Libor Mk2? Were the betting markets on the EU Referendum fixed by The City to manipulate FX markets?

Wild political and economic times breed paranoia and conspiracy theory.  Right now, people are saying the Sunday Times is sniffing around about a big story.  A gigantic story.  Elements in the City attempted to rig the relatively illiquid betting markets on the day of the EU Referendum.  They wanted to send Foreign Exchange markets the wrong way – i.e. strengthen the Pound – so they could sell it at high levels and make a killing when it collapsed with a Brexit vote.  Their losing outlay on Betfair was modest compared to what they could win on the vastly more liquid FX markets.  Is this true? 

Were city traders political villains?

Allegations of market manipulation at Betfair in particular had been circulating on Twitter for weeks prior to the vote.  Arch peddler is a bête noire of this blog, Professor Leighton Vaughan Williams (@LeightonVW), Director of the Betting Research Unit and Political Forecasting Unit at Nottingham Business School  – although he suggested manipulation was in the other direction.  He insinuated Leave were being ‘bigged up’ in the markets, and merrily revealed how he was hoovering up value bets on Remain. 

Just hours before the Brexit result became known on June 23^rd, 'Remain’ traded as short as 1/10, a 90.9% probability that Britain would stay in the EU.  Were the public sucked into believing that Remain were winning, hands down?  Was the social media narrative of a failing Leave campaign - on the crucial day - a bogus construction of some pernicious speculators?  Like lemmings, did punters place losing bets on Remain, thinking it a slam dunk certainty?  One £100,000 bet was reported at 1/10 from a member of the public. 

Far more seriously, did the actions of some corrupt traders influence how people voted?  Was the dark hand of the City attempting a more audacious plot, beyond winning a few quid and queering capital markets, to send voters the wrong way?  News of the odds were public as voters made that thoughtful trudge to the polling booth.  With a Remain victory looking like a near certainty, perhaps voters either wanted to be on the winning side, or felt some new assurance in a Remain choice, given their fellow voters were for staying in, in the very hours of casting their ballot.  If the suggestion of betting market rigging is true, this could be a Libor Mk2 scandal with political knobs on.  The vote for Leave might have been larger.  Our political future could have been deranged.

For all the naysayers, betting markets have a credibility in the public mind.  There is good reason for trusting those bookies.  This blog believes that markets should usually be our most reliable guide to future political outcomes, in fact any sort of future outcome. 

Unlike answering an opinion poll question, the act of staking personal cash can be a tax on stupidity - if you lose.  Bettors pay more attention.  The betting market is like a vast information storage system.  It draws information from every nook and cranny of the public conscious.  Every speech, every interview, every slip, every piece of punditry, every economic indicator, every pub conversation, every grating piece of’ Vox Pop’ from the BBC.  In it goes into the mixer.  And yes, dear old polling goes in too.  It’s trusted.  But maybe less so now.  The verdict on polling's value gets mashed, whisked, sieved and weighed with all other indicators.  A mass of punters attempt to sort the wheat from the chaff, motivated by the power of self-interest.  This is the fullest and most reliable aggregation of our public collective wisdom. 

No one television commentator could compete with it.  During the campaign, Laura Kuenssberg et al. should have just read out the moving odds for Remain and Leave, with their implied probabilities to make it really simple, and let it rest there.  That would be our best guide to what was going on.  Unfortunately the professional journalists don't talk odds much, particularly the lofty TV ones, it usually gets in the way of their own take.  They also loathe betting as a dirty business, probably thinking they have a responsibility NOT to mention it.

But what if this actually beautiful process of public judgement making, political betting, was being buggered by nefarious capitalists from the City?  Did it happen?

The short answer is that only Betfair and the bookmakers will know who was staking what.  I worked at Betfair and others.  They know.  Just as they have been excellent in addressing match-fixing questions, the onus is on them again to tell the public what was going on.  Prior to the investigation however, I will make two points in defence of betting markets.

Firstly, this is indeed a mad and paranoid story.   The problem with it – as a conspiracy – is why would a small group of traders waste probably hundreds of thousands of pounds, probably millions, to provide a indivisible benefit for many other City speculators aware of what was going on.  How was it all organised?  And how could they be so sure that Leave would win?  The final polling was dire for Leave.  Word has it the City ran its own exit polling, but decent exit polling on a one-off Referendum is beyond the capabilities of even the best British political scientists; not just hard but hideously expensive too.  Any investigation needs to examine whether there really was exit polling conducted privately, and what the results showed.

