Election prediction market arbitrage

[backtothebeach]

At https://polymarket.com/event/presidential-election-winner-2024
you can currently buy a Kamala Harris win at 40%, whereas on 

https://www.predictit.org/markets/detail/7419/Will-Kamala-Harris-be-the-47th-US-president
you can buy a "NO" at 51%. Seems like a safe 8-9% return, as she will either be president or not, even if something unexpected happens.

 

Anyone playing this?

**No discussion of politics please!**

[DooDiligence]

[bizaro86]

Matt Levine wrote about this in money stuff. Relevant Excerpt:

 

 

Arbitrage

I wrote yesterday about an apparent arbitrage in US presidential election prediction markets: Donald Trump contracts on Polymarket trade at about a 53% chance of him winning the election, while they trade on other prediction markets at more like a 49% chance.[2] If you can buy Trump at 49 elsewhere and sell him at 53 on Polymarket, you can make a quick 4-point profit.

 

I did not take this too seriously, and you shouldn’t either. I assumed that it probably wasn’t a feasible arbitrage: “I am sure there are some fees that I am not accounting for,” I wrote, “and I don’t know how good liquidity is on any of these places.” Also Polymarket is in theory off-limits to US investors. Those sorts of things — trading costs, liquidity, capital constraints, etc. — are the normal explanations for differences in prices in different locations, “limits to arbitrage” that prevent people from selling the expensive contract on Polymarket and buying the cheap one on Kalshi or wherever.

 

But the other natural reaction you might have to seeing the same contract trade at different prices in different locations would be: Well, are they the same contract? What if “Donald Trump will win the election” is worth more — that is, has a higher probability — on Polymarket than it does elsewhere?

 

That seems implausible: There is only one presidential election, and Trump will either win it or he won’t. But that might not be exactly right. There is some history of epistemic uncertainty when Donald Trump loses elections. Different prediction markets might resolve that uncertainty in different ways.

 

Here is Kalshi’s 2024 Donald Trump election contract, whose rules specify that “If Donald Trump or another representative of the Republican party is inaugurated as President for the term beginning January 20, 2025, then the market resolves to Yes.” Here is Polymarket’s equivalent (but higher-priced) contract, which sounds fairly similar:

 

The resolution source for this market is the Associated Press, Fox News, and NBC. This market will resolve once all three sources call the race for the same candidate. If all three sources haven’t called the race for the same candidate by the inauguration date (January 20, 2025) this market will resolve based on who is inaugurated.

 

But then Polymarket has a link to a resolution contract, and a button labeled “propose resolution.” Because Polymarket, unlike Kalshi, is not exactly a corporation with a representative who will consult some authoritative source and declare the winner — for contract purposes — of the election. Polymarket is a decentralized platform, and its method for resolving contracts is crypto-y.

 

Here’s a sample from Polymarket’s documentation on how contracts are resolved:

 

All market resolution is completely decentralized. A majority of markets on Polymarket are resolved via UMA's optimistic oracle, the rest (some price markets) are resolved via Pyth.

 

Polymarket leverages UMA's Optimistic Oracle (OO) to resolve arbitrary questions, permissionlessly. From UMA's docs:

 

"UMA's Optimistic Oracle allows contracts to quickly request and receive data information. The Optimistic Oracle acts as a generalized escalation game between contracts that initiate a price request and UMA's dispute resolution system known as the Data Verification Mechanism (DVM). Prices proposed by the Optimistic Oracle will not be sent to the DVM unless it is disputed. If a dispute is raised, a request is sent to the DVM. All contracts built on UMA use the DVM as a backstop to resolve disputes. Disputes sent to the DVM will be resolved within a few days - after UMA tokenholders vote on what the correct outcome should have been."

 

So there’s a “generalized escalation game” and a possible tokenholder vote. A couple of readers emailed me along the lines of “I thought about doing this arbitrage, then I read that documentation and got confused and decided not to.”

