Victoria University of Wellington, a New Zealand institution, said in an interview that there were frequently major differences between the findings of the polls and the prediction markets. That’s entirely normal, he said. “Polls and prediction markets ask different questions.”A poll asks who, right now, you would prefer as a candidate. But a functioning market that demands real money for a trade asks something else, he said, “not who you want to win but who you think will win.”As a sports fan, I understand the difference.If you asked me which baseball team I wanted to win, I’d always pick the Mets. But over many decades, they have usually disappointed me. So if I had to put money down, I’d never bet on them.What do I really think? It depends on which question you ask.The State of PlayKalshi, PredictIt and the Iowa market operate legally but function under specific limitations.One general problem is that “no states allow betting on political events and, if it was 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. You can’t avoid enticements for betting on sports if you watch a game on television in most major markets, but you won’t see ads for bets on politics. They aren’t permitted.But both PredictIt and the Iowa market offer overtly political wagers 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 devoted entirely to research and teaching, but is open to anyone who wants to place a wager.PredictIt is operating under an academic exemption, too, but it has had to fight to retain it. The C.F.T.C. withdrew its permission in August 2022, and ordered the site to shut down, saying it had strayed from its academic mission. But PredictIt won a court injunction allowing it to continue operating, and it is suing the C.F.T.C., seeking permanent authority to run its market.It has 19 contracts running now, but Mr. Phillips said he expected to offer “hundreds” soon. “We aren’t going anywhere,” he said. “We’re going to keep operating.”Kalshi, the biggest of the three sites, is the most constrained at the moment in betting on politics. As a commercial derivatives market, it can accept trades amounting to scores of millions of dollars.It already runs prediction markets on inflation, unemployment, oil prices, Federal Reserve policy, government shutdowns, the temperature in Austin, who will win an Oscar and President Biden’s approval rating. The consensus forecasts are often on the mark and extremely useful.But what Kalshi has been unable to do is run a market predicting which political party will control Congress. The Commodity Futures Trading Commission has turned it down, saying that would violate prohibitions on election contracts implied by the Dodd-Frank Act of 2010. So Kalshi sued the C.F.T.C. this month.In an interview, Tarek Mansour, a founder of Kalshi, said that he would ultimately like to start markets on presidential elections and on a range of other contests. “Betting on elections is as old as the United States,” he said, adding that if that betting isn’t done through a careful marketplace like his, it will happen elsewhere anyway.Already, he pointed out, sophisticated and well-financed investors can hedge against the risks of election outcomes through bespoke derivative contracts arranged by investment banks. “Why limit these trades to the very rich?” he asked. “We want to make this kind of hedging available to the average investor.”I said that I would call these “trades” bets.He said, “I wouldn’t disagree.”Betting on U.S. elections takes place abroad. Betfair in Britain runs a robust market. And unregulated offshore betting is conducted on Polymarket, which uses cryptocurrency and was fined $1.4 million by the C.F.T.C. for running afoul of its rules. Then there’s FTX, the failed cryptocurrency exchange that was headed by Sam Bankman-Fried, who was convicted this month on seven counts of fraud and conspiracy. It ran an unregulated, offshore prediction market in the 2020 election cycle.“Driving these markets offshore doesn’t make sense to me,” Mr. Mansour said.I’ll leave these legal matters to the courts and the regulatory agencies to decide.But like my journalistic predecessors, I welcome the data trove that betting on elections provides. I’m hoping the entrepreneurs who run prediction markets will keep the information flowing, so we can really test the truth of the old saying, “Wall Street betting odds are never wrong.” More

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      C.F.T.C. Weighs Proposal to Allow U.S. Betting on Control of Congress

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      A New York exchange wants to allow high-dollar trading on the partisan divide on Capitol Hill, but lawmakers and watchdogs worry it could undermine public confidence in elections.Handicapping control of Congress is always a risky proposition, with multiple forces at work and much at stake in terms of policy and power. Now tens of millions of dollars could be riding on the outcome of House and Senate races as well.The Commodity Futures Trading Commission is weighing a proposal from a New York-based exchange that would allow derivatives trading on the question of which party will control Congress, potentially turning Election Day into a political version of the Super Bowl.Backers of the plan, which was proposed by the trading platform Kalshi, say it is simply another way for big firms to limit risk by hedging against possible adverse policy outcomes on issues such as taxes, energy and the environment that turn on which party holds sway in the House and Senate. They say it could also provide reliable data on the public view of elections that rivals or outperforms conventional polling.But the prospect of big firms laying up to $100 million on the line worries lawmakers and Wall Street watchdogs, who say it could lead to widespread gambling on politics in the United States and pose a threat to election confidence at a time when many Americans already harbor suspicions about electoral outcomes.