Secondly there is a lovely and even more paranoid theory to counter the market-rigging one.  Bookmakers have been getting increasingly peeved off about the Murdoch press, particularly the heavyweight Times and Sunday Times, running endless stories about problem gambling.  23 year old accountants jumping to their death after losing money playing online poker, and communities being destroyed by fixed odds betting terminals.  It's bad copy.  I’ve heard rumours – and they are just that – saying Rupert Murdoch is trying to weaken the existing industry prior to introducing his very own betting service in association with The Sun – “Sunbets”.  As yet, Betfair has largely escaped the campaign, but this new story isn't great for them.  

Personally, I don’t believe this particular conspiracy for a moment.  If the Sunday Times run the story they will believe it’s true.

Without pre-judging any possible future inquiry – and leaping forward several steps into the future, this is what I think actually was wrong with the betting markets – although I do not know for sure until Betfair and bookmakers reveal more information.  ‘Wrong’ is also a matter of degree.  Just because Leave drifted to 8/1 on polling day doesn’t mean that the market got it wrong, any more than the hugely liquid Grand National market got it wrong when Rule the World romped home at 33/1.  Markets aren’t wrong just because an outsider wins.  They are only wrong when outsiders win repeatedly and the fair share of favourites fail to win in their turn, at a rate implied by their probability expressed by odds.

To assess the value of political betting as a predictor of political events (against polling), the researcher must use long-term data, i.e. a large number of occurrences.  A large body of global academic research that shows that betting wins in the long run, and is indeed devastatingly accurate, material which I will gladly share.

But a nagging trend has indeed developed of outsiders winning political betting contests of late.  It is interesting.  Think of the 2015 General Election, not just the surprise Tory Majority, but the extraordinary performance of the Scottish Nationalists.  Ladbrokes may have lost up to £2m on that election, and William Hill reported a £1m loss at their official results.  Think also of the remarkable victory of Corbyn, once priced at 1000/1 on Betfair.  And Trump.  All losers for the bookies.

Bookmakers seem to be increasingly embarrassed – looking weak.  They have started to produce some proper hogwash to explain these results.  Worse, they have turned on their punters, their very own customers, to excuse their prices.  This is the official Ladbrokes explanation for the failure of their markets on the EU Referendum – and it's sad a once great company has descended so far:

 “there’s a huge amount of wishful thinking going on in people’s brains when they’re trying to assess the probabilities of these results”. 

So yes, their punters are stupid.  Ladbrokes’ founder, Cyril Stein, would be horrified.  Unfortunately, this sad explanation does not help explain why Remain was as short as 1/10 on the day of voting – assuming that their wishful thinkers were the more emotional (less rational) Leave punters.   Another now more complicated explanation now comes into play from Ladbrokes, equally damning of their own markets.  The problem Ladbrokes says, was a majority of (“wishful”) punters bet on Leave, but the really big bets came in for Remain, and the majority of the staking.  Again, Ladbrokes present a picture of their markets working badly and their punters unable to react correctly to prices.  We are also not told the vital information:   What was their company position on the main EU Referendum result, each day and overall?  Of course we would expect more money to be staked on an odds on favourite (Remain) than an outsider.  Despite this, Ladbrokes could still be taking a position with Leave, offered at longer odds.  

Were they with Leave or Remain?  Can the pricing of the Referendum better be explained by the bookmakers than the punters, including from the alleged nefarious City types? 

One thing is for sure, we know that Ladbrokes fancied Remain, revealing in the Times Red Box expert survey a heady prediction for the ‘inners’ of 57.01% (they got 48.11%).  I am guessing that much of the explanation why Leave was always too long in the betting – as I repeatedly mentioned during the campaign @mincer and see this blog passim – was that the William Hill and Ladbrokes wanted to bet against Leave, themselves.  Not content to eek out a nice little earner on a vast turnover by jobbing the market (i.e. balancing an equal profit on Leave and a profit on Remain), they wanted a little gamble of their own.  When the money came in from Leave punters, they didn’t move the price commensurately, as a neutral market operator would, but kept Leave longer and more attractive than it should have been.  When some lumpy bets came in for Remain on the day – they collapsed the price to unrealistic levels, really bad jobbing probably.  

Assuming the role of bad political scientists rather than proper bookmakers, they didn’t want to lay this money for Remain.  Graham Sharpe, Head spokesman at Hills, confirmed to me during the campaign that his company was taking a position with "Leave".  It wasn’t the “City Traders” who were taking the position – it was the bookmakers – just has they had wrongly against a Tory Overall Majority in 2015, Corbyn and Trump.  If there was “City money” entering the market on the day, the bookmakers accentuated the effect of it on the market price.  This may have had an effect on the Betfair market, because of course they are linked.  Any arbitrage between the two will be filled in. 

