Thursday, 17 April 2014

A note of caution about political betting markets being our guide to British politics

In Mike Smithson's recent post, he draws conclusions on the relative public interest levels in different political events, derived from betting market volumes published on Betfair.  Being a former trader of political markets at the Sporting Index spread betting firm (albeit a very unsuccessful one) and an ex-employee of other betting firms for many years, I've set out below a couple of concerns about the noisy claims about British politics that flow from analysing 'punting activity':

1.  As with any betting market, a 'Pareto rule' applies.  A very high percentage of turnover is likely to be the responsibility of a handful of customers.  For this reason, using turnover as an indicator of wider public salience is fraught with danger.

The Pareto effect varies between gambling products.  In an online casino as much as 95 per cent of the turnover may be generated by just 5 per cent of the customer base (a fact that tells you much about the appeal to hardened gamblers of online roulette and blackjack - and why low staking limits on fixed odds betting terminals are so heavily resisted by the operators).  In the slightly more egalitarian world of sports betting there might be an 85-15 proportion; maybe with political betting the ratio is more equal still.  Betting companies see quite a few 'political geeks' open accounts solely to bet on politics, more out of that passion than a wider interest in gambling.  They are generally low-staking, risk-adverse types who enjoy picking off the big firms in esoteric events like by-elections.
Consequently, political markets see a majority of small wagers - but the important point is that the overall turnover-level (as in nearly all betting markets) is still largely determined by a very small proportion of high-stakers. Turnover is therefore often an unreliable measure of mass-interest in the political event.  

These dominant high-end players are more interested in the attractiveness of the betting proposition than a fascination with the political event itself, although they may share that too.  This is probably why the Scottish Independence Referendum is a relatively high-turnover contest (relative to other political betting heats - but not betting markets generally which I come to below).  It is a two-horse race with a clear (but drifting) long odds-on favourite (No) for chunky players to get 'stuck into'.  There is anecdotal evidence of big odds-on punters refusing to countenance the wild and shocking proposition that Scotland will vote to become a separate country and are lured by the 20-30 per cent return on their stake that it won't happen.  How much this is irrational 'heart not head' betting is the truly interesting aspect of the market.  I remember during the 1997 General Election a similar phenomenon, when I was involved in managing that market for Sporting Index.  The (then) largely Tory supporting stock-broking client base of the city spread betting firms struggled to conceive of a 100+ Blair majority.  It caused arbitrage situations between the ultimately victorious IG Index layers - who took a bold and vindicated position with Labour (their market-maker was Patrick Jay, grandson of Labour premier James Callaghan), and the rest of the industry who moved their prices largely in response to customer demand - diverging all the time from the opinion poll predictions.

By comparison to the Scottish Referendum, the Euro Election for serious gamblers is an all too trappy three-horse affair, fraught with uncertainty and a lack of reliable form.  If it were a horse race, it would be one of those muddling early season handicaps on heavy ground, with all the runners 'first time out'.  Then throw in the UKIP runner, a classic 'dark horse' if ever there was one.  Formbook defying UKIP, with disputed performance on the gallop polls (sorry ed) - is a betting proposition for the brave-hearted only.   

2.  Too many wider inferences about British politics are drawn from low volume, low liquidity political markets that exist for the purposes of bookmaker public relations rather than their direct profit - and also the advantage of other political interests eager to create a bandwagon for their runner. 
Let's be absolutely clear here.  Most political markets are tiny economic events relative to sports markets and horse races. accurately report that over £250,000 has been matched on Betfair on the Scottish Independence contest, and claim that by the time of the vote it could be millions, which I don't doubt.  However this is a fraction of what would usually be matched on an individual football or cricket match covered on TV.  What is more, the 'matched bets' measure refers to the amount of bets that have been agreed on a betting exchange, where many punters open and close positions again and again to lock in a small profit or loss, inflating an aggregate figure that isn't turnover as you would imagine it in a high street betting shop.  Secondly, one or two large wagers struck with the traditional bookmakers may well have been 'laid off' on the exchanges, inflating the matched bets figure.
With low-liquidity markets, very small volumes drive relatively large changes in price.  Too often we hear on Twitter from politicians, pundits and the betting companies themselves that there has been a 'significant move' for a political runner.  Yet in reality this price change is often next to meaningless.  It is likely to be either a nervous response from an uncertain bookie to a small volume trade in a market that itself is low on volume and confidence.  Then it becomes a stoked up revelation from a eager PR man, either a bookmaker seeking publicity or a political interest hyping their own success. The markets which are particularly prone to this are the weakest ones of all - such as 'next Cabinet Minister to leave', the 'next leader of a political party' or by-election results.  Again and again we get this spin effect, linked up with some recently occurred political event, rather like the reporting of suspect short-term opinion poll 'bounces' that don't really demonstrate any significant long term trend but merely 'noise' in the system.  There seems to be an unhealthy lack of checks and balances among all those involved - the bookmaker, the pundit, and the political interest - without any input from someone who knows about the weakness of political markets, to blow the whistle. 

In the world of opinion polling, the likes of the Polling Observatory and Anthony Wells provide some corrective rigour to those who might misuse the numbers, but as for the public debate involving political betting, well it resembles the Wild West where the loser is the uninitiated layman.  Too often the conclusions become the contorted plaything of those with an axe to grind. 

So why has yesterday's article by Mike Smithson got my heckles up?  Well it's a good example of how the operation of political betting markets are abused by pundits in making a political point - in this case the inference that the wider public don't care much about EU matters.  The contention is this: the betting volumes on the Indy referendum dwarf those on the Euro elections which, according to Mike Smithson "really does suggest that the people of Scotland, where I am at the moment, are taking a huge interest in September’s vote. Their future is at stake."  No doubt the Scots do care deeply about this big decision (look at the betting on referendum turnout), but the conclusion made from the betting market volumes on Betfair is utterly invalid.  Then the cheeky political point follows (from a self-confessed Lib Dem and probable Europhile).  With somewhat mock surprise, he wonders why there is not more interest in the Euro elections, "despite a possibility that the purples could come out on top". Once again, through subtle suggestion we are being reminded, via a bogus contention that bet volumes relate to wider political interest, that public salience for anything Euro is low, perhaps even among UKIP supporters. (Remember also how UKIP voters are more interested in immigration than the unrelated? EU question).

So how can political betting inform us about our politics? 

There is much to be said for the idea that 'money talks'.  Political betting could be a reliable guide, informing on changing public narratives towards political outcomes, but only when the markets are sufficiently liquid and recognising that key high-end punters are not representative of the general public.  Divergences between political markets and opinion poll trend lines raise interesting questions of each predictor.  General Election markets have the greatest volumes, particularly closer to the event, and therefore greater reliability and usefulness.

In respect of judging political interest in events, 'number of bets' rather than 'volume of bets' might be a slightly better indicator, but I don't think it ever gets published by any betting company.  And there is a good reason for this.  It would reveal just how low salience political markets are at the mass-level, belying claims made in press releases.  When vague references to the number of political bets taken is revealed by bookies such as 'we have been inundated with wagers' or 'flooded with cash' - I feel a burning sense of scepticism.  If only we could interrogate their backend bet capture systems.  It would be nice to know just how many Scottish punters have engaged as Mike S suggests they have, but how will we really ever know?  I would hazard a guess of a hundreds across the board via traditional online betting sites - at the very most - not thousands.  I would love to be proved wrong and I don't really know these days, but don't be fooled into thinking that for the Scots the Referendum is the great betting event to rival even a Scottish Grand National at a soggy Ayr.