The Journal. - Betting Big on U.S. Politics

Episode Date: September 9, 2024

WSJ’s Alexander Osipovich explores the world of political betting. We meet a trader making big money making predictions on the upcoming U.S. elections over a platform called Polymarket and examine the fight that is brewing with regulators over the practice.   Further Reading: - Meet the Traders Making Money Off the Trump Shooting and Biden’s Stumbles  - Judge Holds Off on Allowing Election Bets–For Now  - The Hot New Trade That Everyone Is Watching: Will Biden Drop Out?  Further Listening: - How Gambling Scandals Are Rocking Sports Leagues  Learn more about your ad choices. Visit megaphone.fm/adchoices

Ryan is a Canadian university student who follows US politics closely. So when former President Donald Trump was nearly assassinated back in July, Ryan, we agreed to use only his first name, heard about it just minutes after the story broke. And I see that people are saying Trump just got shot. So I go to the live stream and I see Secret Service pushing him away. There's confusion everywhere. A big event like this is market shaping news and Ryan had money on the line. Not necessarily in the stock, but in a growing market based on betting. Ryan had a number of bets going on the U.S. presidential election.

And if Trump had been killed, that would have changed everything. But of course, Trump survived. And I go onto Twitter and I see people starting to say, Trump just locked the election. He's the winner. He's resilient. Trump is going to win now. Ryan logged onto the site that he uses to make bets on American politics. He goes by the name PhantomBetsOnline.

He quickly bought more shares on Trump to win the election. When the photo of Trump raising his fist began making the rounds, the share price soared. And that was when Ryan sold his position for a tidy sum of $700. It's all about riding the wave, riding the narratives that you see. I want to catch a narrative before the public does, right?

I buy the rumors, sell the news. I just sensed that the price would move and I was right. Sites like the one Ryan is using are on the rise. Their popularity is leading to a wave of betting on political events in the US, and it's setting up a clash with US regulators. Welcome to The Journal, our show about money, business, and power.

I'm Jessica Mendoza. It's Monday, September 9th. Coming up on the show, how the U.S. election became such a hot bet. Your team requested a ride, but this time, not from you. It's through their Uber Teen account. It's an Uber account that allows your teen to request a ride under your supervision with live trip tracking and highly rated drivers. Add your teen to your Uber account today. 90 calories per can. They chose both because they knew the best part of beer is the beer.

Your game time tastes like Miller time. Learn more at MillerLight.ca. Must be legal drinking age. In 2024, betting is bigger than ever, especially online. People are betting on all sorts of things. They are betting on whether they're betting on pop culture events. They're betting on the Oscars. They're betting on economic data, like whether the Fed is going to cut interest rates. I talked to our colleague Alex Osipovich about the platforms where people can place these bets.

They're called prediction markets. Prediction markets are places where people come together and they bet money on future events. Will Taylor Swift get engaged by the end of the year? Will Donald Trump win the election? And in the push and the pull between the people betting one way and betting the other way, you have essentially a price that's established. And the idea is to sort of harness the wisdom of the market and try to arrive at a consensus version of the truth of what the masses of people think is likely to happen.

And one prediction market platform that's recently taken off is called Polymarket. Polymarket's been around for a few years. It was founded by a young guy in his 20s named Shane Copland in 2020. Polymarket, as its name kind of suggests, is meant to be a market for everything. There are all sorts of topics there. Essentially anything that you see in the news, they will try and make a market out of it. But its users have generally gravitated to the political markets and it's the election related markets right now that are getting the bulk of the trading volume and the bets being placed.

Polymarket sets up betting by allowing users to buy shares of yes or no on an event. Just like buying shares of a company, if more people buy yes, the price of yes shares goes up. People can buy and sell these shares up until the event happens. They use cryptocurrencies to make the trades. The way you're describing it, it does sound like somewhere in the middle of like a brokerage site where you would like trade stocks or futures and also kind of a sports betting site where you're placing bets on the outcome of events. It sort of kind of lives in a middle spot. It is sort of a mashup between brokerage type markets and plain casino type gambling.

Right now on Polymarket, there are bets about who will win tomorrow's presidential debate. Will August be the hottest on record? Who will win the popular vote in November? But one of the big questions that really drove people to the marketplace came up in June. If you look at its trading volumes, they really took off this summer around the time of the Biden-Trump debate. And the reason for that is because the debate and Joe Biden's poor

performance set off this huge wave of speculation of is Biden gonna drop out and For several weeks after the debate as different bits of news rolled in, you know Joe Biden saying he was gonna stick around Prominent Democrats calling from to drop out all of these things moved polymarkets odds on Biden dropping out of the race. And some people in the end ended up making a fair amount of money because they bet that Joe Biden was going to drop out when that was not a consensus position. One of those people who won big was Ryan, the Canadian university student.

I think I got around 110,000 shares of Biden not to be the nominee, between 15 and 20 cents. And then as House reps and senators started to call on him to drop out, Nancy Pelosi gave vague answers. The odds would go up and down throughout the June to July period. How much did you wind up making? That I'm not sure sure because I have so many so many trades on the site that everything was so volatile. But you're

sure you made money? Oh for sure. It was one of my bigger wins of the year for sure. In total, Ryan's made more than $290,000 on Polymarket since he started trading on the platform a few years ago. The site is attracting a lot of folks like him. People curious about gambling, or wonky about politics, or, because all the bets are done in crypto, crypto enthusiasts. And that's led to investors taking notice. In May, PolyMarket announced that it had raised around $70 million in new venture capital funding, including from Silicon Valley big names like Peter Thiel.

