The forecast for prediction markets

Katie Martin (0:06)

PUSHKIN Prediction markets let you bet on pretty much anything. You can bet on sport and politics, both things that Brits have been used to for years, but that Americans have gone absolutely bonkers for more recently. Not sure how healthy that is. But anyway, those clever young things in Silicon Valley think we should be betting on everything. Every life event is something that you can bet on.

One thing that's becoming increasingly popular is betting on markets, financial markets. So will the US raise interest rates? Will the UK? What will the euro be doing in the next few days? Will it be up or down against the dollar? At a certain point, this starts to look and smell a lot like mainstream wholesale derivative markets. So today on the show, is this a disaster waiting to happen or actually a useful way for investors to gauge the mood?

This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist in London. By the time you hear this, I'll be relaxing on a sun lounger in Greece.

Rob Armstrong (1:16)

Hooray.

Katie Martin (1:17)

Joining me from New York City is the big man Rob Armstrong off of the Unhedged newsletter. Rob, the US has gone kind of gambling crazy, right? Like sports betting is quite new for you guys, isn't it?

Rob Armstrong (1:32)

It is. I was shocked when I moved to the UK and there were betting shops on every street. Whereas in America, there's like one dreary place that you were allowed to bet on horse racing in every city. They called these things off track betting. And it was like 80 year old men chain smoking cigarettes and losing money.

But it's a different story now, and everybody can do it from their phone. And you watch any sporting event, half the ads seem to be for sports betting products. As a sports fan, I think this is a complete disaster and I don't approve of it.

Katie Martin (2:07)

No, but it sounds like, so when was it permitted over that? This is something that's quite recent in the past couple of years, isn't it?

Rob Armstrong (2:14)

It is.

Katie Martin (2:14)

It does sound like the Americans have jumped in with both feet. Like, there's a lot of people with sports gambling problems all of a sudden that weren't there before.

Rob Armstrong (2:22)

Yeah, I think that is all true. And, you know, I don't claim not to be a hypocrite on this topic. You can't be interested in finance, like you and I are, without having some admiration for the principle of settling a disagreement about what the world is going to do by putting some money on it. You think you're right and the rest of the world is wrong, you have two options. You can gas on about it until everybody throws you out of the house, or you can put some money down and see who's right and who's wrong. And so I think betting, in the broadest sense, is a really good way to clarify your thoughts.

Katie Martin (3:05)

There are some, like, bad things that come from this.

Rob Armstrong (3:09)

Very bad things.

Katie Martin (3:11)

So these prediction markets allow you to bet on things like wars. And to me, that's like, uncool, you shouldn't be betting on wars. And then there was that whole thing recently where some people have bet on one of these prediction markets that the US was going to invade Venezuela.

And then it became this whole dispute because it was like, well, did the US invade or not invade? What is an invasion really? Does it require boots on the ground? How many boots on the ground actually counts as an actual invasion? So a bunch of people who had bet on the US invading Venezuela were cross that they didn't get paid out by one of the big betting platforms.

Rob Armstrong (3:49)

Yeah, it was just a kidnapping, not an invasion.

Katie Martin (3:56)

So to me, some of this is deeply nihilistic and awful. The other thing that I think is deeply nihilistic and awful is that apparently some betting platforms are at least considering you to bet on wildfires. So will Rob Armstrong's house catch fire, for example? Like, what does that incentivize people to do? What could that possibly mean?

Rob Armstrong (4:20)

Well, I mean, look, you know who else bets on wildfires? Insurance companies, and we're glad they're around.

My point being that having ways to make a market for future events is a very important way for people to transfer risk, right? I think the kind of concerns you're talking about, betting on the wrong kind of events, disputes about what counts as an event or not an event, a lot of that boils down to concerns about what we call in the financial markets inside are trading. And so, you know, it is bad to bet on a war. It's really bad to bet on a war if you're one of the people participating in it and you have information other people don't have. Right? And we have reasonably clear rules for what that means for people who participate in financial markets. You know, if you are a company and you know what earnings it's going to report in a few days, you're not allowed to buy and sell the stock on the basis of that information. Does the same apply to a soldier who's part of the unit that is being prepped to go do something? We don't think we know the answer to that question. I mean, the regulatory regime has to catch up with the reality of these markets. And it should be noted that prosecutors quite rightly are going after this kind of trading on prediction markets. So here from the FT in May, a Google software engineer allegedly used confidential information to make more than $1 million on prediction market, polymarket, according to criminal charges unsealed in New York Federal Court. So it is, there is a door here for insider trading.