Politics Could Present Problems For Prediction Markets

Prediction markets are making a lot of noise of late with sports, jumping into a realm previously reserved for sports betting. And keep in mind, widespread legal/regulated sports betting is still relatively young in the United States, only expanding across the country since the 2018 overturning of PASPA.

But prediction market operators such as Kalshi and Polymarket are also stepping beyond sports, into pop culture, and very much into everybody’s favorite opinion-driving realm: Politics.

A recent report from The Hill highlights potential pitfalls of prediction markets on politics and what should happen to avoid those pitfalls.

Special Interests Intrigue

Special interests are tied to the hip of U.S. politics. As John Farmer and Alex Goldenberg reported for The Hill, big-dollar donors, political action committees (PACs), and other politically motivated actors could stand to profit from the outcomes they are already working to shape.

Prediction markets enhance that potential profit motive. As the report notes, prediction markets are a mechanism that gives well-capitalized actors a direct profit motive to manufacture the future they trade on.

For example, a well-funded PAC or even a wealthy individual could buy a large position on an outcome and potentially skew the market by the size of that trade. Farmer and Goldenberg cited the 2024 presidential election, in which one trader using four accounts had $30 million on Trump at Polymarket.

At one point, that represented 25% of all Electoral College contracts at Polymarket. The market had to move in response to such trading, and of course, the media in turn cited the changing odds.

The report noted that the issue in that instance is that “concentrated wealth — not the wisdom of crowds — was moving the price.”

Another example cited is the current South Carolina Republican primary for governor, between Lt. Gov. Pamela Evans and Rep. Nancy Mace. “Both candidates [are] treating anonymous market prices as evidence of momentum without any way to know who is behind them.”

In other words, as Farmer and Goldenberg wrote, the prices can be a reflection of institutional hedging, rather than collective belief in an outcome.

Manufactured Result

Big money being traded on political prediction markets could indeed be a hedge, an insurance policy against a possible unfavorable election result. But it could also be utilized to help produce a favorable result.

The Hill Report’s hypothetical: A well-moneyed PAC or major-dollar donor places a large position on a favorable electoral outcome, then deploys comparable resources to influence that outcome.

Farmer and Goldenberg note that current prediction market regulation doesn’t solve this issue. The report recommends heightened transparency on who is trading and why. Specifically, the authors want to see position disclosure thresholds, mimicking the Securities and Exchange Commission requirement for large equity stakes:

“We need counterparty classification, so the public can see how much volume comes from retail participants versus corporate hedgers. And we must concentrate reporting, so that a single actor accumulating an outsized position on a political contract triggers disclosure.“

Relatively speaking, sports betting in America is still in its infancy. Prediction markets on sports and politics are even younger.

Farmer and Goldenberg highlight that there are some necessary solutions for political prediction market growing pains, in order for those markets to prove trustworthy to everyday retail customers, rather than just a bastion for big-moneyed interests to influence outcomes.