“I just think this is hugely damaging to democracy, to have a monetary incentive,” said Senator Jeff Merkley, Democrat of Oregon and one of a bloc of senators in his party who oppose the plan.The effort by Kalshi, which already hosts trading on the outcome of real-world events such as when the Hollywood writers strike might end and whether there will be a government shutdown, is the latest in a push to allow more speculation on political contests, on which traditional betting is generally prohibited.The nonprofit firm PredictIt, which has allowed limited trading on political futures since 2014, won a reprieve last month from the U.S. Court of Appeals for the 5th Circuit that enabled it to temporarily continue to operate after an attempt by the C.F.T.C. to shut it down. The case will now make its way through federal court.The operators of Kalshi, a relatively recent start-up with some big-name Wall Street backing, want to go beyond the limited approach of PredictIt to allow large-scale trading on which party controls each chamber of Congress. Individuals would be allowed to take a position of up to $250,000 and big firms up to $100 million.The buyers of such “event contracts” who forecast correctly would be paid out depending on a market-established price, with Kalshi taking a fee for operating the exchange. The regulatory agency opened a review of the trading proposal in June and is expected to decide by Sept. 21.Kalshi executives reject the claim that their plan represents a threat to elections and say that their platform would be heavily regulated and transparent. They point to existing heavy wagering on American elections in Britain and other countries without domestic scrutiny, and say the exchange would open up possibilities for smaller companies and individuals that don’t have easy access to those opportunities.“People and businesses already take positions on elections on unregulated, overseas, or illegal markets in the billions,” said Eliezer Mishory, chief regulatory officer and counsel at Kalshi. “The C.F.T.C.’s choice isn’t whether this economic activity will happen or not happen, it’s whether this activity will happen in a regulated market with full government oversight or continue to happen without any government oversight.”The proposal has drawn the support of high-volume traders, economists and researchers who see advantages to companies whose financial prospects can hinge on the decisions made by Congress, as well as the opportunity to gather predictive election data. Among them is Jason Furman, a former top economic official in the Obama administration and a Harvard economics professor who calls himself an “enthusiastic” backer of the proposal. He dismissed concerns of financial manipulation of U.S. elections, noting that big financial players already make huge campaign and market-based moves based on their assessments of where elections are heading.“There are hundreds of billions of dollars already at stake in elections,” Mr. Furman said. “I think this is a rounding error compared to the set of financial incentives in elections today.”But given the heavy influence of megadonors in political campaigns, opponents in the Senate argue that allowing such substantial investment in potential election outcomes could provide powerful motivation for those with resources and inside knowledge to try to script the result.“Establishing a large-scale, for-profit political event betting market in the United States by approving Kalshi’ s requested contracts would profoundly undermine the sanctity and democratic value of elections,” Mr. Merkley wrote in a letter to the commission. He was joined by fellow Democratic Senators Chris Van Hollen of Maryland, Sheldon Whitehouse of Rhode Island, Dianne Feinstein of California and Elizabeth Warren and Edward J. Markey of Massachusetts. They added that “introducing financial incentives into the elections process fundamentally changes the motivations behind each vote, potentially replacing political convictions with financial calculations.”The proposal has also encountered stiff opposition from Better Markets, an independent Wall Street and consumer watchdog that characterizes Kalshi’s proposal as a “back door” effort to instigate across-the-board wagering on U.S. elections when state and federal regulators have historically banned such gambling.“If it were to be approved by the C.F.T.C. or the courts, you can bet there will be widespread gambling on everything from the presidency to the local dogcatcher,” said Dennis Kelleher, a former top Senate aide who heads Better Markets. “We are at a perilous point in politics where confidence and trust in elections is low and going lower. The last thing democracy can withstand now is additional activities that erode the confidence of Americans.”Kalshi initially tried to win approval for its plan before the 2022 midterm elections but withdrew its proposal when it appeared in danger of being blocked. It resubmitted a revised plan in early June. The C.F.T.C. then began a 90-day review period over the objection of one commissioner, who argued Kalshi should be allowed to proceed. Should the agency rule against the trading plan, a lawsuit challenging that outcome is anticipated.Under the proposal, members of Congress, candidates for federal and statewide office, top advisers and others with a direct role in campaigns would be prohibited from taking part. More