Here's our colleague Alex again. I think collectively the investors behind PolyMarket believe that it is sort of an idea whose time has come. They like the idea of prediction markets. They think prediction markets could have a very bright future if done correctly. There's also this argument, which I find very interesting, that prediction markets create a public good.

Many of us spend a lot of our time checking opinion polls to see whether our preferred candidate is up or down in the polls. Prediction markets offer another way to kind of get at that. They have this interesting property where they react in real time to events. I mean, right after the Democratic convention, there is a lot of interest of like, well, how much of a bump is this going to give Harris? But you have to wait a few days for those polls to be conducted. If you're impatient, you can just kind of look at the prediction markets,

be like, oh, well, it looks like the prediction markets are up a little bit after all those good speeches at the DNC. And so that gives you that real-time fix that is missing from opinion polls. In August, PolyMarkets users made more than $400 million worth of trades, a new monthly record for the company. But all that attention hasn't gone unnoticed, especially from a top U.S. market's regulator. That's next. The rising popularity of elections betting has led to a lot of discussion over the pros and cons of sites like Polymarket. There's a lot of debate over whether betting markets on elections are a good thing or a bad thing.

On the plus side, they do give you sort of an independent source of forecasts outside of pundits and opinion polls. As we've seen in the past few election cycles, opinion polls can be wrong. Advocates of prediction markets say they're kind of more pure in a sense because these are real people putting down real money. And when you do that, you tend to assess the situation. You don't want to lose money, so you place a bet that you have strong conviction in. So the idea is that if you have enough of a diverse user base putting in money and betting

on different things that they know stuff about, the more authoritative voices that are better endowed in terms of funds will have more weight and it'll ultimately trickle into a more accurate result. So let's talk about the people who are concerned about marketplaces like Polymarket. What are they worried about? The main criticism of election betting markets is they could lead to manipulation of elections. You can imagine a scenario where somebody with a vested interest in pushing a certain election result or making money off of the election result

will place a big bet on a betting market and then try to meddle in the election. I mean, we've seen a lot of allegations of election interference in recent election cycles, but those were generally driven by nation states trying to meddle in US affairs. Imagine if on top of that you had the profit motive. Still, election betting is controversial.

It's traditionally been banned by US regulators because of concerns that it could unfairly influence the outcomes of elections. The Commodity Futures Trading Commission, or the CFTC, is the main federal agency in charge of policing this kind of market. Over the years, the CFTC has repeatedly blocked attempts to offer election betting on the trading platforms that it regulates. So Polymarket operates outside of the U.S. to get around those regulations. One of the reasons that the CFTC has been so concerned about election betting is that it does not want to be drawn

into investigations of election manipulation. The chairman of the CFTC has said that the CFTC should not be an election cop. He's expressed concern that if there is a case of election manipulation in which somebody tried to profit from a prediction market, the CFTC would be forced to investigate that and essentially open up a gigantic can of worms that they don't want to get involved with. Has that kind of election manipulation happened before?

I would point you to the UK where there was a scandal in the most recent election in the UK where some politicians were involved in election betting in the elections that they were involved with. How has Polymarket responded to criticisms in general as well as to what the CFTC has said? Polymarket says that it takes every effort to be compliant with U.S. regulations. It says it does not have U.S. users. I think that in general they take the view that prediction markets are the future and

they are building that future. Advocates of prediction markets have argued that the CFTC is wrong and that Americans should be allowed to bet on elections. And there's been some movement. Last week a federal judge issued a ruling that could open the door to election betting in the US. There's another hearing on it later this week. What is it about this moment that makes polymarket and prediction markets like it such a big draw for people. Well, I think polymarket kind of got lucky.

We are in an unusual election. I mean, every four years people say, oh, this is the most important election ever, but this is really an interesting election. I mean, Trump and Harris were present very different directions for the country and it's been unusual in terms of the some of the events that have happened. Joe Biden dropping out. When does that sort of thing happen? The drama around the Trump assassination attempt. So, this has been an unusually volatile election season, and I think that sort of plays to

polymarket strengths in terms of providing a way for people to express their views through bets and, you know, providing this real-time window in what's happening with the chances of election at any given time. And also give people a chance to make money in the process. Exactly. In the meantime, users outside the US, like Ryan, are continuing to bet on US elections on Polymarket. How would you rate yourself?

Do you feel like you're good at this? Ooh, I'd like to think that after three years of knowing the ins and outs of polymarket, I have a pretty good knack for it. I would consider myself center right, but on prediction markets you try to take emotions out of your trading and really in anything you want to take emotions out of what you do, especially financial decisions. So I try to stay as unbiased as possible and really now I hold a big position on Kamala Harris to win the election and that's inspired by the data rather than who I want to win. It's not just who wins and loses. Ryan, like many polymarket users, is betting on key moments leading up to the presidential election. On Tuesday, Vice President Kamala Harris and former president Donald Trump will square off in a debate.

And Ryan has money on it. What bets are you thinking about making with regards to the Harris-Trump debate? Yes. So with the debate coming up tomorrow, there's a market on Kamala and Trump shake hands at the debate. And that's a market I'm particularly interested in to see what happened in the previous debate, because Biden and Trump didn't shake hands.

I had a bet on them not to shake hands, which won. Are you purely on polymarket to make money? I am a university student, a business student, and this is something of a resume builder. And that's something of a story that you can go and tell someone at a big trading firm that they might be interested in someone who has the intuition and has done this for what is a good couple of years at a young age. So that is one of the motivating factors for me trading. But of course, the money is great and it is a lucrative opportunity that I don't plan on dropping anytime soon. If you like our show, follow us on Spotify or wherever you get your podcasts. We're out every weekday afternoon.

Thanks for listening. See you tomorrow.