Prediction markets and Brexit

My day job leaves little time for blogging, but I want to get this down before the whole topic is history.

The Brexit referendum begins in just a few hours. The Leave side was showing momentum prior to the murder of Jo Cox, but since then, pretty much all polls have been stuck at “too close to call”.

Prediction markets, on the other hand, have indicated a bias against Leave regardless of the polls. As I write, they give Leave just north of a 25% chance.

The question is, why are the polls and the prediction markets so different?

This morning, Zero Hedge (I know, I know, bear with me) published a very interesting article pointing out that the Remain bets are fewer in number but larger in dollar amount.

In a brief Twitter exchange, JC Kommer reminded me that it is normal for the bet sizes to skew as the odds shift. (This is simple math; for a $1 payout at a 25% probability, one side has to put up $0.25 and the other $0.75.) But the skew here is significantly larger than 3:1… So it is demonstrably true that the Leave odds are being pushed down by a comparatively small number of large bets.

When I mention this to family and friends, some say that it is not surprising, since relatively small amounts of money can move these markets around. Remember 2012?. But I am not so sure in this case. Betfair alone has over $70M in matched bets on the referendum, and thanks to arbitrage, manipulating any prediction market requires pushing on all of them combined.

I can think of a few reasons the Big Money might be betting against Leave. Maybe they are the same as the Smart Money, and the prediction markets are just doing the efficient thing. Or maybe they prefer Remain and think that manipulating these markets can tilt the balance in the real world; cf. reflexivity. (People do prefer to vote with the winning side.) Or maybe they are trying to manipulate other assets indirectly, several of which are heavily correlated with these markets.

Of course, these explanations are not mutually exclusive, and I do not ever expect to know for sure. But the bias of the Big Money is surprisingly visible. In the future, I expect they will use a large number of small bets to hide this sort of tell.

[Update 2016-06-23 16:30 EDT]

Betfair now shows $97M in matching bets with Leave at 14%.

[22:12 EDT]

$137M in matched bets, odds essentially 50/50. Holy crap.

Tonight is basically God’s stop hunt