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      Forecasting the Future of Election Prediction Markets

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      After flying under the radar as academic experiments, the markets are facing close regulatory scrutiny. But they are worth preserving, our columnist says.I’ve used prediction markets for years, never for trading but rather as a source of information, an interesting adjunct to polls, economic and political models, and traditional reporting, especially when elections grow near.But the U.S. prediction markets that allow people to place legal bets on American elections have run into regulatory problems.PredictIt, the larger of the two prediction markets operating in the United States, has emerged over the last several years as a go-to source for journalists and academics seeking to harness the “wisdom of crowds” for a sense of where the elections are heading.At the moment, the bets on its site amount to a forecast of Republican control of both the House and the Senate. PredictIt’s older and more purely academic counterpart, the Iowa Electronic Markets, is showing the same essential picture.Kalshi, a third and overtly commercial derivatives market, had hoped to start trading contracts on the outcome of the midterm elections by now, but its application has stalled at the Commodities Futures Trading Commission.The various markets — PredictIt, the Iowa market, overseas markets like Betfair in Britain and predecessors like the Irish sites Intrade and Tradesports — have had plenty of glitches through the years. They aren’t always accurate, and their results, if not interpreted carefully, look deceptively extreme. A thin edge in election polling can be magnified in these markets as a definitive advantage, but they are often fundamentally correct. Academic studies have found that they stack up quite well against opinion polls and standard political forecasts.Such markets have also provided compelling results in experiments aimed at estimating Hollywood movie box office results, improving weather forecasts and providing corporations and the Defense Department with information on security, health care and product quality control issues.They all work on the basic notion that when markets are broad and efficient enough and money is at stake, the collective information embodied in their prices is closer to the truth than the conclusions that most individuals can come up with on their own.This may well be true over the long run, but one flaw in this approach is obvious if you have been following the stock, bond, foreign exchange or commodity markets this year: Over short periods, markets are as fickle as a cat. I see no reason to assume that election markets are inherently wiser or steadier than the stock market, which I don’t trust as a guide to much of anything over short periods.Still, prediction markets are fascinating, and provide a worthwhile source of data on a vast array of subjects. They also have tremendous financial possibilities.The State of the 2022 Midterm ElectionsElection Day is Tuesday, Nov. 8.Biden’s Speech: In a prime-time address, President Biden denounced Republicans who deny the legitimacy of elections, warning that the country’s democratic traditions are on the line.State Supreme Court Races: The traditionally overlooked contests have emerged this year as crucial battlefields in the struggle over the course of American democracy.Democrats’ Mounting Anxiety: Top Democratic officials are openly second-guessing their party’s pitch and tactics, saying Democrats have failed to unite around one central message.Social Security and Medicare: Republicans, eyeing a midterms victory, are floating changes to the safety net programs. Democrats have seized on the proposals to galvanize voters.“Prediction markets are going to be a very big business,” said William R. Hambrecht, an early investor in Silicon Valley companies like Apple and Adobe and a major investor in Aristotle, the company that runs PredictIt. “I don’t think you can overstate the potential, once the regulatory issues are resolved.”An Old American PastimeBetting on elections is, technically, illegal in the United States. But the reality is that it has been commonplace since the early days of the republic, Koleman Strumpf, a Wake Forest University economist, said in an interview.By the late 19th century, New York City had become a national center for betting on both finance and politics. Early in the 20th century, whenever elections rolled around, traders outside the New York Stock Exchange placed high-volume wagers on the Curb Market, a rollicking, over-the-counter outdoor marketplace for stocks, bonds and politics.In the current era, the