26: How To Make Money By Betting On The U.K.’s Big Referendum

Executive editor at Bloomberg Markets. So Tracy, on our last episode we talked a little bit about politics, and this episode is about another political event that's coming up, the upcoming Brexit vote. Brexit, of course, refers to this possibility that on June three, when the UK holds its referendum,

that people might vote to leave the EU. And while the expectation and the polls suggest that probably the UK is going to stay in the EU, there is a significant enough debate and doubt about this question that there's

a lot of excitement going into this vote. Have you've been paying much attention to it, you know, obviously I'm in market, so there's lots of people talking about the potential impact on the financial system, on currencies, on the unity of the EU, I also used to live in the UK for about ten years, so I do take

a personal interest in this. So that's a long way of saying yes, yeah, I'm really I'm really fascinated by the story, and I just like, I just love votes, Like, even if I don't have much of a stake in it, anytime I hear of some big votes somewhere, it's like, oh, Philip, your relationship. Scottish referendum. I just love the tension of them because there's all this build up and then bam,

it's over in a second. So it's very exciting. Um today we're going to talk kind of about this bregsit referendum, but we're going to talk about it at a unique angle, which is the gambling side of it. So people are betting on whether or not Brexit will take place, right So unlike you know in the US, we have this sort of weird relationship with gambling where a lot of people like to bet on things, but it's also heavily restricted. There only select locations or select states and select things

you're allowed to bet on. In the UK, they just love to bet on everything and it's wide out in the open. So obviously the soccer teams. They're openly advertised that you can bet on them. It's just much more part of the culture, including betting on political outcomes. Right, So I remember this from personal experience. You could go to the bookies. You could bet on all sorts of sports games. Obviously I did it for the World Cup

in two thousand and six. I remember you could bet on more esoteric things like like you could bet on who the next Pope is going to be, right they said odds for stuff like that, or whether or not Harry Potter is going to die at the end of the Harry Potter series. All sorts of things. And so of course you can bet on political outcome ms in the UK they've been doing it for a long time. And today we're going to talk about the expert in

political betting. His name is Mike Smithson, a former politician. He now runs the website political betting dot com and he wrote a book specifically about how to make money betting on politics. Interesting, so has he used his political experience to become an experience on betting on politics? I guess we're going to find out, and I hope we get some tips on how we can make money getting on politics in the future. What are the tricks to use to beat the system? All right, Mike Smithson, you're

the editor of Political betting dot Com. Thank you very much for joining us. They liked it to be on the program. Thanks Mike. Uh So, Mike, tell us about the gambling market in the UK and the upcoming Brexit referendum. How much money are people betting on this? On this event? This has been the biggest political betting event of all time that I've I've certainly been doing this for about fifteen years and we're getting on the betting exchanges, which

operates where where buyers and sellers come together. We've been getting up to a million pounds a day being traded. And that's extraordinary for this to be happening eight weeks out because the election, of course takes place eight weeks eight weeks today. And simply it's not it's it's taken everybody by surprise this year's scale. Generally speaking with with elections, you nobody really pays any attention on the betting markets still in about four or five days beforehand, so this

is absolutely massive. Is it popular in terms of betting? Because it's basically a binary outcome, it's either yes or no. Does that make it easier to bet on or place odds? And someone, oh, yes, it's It makes it much much simpler because you know, there there is. It gets compared with a general election in the UK, which are quite complicated, where it's much harder to work out the tours might be they won the last election on thirty six point nine percent of the vote, so that was not so obvious.

Wherever something like this, it is blindingly obvious from the polling which way it's going, and it's and people adjust their bets accordingly, and there's a massive amount of polling analysis goes on and people every new poll that comes out, people try to look and seek to undermine it or seek to does it reinforce their positions and so on, and it's it's it is. It is a fascinating period.

All right. Let's back up a minute, because to an American audience, the idea that politics is a big thing where people openly bed and openly tracked the gambling odds is a weird thing. What's the history of political betting

in the UK? How did political events come to be this thing that professional bookmakers and gamblers took interest in a fact it goes back for century a couple of century is that a better used to be illegal except on race courses, but you would have a certain bookmakers were able to operate this again that in the nineteenth century were able to operate credit accounts, and what would happen is that within the sort of London clubs people would be placing pets and that would be that would

be sort of legal. But the big thing that where it took off was in ninety one when betting betting over the counter in shops, betting for virtually everybody was made legal and since then it is exploded. And of course what people love doing is matching their own predictions of an outcome by putting their money on and risking risking their cash on it. Joe was telling me earlier in the segment that you actually used to be in politics.

You were with the Liberal Democrats. Can you maybe make the connection between being in politics and then going on to actually become an expert on political betting? Oh? Yes, I think you understand the dynamics of elections a lot more. You understand the sorts of people who votes. So for instance, at the moment that The critical thing is turn out.

