A markets regulator is concerned about bets on election results
A markets regulator is concerned about bets on election results
You can buy a stock, expecting it’s value will go up. Or you can buy a derivative, where you bet the stock will go up or down but never actually buy the stock. You can place a derivative bet on whether Dwayne ‘The Rock’ Johnson will become our next vice president or whether the “Mad Max” prequel will win Best Picture next year.
Financial regulators are worried about these derivatives markets — maybe not the Hollywood example but certainly the election one. For more on how all of this works, “Marketplace Morning Report” host David Brancaccio was joined by Erik Gordon, a professor at the University of Michigan’s Ross School of Business. The following is an edited transcript of their conversation.
David Brancaccio: So our friends at the Commodity Futures Trading Commission are looking askance at this kind of derivatives that looks a little bit like betting. They do it over in England, but what’s the beef here?
Erik Gordon: So the CFTC is worried about bets on the presidential election. They’re nervous that it could affect the presidential election. But there’s some concern that goes back to the election between Barack Obama and Mitt Romney, where people placed bets — or maybe it was one person, we’re not actually sure — at the last minute, big bets that Mitt Romney would win. He didn’t. But the concern is that that bet was placed deliberately to get people to go vote for Romney, to show that maybe he would win.
Brancaccio: So the idea is, this bet, which is public — you could look up how people are betting — made a candidate look like they have more momentum than maybe they did.
Gordon: Yeah, it was thought that it was sort of a signal. And you have to ask yourself, “What’s wrong with that?” What the CFTC thinks is wrong is that it was a phony signal. It was a signal that was manipulative, not an honest signal.
Brancaccio: So the CFTC has already been rejecting applications from some trading platforms that want to encourage this kind of political betting?
Gordon: The CFTC recently revoked permission for a platform. Oddly enough, it was a platform in Australia. You know, we do have one platform: We have the famous Iowa Electronic Markets platform where people can bet on the outcome of the election, because it’s for educational purposes. It’s run by an educational institution. There’s no profit made, and it’s small scale. And it turns out that it’s very useful.
Brancaccio: Interesting. And we should be clear, Americans can still, if they wish, bet on things like sports games in states where that’s legal. You’ve got to do it through a sports book. That’s a different thing.
Gordon: You and I can bet on almost any sports game, and in fact we can bet on the presidential election. We just have to do it through the U.K.
Brancaccio: Yes — where the British seem to relish this kind of stuff.
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