Predictions, exchanges and the rise of political betting

When political betting goes wrong, it really goes wrong. In the 2020 US presidential election, with conspiracies spreading from the White House to the message board, protests began assembling outside state houses and ballot-counting venues throughout the critical states of Pennsylvania, Michigan and Wisconsin, where the race was agonisingly close. It was the first stirrings of what was to become the so-called “Stop the Steal” movement – the last-ditch organisational effort to save the Trump presidency.

It was also the beginning of what is often known as the “shenanigans” – the weaponisation of an array of legal and legislative tools to muddy the water and frustrate democratic majorities; a catalogue of failed dirty tricks that culminated with the insurrection at the United States Capitol, and the ultimate signalling from the US military that it would support the peaceful transfer of power.

At every stage of this, money was changing hands.     

A little wager

“The constitution wasn’t designed for betting purposes, to put it mildly,” says Matthew Shaddick, a veteran political analyst for the Smarkets betting exchange.

“You think it’ll be totally straightforward. You’re thinking – who’s going to win the election? That seems like a very straightforward proposition, but as 2020 showed us there were an enormous proportion of people who didn’t agree with the result when it came in, and it took weeks or months in some cases for some people to settle the results of those markets.”

This is the nightmare that keeps operators up at night. For a bet to be resolved, there need to be discrete, measurable win-loss outcomes. In sports this is easy: every outcome can be accounted for, and those that are awkward are a matter for referees and governing bodies – but politics is murkier. While there are referees and rulemakers of a kind, as 2020 proved, it can end in a mess of accusations and lawsuits, with long delays raising difficult questions about when a bet is won or lost.  

Shaddick emphasises that this must be accounted for in political betting sites. One of the foundational practices in political betting must be to have clear and thought-out rules that account for every eventuality or you will lose money.

“It’s important to have a long list of well-defined rules for every single event. If you go on to some other operator sites, their platform just doesn’t allow them to have paragraphs of rules next to every single market. But that’s really, really important. You can’t bury those away somewhere and hope somebody reads them,” says Shaddick.  

“But because there are lots of different events that pop up and you need specific rules to cover those, you can’t just rely on general terms and conditions. You have to try very hard to get all that right.”

Size of the pie

Importantly, people are clearly interested too – the 2020 US presidential election was likely the most bet-on event of all time, with the total handle running into the hundreds of millions of dollars.

And as the Tory leadership contest in the UK approaches its final stretch, the amount of money wagered has been enormous – handle on the Smarkets exchange alone is nearing £2.4m. Not only has this created a new market overnight but it has also generated volumes of useful information critical for anyone seeking to understand the race.

In fact, some argue that betting markets are more predictive of outcomes than polling – or at least more useful in giving the conventional wisdom a hard numerical value.

Over the last 10 years, gross gambling yield from political betting has risen dramatically – but are bookmakers looking to take advantage of any new opportunities the new market might create?

For Shaddick the amount of money staked on political bets puts it in a qualitatively different category to more trivial novelty bets. 

“I think in a lot of even quite major betting operations, they still do keep politics in the same sort of bucket as betting on the weather and Strictly Come Dancing,” he says. 

“And whereas you know in reality in terms of the amount of money being turned over any particular long period of time, politics will be 10 times as big as any of those things. That’s basically excepting Eurovision.”

And while an exchange model may allow it more flexibility to be involved in political bets without having to stand by a price, more conventional fixed-odds operators have long struggled with the inherent uncertainty in political bets.

Odds bedfellows

One of the evergreen problems with political betting has been effectively calibrating the odds. While an operator with a sportsbook in a more traditional vertical might employ full-time in-house experts to analyse form, operators rarely have such permanent staff for political events.

Political predictions are notoriously difficult at the best of times, with even dedicated poll aggregation and analysis ventures such as Nate Silver’s FiveThirtyEight or the New York Times’ The Upshot being far from 100% accurate.

And even if an operator wanted to take the bullet and hire an in-house expert, they face hanging questions.

“I imagine if you’re a trading director of even a very big firm you’ll say, ‘Should we employ even just one full-time political specialist to run this for us? Well, then you’ll say, ‘We don’t think it’s going to be making that much money anyway,” says Shaddick.

“And then what are we going do with this person when there aren’t any big elections on, and so on. So, I think that’s put off a lot of people from trying to progress the product very much.”

And even the hiring of a dedicated political analyst is far from a guarantee of success. Incorrectly assessing the probability of outcomes is the obvious possible failing, but simply not being clear on the rules can lead to difficulty when dealing with complex real-world events that can have end-states beyond simple win-lose scenarios.

“You know, I made an enormous amount of mistakes when I first started doing this. You need somebody who’s at least interested and keen on doing it and obviously it would help if they had some experience in the area as well because the potential for things to go wrong is quite high.

“Never mind just losing money, if you haven’t got your rules written spot on, if you haven’t got the range of options in each market in an accurate fashion, then you’re going to have a very poor customer experience, and you’re going to lose money.”

Add this all together and you have a recipe for a deceptively unprofitable vertical.

“Particularly when you look back to the 2015 general election, the Brexit vote, Trump winning in 2016 – for most fixed-odds betting operators they were very, very big losing propositions.”

All that is to say that fixed-odds political betting is not an easy way to make money. The number of operators that offer it are small, and those that do put any focus on it, such as Star Sports, more often than not do so to differentiate themselves against larger, more dominant sportsbooks.

