ELECTION BETTING

PRESIDENTIAL BETTING MARKETS
https://uvm.edu/~awoolf/classes/fall2004/Historical_Presidential_Betting_Markets.pdf
https://nymag.com/intelligencer/artic le/trump-harris-election-betting-legal-kalshi.html
Gambling on Elections Is Legal Now
by   /  October 2, 2024

“On Wednesday, a Washington, D.C., court ruled that betting markets were legal in the U.S. — the first time in about a century that the practice was allowed in the country. The road to that ruling, however, was far from a sure thing. In June, Chief Justice John Roberts wrote an opinion that overhauled how a large segment of the federal government operates. The case, Loper Bright Industries v. Raimondo, was one of the more quietly momentous decisions of a historic summer session, overturning the so-called Chevron deference precedent and effectively restraining regulators from interpreting the laws and regulations they are tasked with enforcing. Last week, one of the first major lower-court decisions to come out of Roberts’s ruling dropped, clearing the way for people in the U.S. to gamble on elections for the first time in nearly a century.

The case pitted a New York online betting market against a federal regulator, the Commodity Futures Trading Commission. The betting market, a company called Kalshi, claimed that the CFTC had wrongly stopped trading of contracts on political elections under a mistaken interpretation of gambling laws that equated elections with games. On the side of the betting-market firm was right-wing think tank the Cato Institute, where one of Donald Trump’s largest donors, trading firm Susquehanna International Group co-founder Jeff Yass, is the vice-chair. After a short trial, a Biden-appointed judge ruled that Kalshi, which allows betting on anything from earthquakes to bitcoin, could allow people in the U.S. to gamble on elections. In her decision allowing election-betting to go forward, Judge Jia Cobb cited the decision in Loper Bright, and how it changed how she could consider the law. One of Kalshi’s biggest investors? Yass’s trading firm, Susquehanna.

Nobody knows how open and legal betting American politics will play out — especially if it kicks off during an election that is hardly in short supply of extreme drama. The Washington D.C. appeals court cleared the way for Kalshi to open up gambling on elections, with just 34 days to go until the U.S. election. The ruling was made in part because of colossal changes to the way that federal agencies can oversee industries, but also because regulators “failed at this time to demonstrate that it or the public will be irreparably injured” by the spread of rampant election betting. Offshore gambling, through sites like Polymarket and Predictit, have been predicting winners and losers for most elections this century, but generally with very light and sparse trading. This decision would likely represent a mainstreaming of the practice.

Not that political-betting markets don’t have some usefulness — they can reflect shifts in popular sentiment and election dynamics faster than scientific polls. Still, how they will actually impact an election once they are fully unleashed remains to be seen. These political markets all generally work the same way: They allow bettors to put money down on, say, Kamala Harris or Donald Trump winning on November 5, and the balance of both sides ends up being either candidate’s odds of winning. The companies collect fees on each trade, so the more people trade, the more money the company makes. Kalshi has made it clear that the demand for legal betting is an important part of its underlying business. “The election is now 50-some-odd days away,” Yaakov Roth, a lawyer for Kalshi, said during a court hearing in September, according to a transcript. “These markets are time bound. They’re going to disappear in a matter of weeks. So there’s obviously the loss of the business over the next period of time.” Kalshi is not the only betting market that stands to enrich a major political backer. Polymarket, whose main market on the presidential-election outcome has seen nearly $1 billion in bets placed, received funding from Peter Thiel, as well as venture-capital firm General Catalyst, where Ken Chenault, the former CEO of American Express who backs Kamala Harris, is managing director.

Already, concerns that the markets could be used to manipulate public sentiment are rising. That question looms large among opponents of political betting. Democratic senator Jeff Merkley, of Oregon, told Politico that the decision is a “nightmare” that could allow for wealthy backers to paint a preferred candidate as more likely to win. “Think about that anonymous political power or that anonymous corporate power that says, ‘Not only do we want this candidate to lose or that candidate to win, we’re going to bet on the person that we want to win,’” Merkley told the outlet. “It’s a deeply corrupting combination of dark money and election bets.” How that would work is less clear. Political-betting markets were a routine part of the elections going back to the founding of the country, before the advent of scientific polling, and were only outlawed after a series of state and federal laws started to clamp down on the practices, said Koleman Strumpf, a political-economy professor at Wake Forest University. “In the early 20th century and the 19th century, these markets were humongous,” Strumpf said. “There is very little evidence in the historical record of market manipulation.”

