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How the nature of politics creates trading opportunities

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Political betting is increasing in popularity, and with more uncertainty than ever before, there is great potential to make a profit trading on political markets. This article examines what causes such trading opportunities.

Political markets typically follow the election cycle and have become more common and mainstream, not only because they appeal to the general public, but also their ability to offer an insight into what the result may be.

Betting on politics is one of the fastest growing markets on the Smarkets exchange and its unpredictable nature can offer plenty of trading potential. But what causes these betting opportunities, and what should bettors consider when trading?

How the news affects political odds

Unlike sports, political markets are traded on regular news flow. For instance, if you’re trading a tennis match the score will have a huge effect on the result and dictates your trading patterns.

However, political markets have no score until the polls close. Until this point, the outcome of a result is ultimately speculation - with publications and broadcasters driving the news flow rhetoric.

Anything from the latest poll highlighting a shift amongst voters, candidates’ performance on TV debates, or a policy U-turn can be enough to drive opinion and the betting markets.

It’s vital to recognise that each news publication and broadcaster have their own agenda and will strategically choose what they cover during a campaign. It is accepted that coverage from major media outlets reflects their own political bias and that of their audiences.

Given how instrumental news can be on political betting markets, gauging accurately how effective the news is at influencing voting behaviour is key.

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How polls affect political betting

Polling data is an obvious tool that a trader can use to gain an insight into the eventual outcome. American Nate SIlver’s career took off when he aggregated individual polls, with other data, to predict the 2012 election correctly in all 50 states.

However, confidence in polls has diminished greatly in recent times. But what has caused this?

Polls are not necessarily wrong, the data doesn’t lie, particularly when you factor in their margin of error. What is becoming more evident however is that some voters poll in one way and perhaps vote in another.

This can be attributed to a human bias - when asked which way they will vote on sensitive subjects such as Brexit, they can give misleading information, worrying about how they will be perceived, if they answer honestly.

This is noticeable in high profile political markets where exit polls have indicated a radically differing opinion to a pre-vote poll - which happened in the 1992 and 2015 UK General Elections, and was dubbed the The Shy Tory factor. It appears voters lose their anxieties when they are about to mark their card.

When trading political markets, bettors should understand this potential bias and take measures to minimise its effects by aggregating polls, considering sample size, the reputation of the pollsters, and coupling this with any other information you believe is relevant.

Undecided voters

Where elections are close, the way undecided voters actually vote can swing the result. For this subset of votes, statistics are irrelevant, which can present trading opportunities.

The greater the uncertainty surrounding an election, the more volatile the political market will be as traders put their interpretation of events against one another. This makes the odds fluctuate, and the bigger they change, the more opportunity traders have to make a profit.

Misunderstanding prediction markets

Betting exchanges have been dubbed ‘prediction markets’ because they have been successful in the past at recognising the outcome of an event through their odds - understand how odds reflect the chance of an event occurring.

Like polls, betting exchanges have come under scrutiny after the results of the EU referendum and the US Presidential election. The problem, however, is not the betting exchange, but the misinterpretation that exchanges are prediction markets.

Betting exchanges do not predict the future, but instead suggest what chance an outcome has of occurring. On the night of the EU referendum and US Presidential election in 2016, the exchange gave implied probabilities of around 90% for ‘Remain’ and a Hillary Clinton win. In simple terms, it suggested that Clinton and Remain would triumph in nine out of ten elections or referendums.

Are these probabilities always correct and can this misunderstanding of what betting exchanges represent create an opportunity for savvy traders?

Previously, traders followed the polls religiously, which gave volatility to the market. Now, because people believe in the accuracy of the betting exchange as a prediction market, new external information which would normally be incorporated into the market, may have been ignored.

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Look at implied probabilities in the graph above for the EU referendum. The market remained reasonably stable, despite an eventful and hard-fought campaign. The initial odds were probably accurate based on the information available, however when new information was obtained - polls showed solid and consistent majorities for Leave in the days leading up to the vote - it seems to have been discounted, and actually had the reverse effect as the probability dropped.

It appears for the EU referendum traders had been anchored by the betting exchange as a prediction market, and therefore, the exchange odds did not react accurately to new information.

The implication this has for political betting is that if the odds appear too stable, don’t assume the market has already absorbed the new information. This, therefore, creates an opportunity to trade on the new information.

Trading politics on the day of the election

Unlike sporting events, political betting markets are always ‘in-play’. Once the market has been created and up until the declaration of the result, the market is live.

As the results come in on voting day, the market reacts as it incorporates fact from speculation based on vote results. This can create plenty of volatility, as the odds move quickly based on the new information.

As we mentioned above when political betting markets remain too rigid, it can create potential trading opportunities - learn how to trade out of a market.

Both the EU referendum and 2016 US Presidential election remained incredibly stable leading up to the results, despite an abundance of news, scandals, poll swings and dirty tactics pumped into the public sphere.

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The two graphs above show what happened once the results started coming in, resulting in huge swings in the odds, and a chance for traders to lock in a profit.

Apply this to betting

This article explains why political betting markets offer plenty of opportunity for traders, due to significant odds movement, created by the volatility of the market.

Once you understand what affects price movement, you can decipher the signal from the noise more accurately, and build a trading strategy to make a political betting profit.

Smarkets offer a number of political betting markets for you to trade on, and the best politics betting odds thanks to our industry-low 2% commission.

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