We don't know clearly how many people are going to turn out, but we do know that from my experience on the ground and I just stop being in politics twenty years ago, is that people who voted in previous elections are the ones that most likely to vote in future elections. And if you've got a history of never voting, then the chances are you're not you're going to be less likely to vote in the coming election. So all the polling analysis is really based on that's that's that

sort of that sort of thing. Generally speaking, UK pollsters asked, you know, could you rate on a scale of one to tend whether whether or not you're likely to vote or not? And there are And what we're finding is that a lot more people who are saying they're voted they want to vote leave I'll say, are saying that. But if you then analyze the back ground where they come from, are you their socio economic groups, you discover that they are the most least likely to vote it

to vote in elections. So you've got to sort of balance that down. And that's that's where a debate with people like me, where it comes down to what's the turn it going to be so from your expert analysis and having watched these things so far, where do you stand based on the polling and what you read into the polling? See Mike. This is the point at which Joe asked you for betting toes um Well and and and yeah and how do so? What do you see as the likely outcome of the Brexit referendum? And be

do does your assessment match up with the current adds? Well? First of all, as my own gambling is, I tend to bet on betting, So if I think that there will be a move towards leaving the betting, then I will get on there so I'll be able to get out of that position later. So it's not it's not just a complete simple thing betting on an overall outcome.

But my reading at the moment is that probably we're going to vote to stay in the in the European Union, but I wouldn't be totally totally certain of that, and currently the markets make it about a probability, which I think is about right. So you mentioned something very important that's different from how most people in the US think of betting, which is that when you place a bet on leave or stay. These you have a tradeable asset, so it's not just that you have to hold on

to it and wait till the outcome. But if the odds move nicely in the favor of your bed before then you can lay it off and take a profit before the ultimate results. So it's really much more like a trading than just a pure buy a ticket and then wait until the outcome. That's precisely and as a result of modern betting systems and certainly online systems, those

complexitis can be handled and handled very well. And that's that's one reason that one of the things really given a boost to a political betting, that the ability to to be able to take a view one day, make a profit three or four days later, and then perhaps

bet the other side of the week after. Now you mentioned the extraordinary um, the extraordinary monetary volume of Brexit vetting betting on this referendum, and of course there are a large economic ramifications, financial ramifications, ramifications for sterling the currency specifically, is there much hedging going on, so people are trying to hedge a certain position in the currency market with a binary bet and somehow exploit an opportunity

a discrepancy between the two. I think that there is that going on at the moment, and I think increasingly that that that will take place. I mean, to my mind, one of the best indicators it actually the value of the pound against the dollar and the value of the pound against the your bow. And if there is a confidence that they that that we will vote for remain,

then seems to increase the increase the value. And I certainly, in terms of my own tracking, I watch I watch those Curvency screens as well as I watch other screens.

So I have a sort of existential question, which is, you know, it's all very fun and interesting to watch the Brexit betting, and we're seeing lots of money exchanging hands based on this referendum, But is there any social value to political betting because people often people often characterize the stock market as sometimes a bit of a casino. People are essentially gambling on the likelihood of companies succeeding

or not. But at least you can say that the stock market is diverting money into actual capital, whereas this is pure, pure bedding. Yes, um, I don't think there's any social value at all. I think it's just providing a means whereby people can bet back up their own opinion by risking their own cash and wear their amounts. Yeah, I can't see any social facular at all. Thank you, Mike.

We'll be right back with you. But first a quick word from a sponsor, but knowledge to work and grow your business with c i T from transportation to healthcare to manufacturing. C i T offers commercial lending, leasing, and treasury management services for small and middle market businesses. Learn more at c i T dot com put knowledge to Work. We're back with Mike Smithson, uh, the editor of Political Betting dot com. So we've talked about this upcoming referendum

and what the odds are saying. Do you have any great examples of the markets having gotten it totally wrong in the past, or uh, something in history that really struck you as a particular the important or pivotal moment for political betting in the UK. Yes, Certainly to the last UK general election in two thousand and fifteen, none

of the all the markets pointed to. Perhaps the tour is the Conservatives certainly winning most seats in the House of Commons, but it was very much a long shot that they that that Cameron could win an overall majority, which of course he did. And in fact, even even when the results were coming in, when the exit polls were coming in, you could still get an overall majority.

Was just rated as a ten percent chance, and it took a lot more results to coming before it turned and people realize that, in fact the Conservatives were going to win a majority. That was just that was just a year ago. So this this, this, this does happen. We also know that that people with an interest of trying to influence betting prices in order to create a sense of momentum. We saw that with the two uson

and twelve the White House race. When the old Irish Exchange in Trade, which I don't think it exists any longer, where where where the the the amount of money that was going on Romney was simply out of keeping what the polls were saying, and was also out of keeping. We watched what the London based exchange were showing and there was a quite a large arbitration opportunity. If you wanted to get involved in that. It was just going to ask how big is that cross exchange arbitrage of

different contracts and different trading platforms. That's certainly, it's certainly possible, it's certainly there, but you've got to act extremely quickly in order because deefinitely speaking, a good position like that

won't last very long. Though we we we did get some quite extraordinary betting moves on this on the referendum about last week or the week before last, when the contrary to where the poles were going, the the leavers the leaf the leavers were seeing a huge amount of money going on them, and then then that sort of ceased, and of course in order to if the if you're putting forward a bet that's offering value to the other the other side that's greater than that perhaps it should be,

then people obviously just sweep it up. It's just a normal market operating well. So, speaking of discrepancies across betting platforms, how do the bookies actually make their odds for things that are often not that clear cut? We're talking about a wide variety of outcomes, right, Well, there are two sorts of bookmakers in certainly in the UK there were those which have an exchange which actually seek to bring back, bring forward to people who want to make a bet together.