The CFTC was only able to produce examples of potential manipulation on betting markets, including one apparent attempt that was erased from the markets in about 30 minutes. And highly regulated markets where there is more trading tend to be less susceptible to manipulation than dark offshore ones where relatively small sums of money can move prices around. Even before the ruling last week, the odds on political-gambling sites have moved more or less in line with those published by FiveThirtyEight or Nate Silver, which use models based on polling data. (To underline how similar polling and betting can be, this summer, Silver joined Polymarket as an adviser.) “The choice is not, do we have prediction markets or not,” Strumpf said. “These markets will exist. One of the lessons from prohibition is that when there’s demand, the supply rises to meet it.”

That doesn’t mean there won’t be problems. The U.K. has recently been going through a series of mini-scandals about political betting, the most egregious of which appears to come down to a political aide to former prime minister Rishi Sunak placing a 100-pound bet on the date of an election before it was publicly known. To that extent, the court has kept open the possibility that problems may arise, and election-betting markets in the age of DraftKings would once again need to get reined in. “Ensuring the integrity of elections and avoiding improper interference and misinformation are undoubtedly paramount public interests, and a substantiated risk of distorting the electoral process would amount to irreparable harm,” the court ruled. However, it acknowledged that troubles could arise from foreign donors, shady campaign-donation practices, or voter confusion and left the door open for the CFTC to find some evidence and try again. “Such a showing is not out of reach.”

NEVER BET AGAINST AMERICA
https://worksinprogress.co/issue/why-prediction-markets-arent-popular/
https://newyorker.com/betting-on-elections-can-tell-us-a-lot-why-is-it-mostly-illegal
Betting on Elections Can Tell Us a Lot. Why Is It Mostly Illegal?
by Danny Funt /  November 3, 2022

“In 1980, John Aristotle Phillips declared his candidacy for the United States Congress, in a district in Connecticut. He would turn twenty-five, the minimum age to hold the seat, a few months before the election. Four years earlier, while a junior at Princeton, Phillips — the son of a Yale engineering professor—had become an unlikely media sensation, thanks to a paper he wrote on how to build an atomic bomb. The F.B.I. confiscated it; after a Pakistani official asked Phillips for a copy, he alerted a senator he admired, William Proxmire of Wisconsin, who later referenced the incident in a speech. “John Phillips is an astonishing young man,” Proxmire said, after Phillips announced his candidacy; President Jimmy Carter and Senator Ted Kennedy, then challenging Carter in the Democratic Presidential primary, reportedly sought Phillips’s endorsement. In November, Phillips lost to his opponent, a four-term Republican incumbent, by twenty-five points. He ran again two years later, and lost by double digits once more. Phillips had miscalculated his prospects. But that failure helped him to detect an unmet need: predictive political data.

In 1983, he and his M.I.T.-graduate brother, Dean, founded Aristotle Industries, which helped introduce computer software to politics. Their début program, Campaign Manager, analyzed polls, campaign contributions, and fund-raising strategies. Within a year, nearly two hundred members of Congress were customers, including the Republican who’d drubbed Phillips twice. Aristotle moved from South Norwalk, Connecticut, to a block away from the U.S. Capitol. “Democracy is a growth business,” the company’s chief executive said. Thirty years later, Aristotle was hired to help with what Phillips calls “the most interesting project I’ve ever been involved with.” Economists at Victoria University of Wellington, in New Zealand, were studying markets that allowed traders to buy and sell futures contracts tied to political events, and they created an experimental exchange called iPredict. But New Zealand politics attracted a fairly small number of traders, so, in 2014, they requested permission from the Commodity Futures Trading Commission, in the U.S., to operate markets related to American elections and economic indicators.

