Are political betting markets really moving UK government debt prices? Maybe! Should they be? Absolutely not!
What happened was a tweet:
๐จ ๐๐๐ ๐๐๐๐ developing this lunchtime…
Boris Johnson is now the odds-on ๐ ๐๐๐๐๐๐๐๐ to become the next Prime Minster. pic.twitter.com/nCEZAdK9Kq
โ Betfair Exchange (@BetfairExchange) October 21, 2022
Which was followed by lots of tweets along these lines:
NEW
UK gilt yields have jumped sharply in the past hour or so following news that Boris Johnson is now favourite, in betting markets, to be the next PM.NB all bonds moving a lot today but UK more than most
Chart is the two year gilt yield pic.twitter.com/I48CwbXFWQโ Ed Conway (@EdConwaySky) October 21, 2022
And yes? Maybe? Overlay the Betfair Exchange implied-chance graph for Boris Johnson becoming next PM (red line) onto the 2-year gilt yield (white) and thereโs a sort-of correlation:
(Note: Betfair doesnโt include a timescale on its markets graphs so weโve had to use some guesswork framed around how long the book has been open.)
The fundamental problem here is that peer-to-peer betting markets donโt test public opinion. Nor do they measure changing probabilities in any meaningful sense. Moment-by-moment pricing is much too thin and too susceptible to manipulation, with each price twitch amplified by trend chasing and circular reasoning.
The weight of money that briefly moved Johnson into pole position on Friday is unlikely to have exceeded the low four figures sterling โ though the publicity value extracted by the ex-PM bookmaker is a multiple of that.
Anyone new to exchange betting should also know that much of the liquidity is bot driven (Betfair offers recommendations) and tied to imperfect arbitrages. In addition to a โPrime Minister after Liz Trussโ market there are much thinner books for next Conservative leader, Johnson reaching the 100-plus nomination threshold and Johnson as Conservative leader at the next election. Scalping any potential disconnect (or selling training courses that teach the art) is a cottage industry.
Since we started this post, Rishi Sunakโs probability of winning is back at 60 per cent-ish and the 2-year gilt yield has slid more than 25bp back to its session low. Nothing of note has happened during that period, either in politics or fixed income. But the bookmakers will have made some money, which is nice for them.
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