When asked once about why shares in his company were lagging, former Telegraph proprietor Conrad Black told analysts: The market is always right.
A fairly honest admission by an embattled CEO, but also very correct. When people have to put real money to work, the invisible hand of the market usually prices things correctly. Usually.
In predicting the outcome of yesterday’s UK Brexit referendum, however, the market wasn’t right at all. In fact it was way off.
We’re not talking about the polls taken by various media and professional pollsters, most of which did predict a very close vote, despite giving a slight edge to Remain until he very end. But polls are often wrong.
What we do mean are the bookmakers and oddsmaker venues where traders and bettors were able to put down real money in betting on the outcome of the Brexit vote. Even as late as last night, most oddsmakers were giving 4:1 odds (see ticket above) on Leave – meaning bettors could put down just £1 to win £4 were the #VoteLeave side to win the referendum. Which it did.
As we at LeapRate were reporting throughout the week, traders placing bets in the political binary market created by leading online trading firm IG Group Holdings plc (LON:IGG) were predicting a very similar result to the oddsmakers. As recently as late Wednesday, IG’s Brexit Barometer based on its political binary market was calling for an 81% chance of a Remain victory.
IG’s political binary market, as well as the bookmakers and oddsmakers venues, have historically been fairly accurate at predicting vote results, especially of the binary (i.e. one-outcome) type, such as Barack Obama’s 2012 Presidential election victory, Boris Johnson’s 2012 London Mayoral election victory, and the 2014 “No” vote in the Scottish independence referendum.
So what went wrong here?
Well first off, we’ll say that it wasn’t the bookmakers and oddsmakers themselves who were wrong. Their venues were just pricing the event based on where the bets were coming in. And the bets were coming in heavily for the Remain side.
It wasn’t ‘lack of liquidity’ or light betting. Several media outlets were reporting that the Brexit vote was the largest political betting market in history, with about £100 million expected to be gambled on the outcome.
In discussions we have had with several personalities in the sector, we have heard many explanations but only two make sense to us.
1) Bettors were trying to influence the result, not necessarily bet on it. We think that this is a bit of a stretch, since we don’t think that bettors taken as a whole (and there were lots of them) were looking to ‘sacrifice’ their money in order to move the needle toward Remain, to help influence other voters.
2) Those doing the betting were mainly from the Remain camp. As with betting on sports events, there is always heavy betting for the Home team from its own city regardless of the ‘real’ odds that the Home team will win.
And for those with a lot of money in the UK, the Home team was Remain.
Examining the referendum results by region (see graphic above, source: telegraph.co.uk), most in favour of Remain were young and wealthy voters. In London – the center of the UK financially and the wealthiest place in the UK – there was a very clear 60-40 vote for Remain.
And it was these voters who were placing bets, much more so than poorer and older voters and those in the rural and periphery areas of the kingdom, whom as a whole voted Leave. The Leave people simply didn’t bet as much.
Those with money and assets had the most to lose were Leave to win, evidenced by the drop in the British Pound and in equity markets today. And those people were the ones most likely to place bets on the outcome.
Only the Home team lost this match.
The oddsmakers now have former London Mayor Boris Johnson as the #1 bet (at about 4:6 odds) to become Prime Minister replacing the resigning David Cameron. Indeed, Mr. Johnson spoke first in a brief victory press conference held earlier today by the Vote Leave side, appearing very Prime-Ministerial in his measured remarks. But based on the betting markets’ recent track record, is that actually a good bet?