A couple of years before, the C.F.T.C. had rejected a request from a registered U.S. exchange called Nadex to offer political-event contracts, ruling that such contracts met a federal definition of gambling: “the staking or risking by any person of something of value upon the outcome of a contest of others.” In 2013, the C.F.T.C. had effectively shut down Intrade, an Ireland-based exchange that had accepted millions of dollars in bets on U.S. elections. But there was a small, noncommercial exception to this rule: the University of Iowa, with permission from the C.F.T.C., has overseen the Iowa Electronic Markets—which accept trades from students and faculty on participating campuses—since 1993. Victoria University proposed expanding on the Iowa model by opening its new exchange to the public, conducting limited advertising, and allowing people to bet as much as eight hundred and fifty dollars on any given contract offered on the exchange, an increase from the Iowa project’s limit of five hundred.

The C.F.T.C. replied to the proposal with a so-called no-action letter, indicating that “an academic exercise demonstrating the information gathering and predictive capabilities of markets” would be allowed, so long as Victoria didn’t profit from it. Victoria outsourced management of the new online exchange to Aristotle. The company dubbed it PredictIt. PredictIt now has around eighty thousand active users. Ahead of the 2020 elections, nearly a hundred and fifty million dollars flowed through its markets. It has shared market data with dozens of researchers around the world, and sometimes created markets at the request of scholars. But, behind the scenes, Aristotle has been at odds with regulators over its desire to keep expanding. The C.F.T.C. has held that election markets are akin to gaming and that they are against the public interest, because traders might be tempted to base voting decisions on which candidate will make them more money. (One might argue that voters do this already.)

Phillips insists that the exchange has positive civic effects, pointing, for comparison, to the obsessive engagement of sports gamblers, who, according to one study, watch about twice as many games as non-bettors do. “If it takes people having a little bit of skin in the game who don’t normally pay attention to something and now they’re reading the newspaper more, or focussing more on absorbing and critically analyzing what they’re seeing on TV, that’s great,” he told me. Critics, of course, say that this amounts to treating politics as a game. One dedicated PredictIt user, Trevor Boeckmann, a thirty-four-year-old public defender in New York, told me that his pastime has made him “a better-informed citizen.” Boeckmann, who grew up in Iowa, has always been interested in politics, but researching trades has made him fluent in Senate cloture rules and other political minutiae, he said. In 2019, Phillips wrote to the C.F.T.C., arguing that election markets collect information “for the benefit of both participants and non-participants,” and pleading for regulators not only to define the “rules of the road” but also to allow more than “small-scale, academic initiatives.”

He never received a response.  Instead, this past August, the C.F.T.C. abruptly withdrew its no-action letter, announcing that Victoria had violated the agreement’s terms. The commission didn’t specify which terms had been violated; Bloomberg, citing multiple anonymous sources, reported that C.F.T.C. staff believed that the agency “had allowed PredictIt to stray too far from the original remit of being a small-scale market designed to facilitate academic research.” (The C.F.T.C. declined multiple requests for comment for this story.) It ordered PredictIt to close existing markets by mid-February of next year. Richard Shilts, a former director of the C.F.T.C.’s Division of Market Oversight who now advises Aristotle, told me that he was surprised at the drastic step and by the absence of a specific stated reason. “They could have amended the no-action letter in some way” if they thought it needed revisiting, he said. Phillips told me that he was blindsided by the C.F.T.C.’s decision, calling that day in August “one of the worst days of my life.” He said that his company pleaded with the C.F.T.C. for guidance on how to close markets related to the 2024 Presidential race—roughly fifty million shares have been traded on those markets already.

Three weeks later, the C.F.T.C. made another surprising announcement: it would accept public comment on a request from a startup, Kalshi, to offer contracts on which party will control the House and Senate after the midterm elections. Kalshi’s chief executive, Tarek Mansour, has declared the opportunity “the holy grail of events trading.” Kalshi allows traders to invest up to twenty-five thousand dollars on a given contract, well beyond what PredictIt is allowed to accept. If its request were approved, Kalshi—which met three dozen times with regulators to discuss, among other things, whether “trading” is a euphemism for gaming and whether election markets are democratically redeeming—would become the first regulated U.S. exchange ever to host election markets.

