Betting Polls Lack Liquidity, Prone to Wild Swings

Election night was an example of how illiquid markets can cause wild swings to the price movement, a Bloomberg analysis of the events on the night and afterwards reports. And it all started with bettors who did not know what they were doing.

Wild Swing on Betting Markets

Misled by the early counts in several battleground states and the arising red tidal wave, gamblers went all-in on Trump on the British exchange Betfair, believing he was again underestimated by polls and would subsequently defeat Biden.

The influx of money at the exchange caused the odds for Trump winning to jump from 31% at the beginning to almost 80% and spill into larger financial markets, where investors bid up prices on US stocks and bonds and sold Mexican peso, causing S&P 500 to soar more than 3% in less than half an hour.

Investors usually rely on gamblers as a collective, stating they have “skin in the game” and their preferences can be more accurate than traditional polls. But what investors did not take into account is the fact that gambling markets are usually lacking liquidity, a feature which makes them prone to wild swings based on incomplete data.

Foreign Bettors Deceived Financial Markets

The night of the elections, November 3, saw Betfair accept roughly $172 million in wagers for 24 hours starting at 7pm on the East Coast, and only a small fraction of it was more than enough to turn Trump into an overwhelming favorite for the vote.

As the main US betting site PredictIt crashed on the night, action switched to Betfair, complicating the matter for traders who had to take cues from oversea bettors, who obviously did not understand the forces behind the shift in the results which happened later on.

The S%P 500 futures slumped initially as the vote count commenced, pricing the less than 50-50 proposition for Trump to be re-elected, but as gamblers flooded the betting site boosted by Florida’s numbers and early tallies in Michigan and Pennsylvania, the futures jumped along with the odds for Trump to win.

The surge in S&P 500 was mostly explained by financial analysts as a result of the “betting polls” which favored Trump by that time, yet those same betting markets used for early indicators reversed themselves back to under 40% by sunrise.

Brexit Market Failure Forgotten

Blaming gamblers for misleading the financial markets would be immature, as there were other factors such as real-time vote tallies, red and blue electoral maps, various needles among others, but it was not the first time financial markets got too caught up in the betting markets.

Just over 4 years ago, a heavily favored “Remain” vote in the Brexit Referendum skewed the odds and overshadowed the larger number of bets for the other proposition, and dragged traders in the equity and markets who looked for cues from betting markets along, setting themselves up for big losses.

During the election night, financial markets took cues from political bettors outside of the US as Americans are largely barred from gambling on elections, beside the PredictIt site which crashed early on, and to expect Australians and Europeans to know in detail the vote counting process in the different states turned to be a premature and costly assumption.

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