The market uses play money but the best portfolios win real cash payouts.
An online political futures market that came close to predicting when the government shutdown would end has begun taking bets on who will win the 2016 presidential nominating contests and will soon launch a market on trends in President Obama’s approval rating.
American Civics Exchange is something like a betting parlor for financial professionals and policy wonks, allowing them to gamble on political contests and policy outcomes the same way investors in energy futures bet on whether the price of oil will rise or fall.
The site is operating with play money while it seeks approval from the Commodity Futures Trading Commission to operate as a genuine futures market. If the CFTC gives its okay, American Civics Exchange will enable groups with an economic interest in Congress passing a new tax reform plan or the government relaxing some financial regulation to hedge against negative outcomes the same way oil companies hedge against a drop in prices.
Disinterested speculators will also be able to bet on those markets when they think they can turn a profit.
While the site awaits approval, it has begun offering monthly real cash payouts to the three investors with the best performing portfolios, including a $5,000 payout to the top performer.
While that’s not a substitute for an actual money-driven market, it should give investors an incentive to bet rationally on political and policy outcomes they think are under-valued rather than ones they support ideologically, cofounder Flip Pidot said.
A moderate Republican investor who wants or even expects Chris Christie (currently trading at $30 per share) to win his party’s 2016 presidential nomination, for instance, may invest in Paul Ryan futures (currently trading at $11 per share) because he expects them to rise in December following House and Senate passage of the budget deal Ryan helped orchestrate.
November’s winner of the $5,000 best portfolio contest described his strategy as trying to establish a “fair market value” for each future based on how related securities are trading in real money markets.
New entrants to the site are given $100,000 in play money, which goes up or down with the value of each stock they bet on. A handful of investors have approached or topped $200,000 so far, Pidot said.
Christie futures currently have the highest value for the 2016 nomination on American Civics Exchange, while Hillary Clinton (trading at $67 per share, which equates to a roughly 67 percent chance of winning the nomination) is the far-and-away leader for the Democratic contest. Her nearest challenger, Vice President Joe Biden is trading at $12 per share.
About 70 percent of investors are betting Democrats will retain control of the Senate in 2014 and only 19 percent are betting the party will take control of the House. Those bets coming to pass could affect the likelihood Congress will remain gridlocked through 2016.
The site is also running contests on whether the U.S. government will regulate the virtual currency bitcoin (“yes” is trading at $67, which translates to about a 67 percent likelihood) and whether the federal minimum wage will be raised in 2014 (“yes” is trading at $75 per share, a roughly 75 percent chance).
The CFTC bars regulated futures markets from taking bets on electoral contests. If American Civics Exchange gets the nod to begin placing real money bets, Pidot and co-founder Paul Lang may ask permission to operate some markets that would approximate those contests, for instance predicting whether A Democratic presidential candidate will be polling above 50 percent on Election Day, Pidot said.
Regardless of whether the regulating agency approves some form of election market, Pidot and Lang may continue to operate those markets on a play money basis, both to raise interest in the site and because it could yield insights for researchers.
In the next week or so the pair plans to launch a side project offering data to researchers in academia and finance about betting patterns on the site, some of it for free and some for a paid subscription.
The first time the exchange tested a real money investment was during the government shutdown when it offered a $100 payout to the investor who guessed most closely when the shutdown would end. The market’s consensus was that it would end on Oct. 18. That was two days later than Oct. 16 when Republicans and Democrats in Congress actually reached a deal to fund the government.
Since then, Lang and Pidot have upgraded the site to more closely approximate an actual futures market, allowing investors to schedule sales and purchases of futures based on contingencies. For example, an investor who thinks Hillary Clinton futures are overvalued could schedule a purchase once her futures begin trading at $55 or below and schedule a sale of those futures if they rise above $70.
Most American Civics Exchange investors work in policy or finance, Pidot said, though some of them come from outside those worlds. Many of them are former investors in Intrade, the Irish betting market that gained fame for trading on the outcome of 2012’s U.S. presidential election.
Intrade went offline in March after citing “financial irregularities.” Academics have since found one supporter of Republican nominee Mitt Romney gambled $4 million on the contest in an apparent attempt to game public perception about the state of the race. Intrade was cited heavily by U.S. news outlets in the run-up to Election Day.
“What’s been surprising is how sophisticated a really broad range of our traders are,” Pidot said. “People have emailed us and told us in forums about policy outcomes they’d like to see us use and they tend to be quite well reasoned.”
One trader, for instance, suggested a contest on whether Sen. Charles Schumer, D-NY, or Sen. Sherrod Brown, D-Ohio, will be the next chair of the Senate Banking Committee, Pidot said, reasoning that if Brown gets the nod he’s more likely to break up big banks deemed too big to fail.
“That could be a dry and esoteric item on its own but, as a proxy, it has a specific, quantifiable, industry-specific financial impact , which is nicely encapsulated in a binary policy outcome,” Pidot said. “We’ve had a lot of really clever suggestions like that.”
The Defense Advanced Research Projects Agency proposed a futures market in 2003 to plumb the wisdom of the masses to predict the likelihood of terrorist attacks against certain targets or the assassination of foreign leaders.
The project, called the Policy Analysis Market, was scrapped after Sens. Ron Wyden, D-Ore., and Byron Dorgan, D-N.D., slammed it publicly, arguing it could allow terrorists to anonymously profit from their own attacks. They also said the idea of the U.S. government taking bets on foreign leaders being murdered was morally repugnant.
The 2010 Dodd-Frank financial reform law bars U.S. markets from taking bets on anything related to terrorism, war, assassinations, and anything else that regulators conclude is “contrary to the public interest.”