Meanwhile, Aristotle, which supports Kalshi’s request, has sued the C.F.T.C. over the closure of PredictIt, with traders—including Boeckmann—and scholars joining as plaintiffs. “The Commission took this step with no reasoned explanation for its decision, no explication of facts that would support its decision, no transition plan for addressing scores of existing contracts held by more than ten thousand traders, and no consideration of any alternatives to the chaotic, disruptive, and economically damaging wind-down of the Market its decision forces,” the suit alleges. The C.F.T.C. has yet to respond to the specific allegations; Aristotle has asked for a preliminary injunction and expects a ruling on that request in the coming weeks. The lawsuit could help determine the future of political betting in the U.S.

It is perhaps not surprising to learn that there is a long tradition of betting on American politics. What may come as a surprise is that mainstream political reporting once devoted considerable space to that pastime. As early as the eighteen-sixties, American newspapers reported on betting markets pertaining to Presidential contests, covering them almost daily as elections neared. About half the trading took place in New York, outside Wall Street offices or on the steps of the stock exchanges. The economists Paul Rhode and Koleman Strumpf have found that such trading peaked in 1916, when President Woodrow Wilson defeated the former Supreme Court Justice Charles Evans Hughes; adjusted for inflation, about two hundred and seventy million dollars were wagered on the election in the organized New York markets that year, more than double what was spent on the Presidential campaigns themselves.

(On some days, investors risked more money on politics than on stocks and bonds.) “The Wall Street betting favorite has always won a Presidential election,” the Times noted on Election Day after Hughes closed in the New York markets a 10–8 favorite, despite a rush of late money for Wilson. The oil tycoon Edward Doheny reportedly made up to half a million dollars by betting on Wilson’s reëlection. These betting markets “vanished out of existence right around World War Two,” Strumpf told me. The disappearance coincided with the rise of scientific polling, which gained credibility in 1936, after George Gallup predicted Franklin Roosevelt’s reëlection, while the influential Literary Digest reader survey picked his opponent, Alf Landon, to win. It wasn’t that polls did better than the markets, which also favored Roosevelt. But a number of Americans disapproved of all forms of gambling, and polls now appeared to offer an alternative predictive measurement. A crackdown on sports gambling likely helped drive political-betting markets underground, as did passage of the 1936 Commodity Exchange Act, which established regulations for futures trading.”

BOOKMAKERS UNITE
https://bloomberg.com/could-political-betting-swing-the-2024-us-presidential-election
https://covers.com/politics/us-election-betting-history-october-2024
U.S. Election Betting Has a Long, Accurate History
by Geoff Zochodne   /  Oct 26, 2024

“It’s the night before the 1892 presidential election. Democratic Party underlings are sitting around their hotel hangouts in Manhattan — perhaps sipping Wilson Pure Rye Whiskey and ogling an R-rated work of art — when some Republicans enter. These Republicans are on a mission: They say they want to make big bets on their candidate in the coming election, President Benjamin Harrison. And these Republicans want to bet “at odds consistent with their candidate having a better than previously expected chance of winning,” a 2004 academic paper said. In other words, shenanigans are afoot. The price offered was 9/10 (or -111 in today’s legal sports betting parlance) for Harrison to defeat the Democratic candidate, former president Grover Cleveland, according to the New York Times. At the Fifth Avenue Hotel, the challenge was answered by Col. “Bill” Brown. The colonel had $2,500 in his pockets, but he also told the Republicans that, if they gave him some time, he could track down $100,000 or more to bet on Cleveland. “Col. Brown’s offer was not accepted, but the Republican leaders took pains to see that dispatches were sent all over the country announcing that the betting in this city had turned in favor of Mr. Harrison,” the Times said.

The same night, a similar “bluff” was made at the Hoffman House, when some men dangled “small sums” on Harrison at -111 as well. “The Democrats eagerly snapped these offers up and the bluff was a failure,” the Times reported. “No large sums were offered at this rate.” This was one of the “few minor instances where market manipulation appears plausible,” economics professors Paul Rhode and Koleman Strumpf wrote in their paper, “Historical Presidential Betting Markets.”  And yet, despite the attempt to puff up the Republican candidate, the electorate didn’t bite. Cleveland won. The bluff didn’t even fool a bunch of guys who were sitting around a hotel in the middle of the night for some reason. “Although large sums of money were at stake in the historical presidential betting markets, we are not aware of any evidence that the political process was seriously corrupted by the presence of a wagering market,” Rhode and Strumpf wrote. The academics added that betting markets were actually “highly successful” in identifying the 1892 election as a close race.

