Equity markets may resemble casinos, but thats not an image that, say, the London Stock Exchange or New York Stock Exchange prefers to project. By contrast, Betfair welcomes the comparison. In 2000 the London-based gaming giant, now part of Paddy Power Betfair, introduced exchange wagering. Online bettors seek out odds to their liking akin to stock order matching in a marketplace so liquid that they can cash out at any time, even before a horse race is completed.
It took until May 10, 2016, for the innovation to reach U.S. shores, thanks to a license from the State of New Jersey and a deal with Monmouth Park Racetrack. Soon awareness will grow that the Betfair brand is not just about the horses. The company makes markets in everything from European Champions League football and the NFL college draft to the Eurovision Song Contest and the Academy Awards. And, in a year of high-stakes politics, its Betfair Predicts service has been setting odds on the London mayoral contest (Betfair betting made Sadiq Khan a 93 percent favorite before the voting started), Brexit (69 percent probability that the U.K. will stay in the EU, as of early May) and the U.S. presidential election (Hillary Clinton, 71 percent likelihood, to Donald Trumps 24 percent, also as of early May).
Indeed, Betfair Predicts is just one of a menu of services listed on the companys website. What is an intriguing sidelight for £477 million ($688 million)-in-revenue Paddy Power Betfair is the main business proposition of U.S.-based entrepreneurs who envision significant commercial potential in prediction markets.
It has been an uphill struggle. Online gambling runs up against state and federal legal restrictions, and anything that resembles a futures contract has to pass muster with the Commodity Futures Trading Commission, which is wary of exposing the general public to financial risks of complex products.
Its as if there is a divide in the middle of the Atlantic Ocean, says Greg DePetris, director and co-founder of Pivit, which bills itself as an interactive marketplace that combines public opinion, news and data to produce live odds on global event outcomes. DePetris and others on his team previously worked for Intrade, a pioneering, Ireland-based marketplace that ran afoul of the CFTC and closed in 2013.
DePetris contends that binary options what Pivit trades, on whether an event occurs or not are a viable way to transfer risk from one person to another, in the process providing valuable insights in real time, no harm, no foul.
Prediction market promoters subscribe to wisdom-of-crowds theory: The more opinions that are aggregated, the more accurate the forecast is. It supposedly works best when players have money at stake the proverbial skin in the game. Amid the current U.S. regulatory reality, Pivit offers nonmonetary points and prizes. It passed the 100,000-user milestone in February and has served as a source of data for CNNs election coverage that often proved more accurate or insightful than concurrent opinion polls.
Pivit has company. PredictIt invites trades in real money on U.S. and world politics; it got CFTC approval because it is an academic research project (led by New Zealands Victoria University) and caps individual exposure at $850. Augur, a beta-stage platform running on an Ethereum blockchain, also promises real-money returns and invites participants to create their own markets. Economist Paul Sztorc has proposed leveraging Bitcoin and blockchain in a predictive voting system called Truthcoin.
Both in and above the fray is PredictWise, where Microsoft Research economist David Rothschild pontificates on predictions generated from real-money markets that trade contracts on upcoming events, namely, Betfair and PredictIt.
But it is Pivit that openly flaunts financial-market connections. DePetris, a onetime futures trader, says predictive techniques can yield valuable market-sentiment and risk signals. Investors in Pivit include its software supplier, Swedens Cinnober Financial Technology; fintech investment bank Broadhaven Capital Partners; and REDI Holdings chair P. Howard Edelstein, who bought his shares in a September 2015 demonstration of Digital Asset Holdings blockchain software for securities issuance. Prediction markets are better than polls, Edelstein says: I can see elections being done this way.