Only complete openness about their trading positions and P & L from Ladbrokes, Hills and others and other trading information from Betfair will resolve why the EU Referendum betting market on Thursday 23^rd June behaved so oddly.  It is extraordinary that in such as tight two-horse race, at one stage, the betting markets suggested Remain had over a 90% chance of winning - as I pointed out on my Twitter account at the time. 

Of course this would have been an important indicator to global financial markets.  The question remains:  was the price of 1/10 a reflection of the weight of genuine money from the public for Remain, money from the City for Remain - either legitimate hedging or attempting to rig the market, or the traditional bookmakers taking fright and protecting their position - which favoured a Remain outcome?  

And was there any secret exit polling conducted,as alleged by city institutions?   The allegations circulating are completely unproved, as our my suggestions that the bookmakers were the real reason why the odds were all wrong, not the massive crowd of punters.  There may have been some big bets for Remain, from whom we do not know.  At the moment, there are more questions than answers, and openness from bookmakers is needed.

YouGov deserve credit for showing the weakness in telephone polling methods during the EU Referendum

British pollsters face a crisis of confidence. Witness the Sturgis Report (Jan 2016) on their woeful 2015 General Election performance, highlighting response error, sampling error and even herding between the firms.

However, for the (online) pollsters, EU Referendum performance was much better, particularly from the most progressive firm, YouGov.  They courageously and correctly deconstructed Populus' (telephone) polling before the result.  See their excellent critique here.  This was perhaps the most useful bit of academic analysis published by anybody during the entire campaign, and boldest.  And the final result supported their claims. Telephone polling was collectively wrong, often predicting Remain 10+ points ahead, before mysteriously converging on the online firms/ numbers at the last minute.  More herding methinks. The online pollsters had generally seen the race neck-and-neck.

The divergence heaped more harm the industry but the telephone pollsters should take the blame. Rather pathetically, Populus had released a telephone poll in February with 44% graduates, and 46% in March in its weighted sample.  Clearly their telephoned graduates responded in greater number, yet despite 'education' being the top demographic indicator of EU support, more important than age or class, Populus didn't weigh the interviewed graduates to the national average of 27%-33%, (the real number in the U.K. from the 2011 Census and adult population surveys.)  This showed how fallible polling can be to expertly devised weightings and assumptions

The disparity between telephone and online polling was the most pressing quandary for political science during the Referendum.  But no one (to my knowledge) adjudicated between YouGov and Populus, bar Matt Singh who gave weak support for telephone polling, proving all winning streaks come to an end one day.  In truth, the likes of Mike Smithson and co, weren't prepared to stick their necks out on something they struggled to reach a conclusion on.  

Very few got to hear about this major fallout between YouGov and Andrew Cooper of Populus, the retained pollster for Remain, and his new side-kick, Peter Kellner (pictured).

Remarkably, Kellner was President of YouGov until just two months previously, but now began railing against the whole online polling model that is championed by YouGov.  Stunning broadsides flew at YouGov methodology from the ex YouGov figurehead.  Ultimately, YouGov won this tiff on the basis of the final result. They have the best staff (like Joe Twyman, Antony Wells, Stephan Shakespeare and many others) and the strongest reputation - only enhanced by the EU Referendum.  Kellner's status meanwhile, despite his undoubted eloquence, continues to nose-dive.

Bet "Leave" at 11/4

In recent days, several people have asked for my view on the EU Referendum result.  I have spent three years on a PhD looking at EU support in Britain and a lifetime in political betting, on and off as a political odds-maker.  I've also taken some serious hits.  The worst was a £16k loss on the 1997 General Election opposing the Lib Dems.  As a spread bet, for every seat they won over 30, I lost £1,000.  They got 46, including winning Winchester by one vote.  The first one vote winning margin since 1867.  Even today I wince as I drive past that place on the M3.  So here we go again.

This blog believes in 'crowd wisdom' as expressed by betting market indicators.  On a liquid market like the EU Referendum, we should expect the market to be a reliable guide as to what may happen.  Taking it on with a bet, together with the bookmaker margin, is unadvisable.  Unless you have a strong view that is.  And I think there are two things badly wrong with the market at the moment.