Commodities Futures Trading Commission has permitted the two low-stakes markets — the Iowa Electronic Markets and PredictIt — to operate under academic exemptions.But in August, the commission ordered PredictIt to cease operations by Feb. 15. The agency hasn’t publicly explained its reasons for the cancellation, which PredictIt is fighting in the courts. One issue may be PredictIt’s popularity — the volume of betting on the site has sometimes exceeded the limits set when PredictIt began operating as an educational venture in 2014.A week ago, the commission staff recommended against Kalshi’s bid to start a higher-stakes trade in futures contracts on the control of Congress resulting from the midterm elections. The commission tends to side with its staff’s recommendations, but has not indicated how it will rule on the Kalshi case.In an email, Steven Adamske, a commission spokesman, said only: “Kalshi’s application is still pending, and I don’t have a timeline for when it will be announced.”In an interview, Tarek Mansour, a founder of Kalshi, pointed out that his exchange already offered robust trading on important questions like the future of inflation in the United States and the path of Federal Reserve interest rate increases, and that it was running an unofficial contest asking people to forecast the elections.“That’s an effort at educating people about our site,” he said. “We agree that we need regulation, and we are waiting patiently for guidance from the C.F.T.C.”The Two Election MarketsIt is possible that once the midterms are over, only the Iowa market will remain as a legal outlet for election betting. It has functioned since 1988 as a modest, money-losing “Internet-based teaching and research tool” that allows up to 2,000 people — students of the University of Iowa and anyone else with the money and interest — to place bets of $5 to $500 on the outcome of events, including U.S. elections.As long as it sticks to these unequivocally educational goals and people at the university are willing to take the time and effort to keep it running, its future seems reasonably secure.“It’s a labor of love,” said Thomas S. Gruca, the director of the prediction market and a professor at the university’s Tippie College of Business. “It takes a lot of time from a lot of volunteers to keep it going. But a lot of people are learning a lot because of it.”PredictIt is something of a hybrid. It is a joint venture. One partner is Victoria University of Wellington, a New Zealand institution. The other is Aristotle, a for-profit American political consulting, compliance, data and software company, whose founder, John Aristotle Phillips, first gained national attention in 1976 as “the A-bomb kid” — a Princeton undergraduate who successfully designed an atomic bomb in a physics class project.“It was about arms control,” he told me in an interview. “I showed that a bomb could be built, and that we needed more controls.”Aristotle does the day-to-day work running PredictIt, and the university has been playing a passive role. While the data from the prediction market at the University of Iowa is regularly used in classrooms and in research there, that is not the case for Victoria University.“We are not aware of any scholars at Victoria University of Wellington using the data, but, as they don’t need to come through us to access it, that would be a question better directed to PredictIt,” Katherine Edmond, the university’s director of communications, said in an email.PredictIt is used extensively by scholars around the world, but mainly by Americans, who are listed on its site, and have relied on it for years, as have journalists like me. In addition to filing suit, Aristotle has applied for permission to become a commercial exchange, like Kalshi, a move that would end the restrictions on its size and scope.A Modest PredictionFrom the standpoint of many economists, the prediction markets, for all their flaws, have been spectacularly successful.“There’s tremendous social utility to having these markets operate, and having this information available,” said Eric Zitzewitz, a Dartmouth professor who has studied prediction markets extensively. “There’s a lot of demand for them — people enjoy participating in them and consuming the information they provide.”Betting on elections won’t go away, no matter what the regulators decide. Such betting could migrate to overseas markets or to unregulated markets in cyberspace that are outside U.S. regulatory control.Far better, I think, would be to allow them to operate within U.S. borders as transparent, robust — and carefully regulated — operations. Until now, both the Iowa market and PredictIt have been small enough to be fairly innocuous in terms of their effects on elections themselves. When big money flows into prediction markets — as I suspect it one day will — the potential for real trouble will be far greater. Markets can be manipulated and corruption flourish, so smart and active regulators are needed to keep markets honest.That’s true for the stock market. Regulating U.S. prediction markets will become far more critical when large sums are focused directly on the outcome of elections, which are, after all, the foundation of our democracy. Prediction markets are important enough to be preserved. But elections are important enough for regulators to move slowly and carefully. More