The markets functioned similarly in 1884, 1888, and 1916, when “market odds correctly predicted these elections that would be toss-ups.” There is indeed a fair amount of history that suggests wagering on elections in the U.S. provided accurate forecasting and that attempts to manipulate betting markets were fleeting or disregarded by punters.  “Wagering on presidential elections has a long tradition in the United States, with large and often well-organized markets operating for over three-quarters of a century before World War II,” Rhode and Strumpf wrote. “The resulting betting odds proved remarkably prescient and almost always correctly predicted election outcomes well in advance, despite the absence of scientific polls.” When it came to presidential wagering markets run between 1868 and 1940, the two professors said that “[i]n only one case did the candidate clearly favored in the betting a month before Election Day lose, and even state-specific forecasts were quite accurate.” But betting on U.S. elections ultimately fell out of favor and it is now tightly restricted across the country. Rhode and Strumpf wrote that newspapers reported less and less wagering activity, which was partly because of “a growing reluctance … to give publicity to activities that many considered unethical.”

However, what really helped kill election betting (at least in New York) was that there was something else, and more immediate, you could gamble on. “Ultimately, New York’s legalization of pari-mutuel betting on horse races in 1939 may have done more to reduce election betting than any antigambling policing,” Rhode and Strumpf wrote. “With horseracing, individuals interested in gambling could wager on several contests promising immediate rewards each day, rather than waiting through one long political contest.” So all the gambling didn’t stop, it just migrated, whether to horse racing or between individuals. You could also argue widespread election betting was resurrected by the internet, which allows Americans to access offshore and illegal bookmakers that take action on political events. Nevertheless, legal election wagering has been on the comeback trail lately in the U.S. Prediction markets like Kalshi and PredictIt have opened up avenues for betting on the outcome of this year’s election.

Already, tens of millions of dollars are at stake on the results of Nov. 5. U.S. election odds also suggest the contest between Republican Donald Trump and Democrat Kamala Harris is tilting in the former’s favor. However, there is plenty of time for things to change, and for people to wager.  That said, those legal options remain contested by lawmakers and regulators. Moreover, online sportsbooks such as DraftKings and FanDuel are still on the sidelines in the U.S., blocked from taking election bets in their home country despite doing so in the Canadian province of Ontario.

Concerns about election wagering include the potential for market manipulation and misinformation for voters. “Allowing billionaires to wager extraordinary bets while simultaneously contributing to a specific candidate or party, and political insiders to bet on elections using non-public information, will further degrade public trust in the electoral process,” a group of Democratic lawmakers warned in August. Yet history suggests those fears could be counteracted by the very betting markets that have some policymakers so concerned. Furthermore, anyone who really wants to warp the public opinion about a candidate or party could already be doing so, and in much bigger ways. “Yes, creating more economic incentives to distort political outcomes may seem unwise, but it seems unlikely that the economic interests reflected by event contracts on these markets will come close to the immense economic interests that already hinge on political outcomes,” lawyer Behnam Dayanim wrote earlier this month.

Still, just because attempts at market manipulation may not have long-lasting effects, it doesn’t mean people won’t try. That was outlined by Rhode and Strumpf in a follow-up paper in 2008, “Manipulating Political Stock Markets: A Field Experiment and a Century of Observational Data.” In the paper, the two academics looked into “the impact of actual and alleged speculative attacks” on election wagering markets on Wall Street from 1880 to 1944, the Iowa Electronic Market from 1988 to 2008, and over the internet, starting in 2000. What they found was that such attacks could have an effect on a political betting market, but that there were quick corrections. “We find little evidence that political stock markets can be systematically manipulated beyond short time periods,” the paper said. What’s more, Rhode and Strumpf wrote that “our evidence suggests that manipulating political stock markets is difficult and expensive to do for more than a short period.”

Manipulation indeed comes at a cost. One possible example of this was a single trader in 2012 who lost millions on an online exchange in what could have been an attempt to make Mitt Romney’s chances of winning the U.S. presidential election that year look better than they were. A 2015 paper by two economists said the bets “resulted in remarkable stability in Intrade prices for several hours on Election Day, and at other critical moments of the campaign, even as prices on Betfair were moving sharply.” However, as the paper notes, another exchange was reacting to the latest news. And when the Romney bettor’s orders were removed after the polls closed in Colorado “[t]he effect was a sharp price movement and immediate convergence to the Betfair prices.” The Romney incident was raised by the U.S. Commodity Futures Trading Commission in its ongoing legal fight with Kalshi over election-related event contracts.

