Electronic Market Predicts Presidential Election
Editor's Note: A piece from Market to Market on Iowa Public Television.
Both President Obama and Governor Romney were back on the campaign trail Thursday, ending a three-day lull in the wake of Superstorm Sandy.
The storm that devastated parts of New York and New Jersey is blamed for more than 90 fatalities; nearly half of them in New York City alone.
More than 4.5 million homes and businesses, including about 500,000 in New York and its northern suburbs, are still without power.
Wall Street endured its first two-day weather-related shutdown in more than a century due to the storm. But even as Sandy wreaked havoc on the financial district, trade continued on electronic exchanges. And as David Miller discovered, some traders were even speculating on America’s next president…
While the New York Stock Exchange was dormant in the wake of Hurricane Sandy, a stock ticker in the heart of the Midwest was spitting out data from thousands of active trades. But these weren't shares of General Electric or soybean futures from the Chicago Board of Trade. In fact, this market is tied directly to the November elections and is one of the only legal ways to speculate on an intriguing commodity: America's next President.
Joyce Berg, Iowa Electronic Markets: "Just like any other market, it's a futures market—like corn futures market—except the things we trade are political candidate's outcomes rather than the price of corn at some time in the future."
These streaming quotes make up the Iowa Electronic Markets, formerly known as the Iowa Political Stock Market… and it's home to a multitude of potential trading opportunities. Are you bullish that Mitt Romney will win the popular vote Tuesday? Or perhaps a 2nd term for President Obama is more of a risk-off position? Put your money where your political prognostication lies. That’s right, real money is traded here on the University of Iowa campus.
Joyce Berg, Iowa Electronic Markets: "This is our 'Winner Take All Market.' So, in this market, contracts are gonna pay off a dollar for the candidate who gets the largest share of the popular vote and zero, otherwise. The blue line, here, is the Democrat price and the red line the Republican price. What you see here, in the middle, where things are starting to spread out, is during the Republican campaigning where it wasn't clear who was gonna be the nominee. So, here it's Romney, Santorum, Gingrich arguing with each other rather than positioning themselves against the Democrat. Where prices are coming back together in here is after that first debate."
The second, and more heavily traded IEM commodity, is candidates' share of the popular vote. Its graph is tighter, as experienced traders attempt to predict the exact vote percentage outcome on November 6. As of November 2nd, President Obama has a small lead.
This decades-old tradition of political futures markets plays by a strict set of rules. Each account is limited to no more than $500. Shares are initially priced at $1, but the trade quickly establishes their true market value. Since it operates exclusively online, the IEM is open to traders all over the world. Nearly 2,000 currently have positions in the unique market and the university charges a small, one-time fee to cover operating costs.
Joyce Berg, Iowa Electronic Markets: "It's illegal to bet on elections. Right? It's not illegal to have markets. But markets are regulated here in the U.S. so our market, run for research and teaching purposes, we stay small, so we're operating under a no action letter from the CFTC."
But is this political market merely a low-cost tool for professors, students, and political junkies? The data demands a closer look...
In 2008, many well established polling operations predicated victory for then-Senator Barack Obama but the margin fluctuated wildly. According to the Iowa Electronic Markets, its traders proved to be more accurate than polls conducted by Zogby, Gallup, CBS, ABC, NBC, and FOX.
Four years earlier, the IEM correctly predicted George W. Bush's tight 2004 re-election over John Kerry. And in 2000, the IEM correctly picked Al Gore as the winner of the popular vote even though George Bush went on to win Florida and the presidency. Which brings up an important note—the traders on the IEM predict the national popular vote, NOT the Electoral College. So why is this market so accurate? According to director Joyce Berg, real-time data and active traders weed out political partisans.
Joyce Berg, Iowa Electronic Markets: "We do have some traders that trade with their hearts. They don't tend to affect price, though because they'll come in, they'll buy up the candidate of their choice, and then they'll hold that position until the election. Once they stop trading they're not affecting price anymore."
While the University of Iowa site may be one of the few legal political markets trading political futures in the U.S., overseas a "wild west" of online prediction markets has flourished far from the grasp of the CFTC. Ireland-based Intrade advertises itself as the world's largest prediction market with categories ranging from the likelihood of Iranian air strikes to the outcome of the Academy Awards. But there is no greater gambit than the U.S. presidential election where volume exceeds 5 million trades this cycle.
Carl Wolfenden, Intrade: "U.S. elections, really, are our marquee event. It's what brings most of our traders to intrade. You know, Obama has really held a comfortable lead the whole time, trading around the 55 to 60 percent mark. He took off and peaked at about nearly 80 percent in September. He's kind of fallen back down, now, in the market for last 3 or 4 weeks."
Unlike the IEM, Intrade focuses on the Electoral College and does not put monetary limits on account transactions. With only hours left until November 6, Intrade's legion of traders peg President Obama’s chances of being reelected at better than 60 percent. Mitt Romney currently hovers around the mid-30 percentile.
If you want to buy 10 shares of President Obama at the current market price of more than $6 per share...his reelection earns you the maximum $10 per share...more than $30 in this case. But an Obama loss wipes out your total investment. Romney shares currently trade under $4 and have more potential earning power. A 10 share Romney investment could return more than $60 in profit. While a loss, once again, brings you back to zero.
So how does Intrade matchup with previous event outcomes?
Carl Wolfenden, Intrade: "In looking back at past elections in 2004, the market predicted a victory for George W. Bush, which is what happened, and also predicted all 50 states, as well. And in 2008, predicted a comfortable victory for Barack Obama and the market predicted 48 out of 50 states—they got Missouri and Indiana around the wrong way."
Intrade also allows traders to predict any potential outcome of the November elections including this scenario: a Republican President and U.S. House alongside a Democratic Senate...which the market pegs at roughly 15 percent. That’s only a few points higher than Intrade's more peculiar prediction markets including...whether NASA will announce the discovery of extraterrestrial life before the end of 2013...those shares currently trade at 90 cents.
So what is a trader to make of all these markets? Despite their intriguing character, these electronic exchanges feature many of the same risks and rewards as any other market. Nevertheless, it just may be more interesting to predict the next president instead than the price of a barrel of oil.
For Market to Market, I'm David Miller.