Will the prediction market live up to the hype?

T.HE line Investment and gambling have always been thin. This is especially true for predictive markets, where punters make bets ranging from banal (“Will gas prices be higher this week than last week?”) To light (“Who will win Best Actress at the Oscars?”). ) Among the types of predictive market money there are some followers of a religion who are excited about the value of pricing at any event anywhere in the world. Such prices capture the insight into the possibility of something happening by forcing them to keep money in place. But critics argue that such markets will fail to grow outside of a particular group, reducing the value of their predictions in the process.

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The controversy has been re-discussed through a new “Event Contracts” exchange – a marketplace where traders can buy and sell contracts tied to event outcomes – run by Kalshi, a New York-based startup. The firm has made headlines because it is the first in America to be allowed to run such an exchange without regulatory limits on the scale of activity – an achievement that its predecessors have long avoided. PredictIt, one of the most popular predictive markets in America, serves as a nonprofit research project limited to 5,000 bets for each event. The size of the bet is also limited to প্রশ্ন 850 per question. Kalshi has overcome such obstacles by consulting with American regulators for two years to gain their confidence, his boss Tariq Mansour said. He believes this could turn event contracts into a real asset class, such as options.

Maybe that’s why there’s so much interest in startups. It counts as a supporter of big names from Sequoia Capital to Charles Schwab. A former member of the Commodity Futures Trading Commission, the regulator of Kalshi, has joined the firm’s board.

Kalshi is also opportunistic. Retailers have moved beyond blue-chip stocks to assets such as alternatives and cryptocurrencies. The company sees the event deal as a natural extension of that curiosity. And Kalshi specifically looks for events that are ripped from the headlines, says its co-founder Luana Lopez Lara. For example, it has launched in the market Us Supreme Court case in December 2021.

In the long run, it hopes to attract more sophisticated investors. Why would they join a seemingly play-like platform? For one, they can make money from lesser-known amateurs. They can use it to hedge against risk. An investor with stocks in the American construction industry, for example, could bet on President Joe Biden’s infrastructure bill to reduce his losses if the bill fails.

But there are several obstacles to greater adoption. One is that there is a fundamental difference between betting on events and betting on stocks Public companies are usually engaged in profitable projects, so the shares give a positive return; For a long enough time, investors would make money even if they chose random stocks. That draws in more participants. In the predictive market, by contrast, the game is zero-sum, says Eric Zitzewitz, an economist at Dartmouth College. The pay-out of a trader is the loss of the other side of the bet.

A big turn-off may be lack of liquidity. Sophisticated investors will be reluctant punters if they cannot easily do big business. In large macroeconomic data releases such as Deutsche Bank and Goldman Sachs, two banks, employment numbers in 2002 – what Kalshi now offers, although only open to large investors – launches a market for trading event contracts. It closed a few years later, probably because investors who wanted to trade on such data were stuck using options and stock indices instead of betting on the entire stock market; Traditional resources had a much larger volume and so business was easier. In many cases liquidity is more important than having a perfect hedge, says a businessman at a large investment bank.

Looking abroad gives a clue as to where the volume may come from. Smarkets, a popular betting exchange in the UK, where regulation is lighter than in the US, has seen the most activity at major political events. The biggest market for the US presidential election in 2020 was the 20m ($ 27m) transaction, said Matthew Shadick of Smarkets. Kalshi’s political markets are also finding some success: it is by far the most talked about whether Federal Reserve Chair Jerome Powell will be replaced by December 2021. Elective markets, though not yet approved in America. Mr Mansour said Kalshi was “working with regulators” to change that. Perhaps the forecast market should open a market to their own success. 3

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This article was published in the print edition of Finance and Economics under the heading “Profit Capital”.

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