Star Sports retains well-known political analyst William Kedjanyi to advise on political odds, and the site in general has carved out a niche as a site hosting novelty bets in addition to its core horse racing betting vertical.

Kedjanyi is bullish on political betting, arguing that the vertical is only set to get bigger in the coming years, as it has done in the previous decade.    

But for the bigger operators enthusiasm is at a low ebb, even though they have experimented in the past.

“I think a lot of people who were trying to dip their toe in the water to try to take advantage of the exploding market got put off by that,” he says. “And the range of offers at even the very big operators, for example Bet365 just to pick out the biggest, hardly offer any political ads. The Paddy Power brand tried quite hard six or seven years ago. They don’t seem to be making much of an effort any more.”   

While political betting is by no means the bookies’ favourite, betting exchanges like Betfair and Smarkets may seem more suited to the product.

Exchanges to the rescue

So then, are betting exchanges the answer? By shifting the risk from the operator to the consumer, exchanges can offer a platform for less traditional forms of betting, of which political betting is one of the most important.  

According to Thomas Vermeulen, head of affiliates and international markets for Smarkets, political betting has always been integral to the Smarkets product.

“It has definitely been a big point of focus for many, many years. Our current CEO who founded the company, he used to be a UBS analyst. And one of the things that triggered him to basically found Smarkets was the Al Gore–George Bush election back in 2000,” says Vermeulen.

“He was very interested in how you can trade on those political events and basically the power of people putting their money where their mouth is. So we have always had a political department.”

Ultimately, this is what can make political betting fascinating. Winning at sports is interesting and can have real world implications, but its impact does not compare to political outcomes. With political betting the calculus is reversed from other kinds of sports betting, where the information generated is useful in its own right – helping people plan for real world events.

Wisdom of the crowds

Smarkets leans into this informational service as a core ethos of its platform.

“The advantage we have as a market is that we don’t run this as a money-making exercise,” says Shaddick.

“We are in a sense subsidising traders to use our platform in order to arrive at better prices. So we’re not restricting people from what they can bet on, what they can’t bet on, and closing accounts down because they win too much money.

“We need those people to move the prices as quickly as possible to get what the correct real-world price should be, if there even is such a thing, so we can then say that this is the best source of information about the probabilities of things happening.”

While Shaddick presents this as almost a humanitarian exercise, it is also possible to see how having a reputation as providing the most accurate odds might be useful for attracting bettors to the site. 

One question this brings up is to what degree can these probabilities be trusted? Is there a ‘wisdom of the crowd’ effect that allows the market to crunch through and overcome personal biases to reach beyond what might be described as the conventional wisdom – or does it merely reflect it, and provide a discrete value to the conventional thinking?

From Hillary Clinton to Penny Mordaunt, the Smarkets exchange has tended to track the mainstream view. Being able to see around corners, in the way some of the more militant defenders of political betting would like, seems to have eluded it.

The information is useful, but only as part of a wider catalogue of indicators, not as the final word on political prediction.

Not there yet

But for all the important work done to advance a workable political betting product, the vertical remains niche and in many large markets is unregulated or outright illegal. In the US for example, the de facto single regulated political betting site is PredictIt – a venture that owes its existence to its non-commercial nature.

PredictIt is a research project from the Victoria University of Wellington and thus was able to receive what is known as a “no-action” letter from US derivatives regulator the Commodity Futures Trading Commission (CFTC), which allows the site to operate “without registration as a designated contract market, foreign board of trade, or swap execution facility, and without registration of its operators.”

Even this status quo is ending – with the CFTC announcing on 4 August that PredictIt’s no-action letter was to be withdrawn due to what it deemed compliance failures.

Interestingly, PredictIt’s unique regulatory status also makes it the only interstate peer-to-peer betting operation in the US – with the no-action letter allowing the prediction market to skirt enforcement of the Wire Act.

But as the US market continues to open, political betting will at some point launch in at least a few states, something Shaddick believes could accelerate the development of the vertical.

“From an industry point of view there’s a couple of things that could make a big difference. The first is political betting becoming available to more people in the world, and in particular in the United States, which you see in the opening up of various states, but you still can’t legally bet on politics on any sort of state. In a state-by-state sportsbook there is only one platform in the US called PredictIt where you can place some bets, but that’s it,” said Shaddick.

“And I don’t know if you know, but it’s a tricky platform with all sorts of restrictions and so on in it. But if a normal sportsbook with customers could be on the US presidential election, it would immediately become the biggest betting event of all time. I mean, I think the Trump-Biden race is, of course, probably the biggest event of all time anyway. But you know, if in 2024 this was legal in some states, it would just be huge.”

Hard thinking

Sometimes the old truths are right. Political betting is, by all accounts, still a hard business, fraught with infrequent events and difficult business models. The operators that have proved successful are specialists in the field and creative in how they approach the vertical.

For Smarkets in particular, it’s an intriguing way to go about things – to put the generation of information at the centre of the exchange’s corporate strategy and the brand’s USP.

When Vermeulen talks about it, Smarkets sounds more like a media organisation than a gambling platform.

“Given the focus on the benefits of an exchange and also the unique USP of politics, we really want to be a source of information. If you want to know who the next prime minister is don’t check the BBC, just come to Smarkets, they’ll be more accurate right?”

Vermeulen is right about one thing: people want to know how things will go. Because the essential difference between sports and politics is that the latter is not a game. It’s not just a horse race where once the blue or red team wins we can go back to our lives. When politics goes wrong, it really goes wrong.