It's all super fast and operated online. Uh and that that that's that's one thing where the other sorts of where you've got traditional bookmakers who work out and try to thick work out what the odds are. They will put odds up, but they will see if if if they've if they've got it's wrong, they'll find a lot of people coming onto them if or they'll find that

nobody's interested in the prices they're offering. So it's in fact it's working in the same way so that the odds will eventually work out in terms of what what what the market is wanting. So one of the things that always comes up when we discuss these kinds of markets, they're always people who say all they do is track conventional wisdom. They don't have any sort of particular They don't offer us any particular insight. Others say, are the markets are the clearest signal we have? Where do you

come down on this? Do markets do they usually get it right? Are they what is their track record as being a tool to forecast what's actually going to happen? I think the best example of that were in two thousand and fourteen September we had the refermendum in Scotland on Scotland going for independence, and about ten days before that, suddenly we have polls which were showing that the vote

would be for independence. Remember that, And what was interesting is that the betting markets hardly turned on that, but hardly any movement, and and and I think that that represented that there was a different view being taken by gamblers compared with what the polls were showing people. So the pundits were losing their heads, but the gamblers stayed cool and got it right, I think, so, yes, I know, I remember on that one I was I tried to

I saw that pole. I thought, well, everybody's going to be wanting to bet on Scottish such as getting independence. And unfortunately the market didn't move and never had a chance to take advantage of Alright, so we just have a few minutes left. So let's say someone wants to get into political betting. Obviously it would take a long time for anyone to match your years of experience and watching markets. But give us a few tips as a

as a pro in this area. What are some things that people can do to improve their chances of success in these markets. The most important thing is to disregard your own what your own desires are, and it's very easy to think I want to I want Barack Obama to win, I want Donald Trump to win. You've got to disregard that completely, and that is that is quite challenging, because that the chances are. You will then interpret all the evidence in line with what your what what your

desires are. That's the most important thing, and a lot of people find that very difficult to do. Uh. Secondly, you've really got to be watching for value. It's when something comes up and you think, wow, that's a that's a good price. You think something's ten percent chance, and you find that the bets of the pricing on it is only making it a five chance, then you've got a value bet. And that's that that happened. That happens

all the time. Um So it's it's it's looking at it, making your own objective assessment of what you think that the chances of this event happening, and then looking at the betting price. And if if your assessment it's better them the price that you can get from the bookies, then you you obviously bet. If it's not, then you don't any anything else. We're just about out of time. One last tip for people, UM, be careful. That's probably the best advice, isn't it? All right? Mike Smithson and

thank you so much. This is a fascinating topic and a fascinating lens through which we can watch the Breggsit vote over the coming weeks. Really appreciate you sharing your experience on this topic with us. So, Tracy, are you going to place a wager on the upcoming breggs A referendum? Uh? You know, I don't feel a lot of well, I don't feel much of an urge to put my money

where my mind is. I did think it was interesting that Mike brought up this idea that one of the things people have to watch out for the most is to avoid sort of confirmation bias and the idea that they want to put money on the people that they want to see in power. Yeah. I also am fascinated

by how big this particular market has gotten. And I mean, there's no way to know for sure, but it does seem to make sense that for people who have a significant financial stake in the outcome of this referendum, that the size and liquidity of this market not for huge players, but for smaller players, you might want to place a wager to sort of head your exposure to a brexit. Right. I do like the idea that there's a secondary market,

there's all this arbitrage going on. It's really financialized. Actually, yeah, no, that's really cool, and that's one of the things that just generally seems cooler about betting in the UK versus Vegas. In the in Vegas, obviously you place a bed at a sports book and then you walk away and you

see the outcome. But it seems so much more fun if you could then have this very liquid market to trade that ticket, to arbitrage across multiple trading player forums, to invest, to make a bet with the expectation that you're not going to win, but that at some point the odds will move in your favor and then you can sell it to all kinds of It just seems very fun to me, right, And I know I asked if there was a social value to this kind of speculation,

and Mike was pretty upfront saying no, not really, it's basically pure gambling. But I do like the idea that he brought up about how this can have a predictive value and sometimes it does indicate things better than some other more traditional indicators. And of course I think if you looked at a lot of Wall Street products and ask the social value question, you would have just as hard of a time coming up with very true, telling answer. All right, well that is this edition of odd LODs.

Thank you very much for listening. I'm Joe Wisn't though you can find me on Twitter at the Stalwart, and I'm Tracy Alloway. I'm on Twitter at Tracy Alloway. Thanks for listening. Put knowledge to work and grow your business with c i T. From transportation to healthcare to manufacturing. C i T offers commercial lending, leasing, and treasury management services for small and middle market businesses. Learn more at c i T dot com. Put Knowledge to Work.