The first is bookmakers are taking positions with 'Remain'.  It is likely that Ladbrokes and William Hill have £1m+ liabilities on a 'Leave' win.  There are plenty of Leave backers out there, but generally the layers are not prepared to make commensurate changes to their odds when accommodating them.  This means their prices don't actually represent market sentiment, but their own trading floor views.  We've seen this before with the General Election, Corbyn and Trump, and each time they have come unstuck.  They think they know better. 

From talking to the current odds-makers, and seeing them operate, it's clear they are being 'advised' by political experts - academics and the like.  Matthew Shaddick, the political man from Ladbrokes, likes pitching up at academic conferences.  In an unholy alliance, he denounces the value of his customers opinions in front of an appreciative audience of expert political scientists, who also loathe betting as a predictive indicator.  At one conference before the 2015 GE, he stated that "political markets are not a good guide to what may happen".  So better take the expert view instead, the complicated academic models and frigged polling methods, with thousands of highly breakable whirring parts.  Received academic wisdom tends to think that the 'Government cue' is still strong, like it was in 1975, and that voters are uninformed and uninterested on Europe and will fall into line.  My own research of British Election Study data from 2008-2012 shows the opposite.  Voters are increasingly independent minded (volatile) and have responded to the crisis in the Eurozone (something Leave should be focusing more on).  Since 2000, EU referendums in Holland, France and Ireland have all gone against the pro-EU Establishment, much to their surprise.  Who is to say it won't happen likewise in more Eurosceptic Britain?

The academic experts and even pundits like politicalbetting.com are also poor oddsmen.  Firstly they are inherent favourite backers.  That is what betting unsophisticates do.  They think 'what is most likely to happen?' and go for it.  A bird in the hand is worth two in the bush.  But betting is about assessing chances against odds of reward, in short, value.   

Secondly, all the noise you hear on Twitter is either from fruit-bat 'Leave' evangelicals or reasoned liberals.  That is the image anyway.  Academia - showered in EU money - is pro-remain, and hangers on to their output, particularly those noisy on Twitter, like politicalbetting, are well known liberals too.  In short, 'informed social media' doesn't want Leave to win, and doesn't want to back something it despises.  The same happened with the Tory victory, Corbyn and Trump, whilst the betting public felt differently - and won.  Ladbrokes lost £2m on GE 2015.  An extraordinary failure when they had so much two way business to eek out a profit.  This was a golden opportunity for bookmaking to prove its worth against polling, instead it just followed it, breaking the golden rule that the market knows better than a handful of traders.     

Lastly, I think a bubble for Remain is developing.  This is most evident in the Times Red Box Survey, where the great and the good of British Politics (and the public) are asked to submit their predicted vote percentage for Remain (average is 54%).  It's revealing.  For example, Matthew Parris thinks 62.5% which proves he is unhinged.  But surely, people are going to be influenced by what others have entered, even Parris and a phalanx of other liberal insiders, kindly marked up with an asterisk on the site so we can pay them special attention.  The exercise lacks one key criteria for a 'Wise Crowd' - independence of judgement.

Then there is Betfair.  People will say that this is a perfect betting market and it doesn't involve bookmakers taking positions, advised by their academic advisors and powered by their own egos.  This is just wrong.  The exchange market reflects the strong traditional fixed odds market.  Arbitrages between the two are soon filled in.  And the old world bookies are far less likely to move their prices.  This is why they build up their liability positions.

Set against the noise of this betting event, and structural reasons why bookmakers may be underestimating Leave chances in their prices, there is some solid evidence to examine.  Pollsters are all over the place and have lost credibility.  But one thing about their averaged results can be relied upon - they will be consistently wrong over time.  We may not know just how well Leave and Remain are doing at any one moment including now, but over the days and weeks we can see how things are moving for the two camps (assuming no methodological changes by the pollsters).  Here there is a clear trend.  Leave are winning this campaign.  Look at the remorseless rise of the red Leave line to now challenge the blue Remain line.  This trend matters hugely, because unless there is some fundamental change to how the campaign is being conducted, it is likely to continue.  And that means - from the graph below (courtesy of Prof. Harold Clarke) - Leave could soon start to overtake Remain.  (Update 13/06/2016 - And they now have).

(Updated 13/06/2016)

So what is the advice for someone who wants a bet?   Look at Oddschecker.com.  11/4 is generally available about a Leave vote.  Have a go and pick up a free bet at the same time.  These odds suggest there is only a 26.7% chance of Leave winning, and 73.3% chance of Remain winning.  It is worth checking these percentages against the full gamut of prediction percentages on the excellent https://electionsetc.com/.