But, in an opinion earlier this month, the U.S. Court of Appeals for the District of Columbia Circuit swatted away the CFTC’s Romney-related argument about potential harms wrought by the contracts. Judge Patricia Millett wrote that “the [Romney] trader fell short because the attempted manipulation was easily detected by market investors,” and that the commission’s “speculation” about the motivations behind the activity was an “unsubstantiated and speculative” theory. “Notably, the Commission offers no other evidence that such market machinations have happened over the last 36 years in which unregulated markets have offered election contracts,” Millett added. While the CFTC is still appealing, the recent legal cover has led to an explosion of election wagering at Kalshi. As of Friday, the company reported that more than $70 million in trading had occurred in contracts tied to the outcome of the 2024 presidential election.

Anyone with fears about politicians and operatives using insider information to bet may have felt justified earlier this year when allegations of just that came to light in the United Kingdom. This summer, several people with ties to the U.K. Conservative Party were alleged or suspected to have wagered on the timing of the country’s general election, which was ultimately held on July 4. Yet the U.K. election betting scandal broke open, at least in part, because of the country’s regulation of such wagering. The Guardian reported “a red flag was automatically raised” by sportsbook operator Ladbrokes, as a wager was allegedly placed by a “politically exposed person.” Ladbrokes then told the Gambling Commission, which began investigating. “The incident in Britain illustrates precisely why these markets should be approved and regulated,” said David Mason, general counsel for Aristotle International Inc., in an interview with Covers earlier this year. “They knew exactly who placed the bets. And so all they had to do was say, ‘Well, wait a minute, these bets were suspiciously lucky.’”

Aristotle helps operate PredictIt, an “experimental” prediction market that caters to U.S. users. But Covers heard similar thoughts from the representative of a U.K. sportsbook operator earlier this week. William Kedjanyi, head of political content for Star Sports, said “Gamblegate” didn’t hurt their election betting business. It did draw more attention to those types of wagering markets, though. “That’s how compliance and regulation systems, etc., should work,” Kedjanyi said. “That’s the same as it would have happened in any sport.” As Orrick’s Dayanim wrote earlier this month, “the United Kingdom long has permitted betting on political campaigns with no fundamental threat to the integrity of their elections.” Granted, there are concerns and fears about the effects of legalized election wagering and what it could do to a democracy already under stress. This election will no doubt be closely watched for any instances of attempted or successful market manipulation. Even so, history tells us there is a formidable force that will fight back against anyone who tries to pull a fast one on election bettors — and it’s the bettors and bookmakers themselves.

On Saturday, Nov. 5, 1932, the New York Times reported that “[t]he betting situation was more confused” on Wall Street the previous day than almost any other time during the campaign. “The odds quoted in favor of Democratic or Republican candidates were assailed by some betting authorities as ‘propaganda,'” the paper said. But the odds quoted by “betting commissioners” — otherwise known as bookmakers — “continued to rise in favor of Governor [Franklin D.] Roosevelt,” the Times reported. Roosevelt became a -500 favorite; on Election Day, Roosevelt’s odds had shortened to -700. Roosevelt ultimately defeated incumbent Herbert Hoover in a landslide. Not every bettor nailed the outcome, though. On Nov. 10, 1932, the Associated Press reported one Edward Cusak “‘enjoyed’ a wheelbarrow ride of three miles” from East Long Meadow in Massachusetts to Springfield. This was, the paper said, “the result of an election bet in which” Cusak backed Roosevelt. “Charles Priest supplied the motive power, having placed his faith in Hoover’s winning power,” the Times said.”

PREVIOUSLY

VOLATILITY KINK
https://spectrevision.net/2020/10/29/election-kink/
EVENT DERIVATIVES
https://spectrevision.net/2015/07/31/decentralized-prediction-markets/
the ACCURACY of CROWDS
https://spectrevision.net/2011/05/20/the-accuracy-of-crowds/

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