 

I wrote once about Polymarket’s contracts:

 

Because it is crypto, in fact “all market resolution is completely decentralized” and there is a complex system of bonds and rewards to resolve questions, but it is a convenient shorthand to say “the result of the 49ers/Jets contract is determined by the official final score of the 49ers/Jets game in real life.”

 

That is approximately correct, in the way that it is approximately correct to say “credit default swaps pay out when a company defaults, and make bondholders whole for their losses on their bonds.” That is: Most of the time, you can just think of the thing as reflecting the underlying economic intuition (“CDS is insurance for bonds,” “this contract pays out if Trump wins”). But some unknowable percentage of the time, weird stuff might happen with the payout mechanism. So you can play the game at the basic level, buying the contract to bet on Trump winning (or the bonds defaulting), and that will mostly work most of the time. But there’s always a chance that somebody else is playing the game at a different level, buying the contract to bet on the resolution mechanics.

 

One reader emailed:

 

I'm pretty confident that if Trump "wins" (in the way the mainstream media and most normal people would use the term) Kalshi will resolve the contracts so that my Trump Yes’s pay out, and Polymarket so the Trump No’s do not. ... If, however, Trump “loses,” then I am again pretty confident in what Kalshi will do, but I have no idea how to estimate the risk that some major stakeholders or Trumpy-crypto-types could affect the resolution of the Polymarket contracts, which is where all of my money would be coming from. So the persistence of the arb could just be the market pricing in a roughly 3% risk of an outcome dispute that breaks the Polymarket/Kalshi symmetry on these events, which in the current climate feels not crazy?

 

I truly have no idea if that is right. Presumably the crypto consensus mechanism was built by smart people who want it to reliably get to the right answer. But if you think it has, like, a 5% chance of getting the weird answer, you’d pay more for the Trump contract on Polymarket than elsewhere, because that contract is worth more.

Edited October 17 by bizaro86

[backtothebeach]

Thanks for posting the Matt Levine stuff. Once you take all the complexities into account, in addition to liquidity and fees, there likely is no real arbitrage here.

 

Nuances matter. For example on predictit.org it says

"This market shall resolve to Yes in the event that Kamala Harris becomes the 47th President of the United States."

Presumably this includes Harris becoming president before January 20th if Biden resigns, or something happens to him.

On Polymarket it says: "The resolution source for this market is the Associated Press, Fox News, and NBC. This market will resolve once all three sources call the race for the same candidate. If all three sources haven’t called the race for the same candidate by the inauguration date (January 20, 2025) this market will resolve based on who is inaugurated."

 

So it is not the same definition.

 

[nsx5200]

https://www.wsj.com/finance/betting-election-pro-trump-ad74aa71

https://archive.ph/Gat8z

"A Mystery $30 Million Wave of Pro-Trump Bets Has Moved a Popular Prediction Market: Four Polymarket accounts have systematically placed frequent wagers on a Trump election victory"

 

If there are agents to distort the betting market in order to influence the election, isn't the best way to profit from it is to bet the on the 'real odds'?

[DooDiligence]

I repeat.

 

 

Edited October 19 by DooDiligence

[backtothebeach]

C’mon guys, this thread is about the prediction markets, not about Trump interviews or memes. The last two posts are off topic, I suggest they be deleted by their authors.

[Xerxes]

25 minutes ago, backtothebeach said:

C’mon guys, this thread is about the prediction markets, not about Trump interviews or memes. The last two posts are off topic, I suggest they be deleted by their authors.

 

done

[UK]

1 hour ago, Xerxes said:

 

done

This was a good video, maybe it would fit under market top thread, where I also posted about the possible implications of elections on the markets and it seems so far no one objected (or maybe Sanjeev was just too busy to notice it yet:)).

[backtothebeach]

8 hours ago, Xerxes said:

done

Thanks. Yes, maybe repost in the other thread.

[Xerxes]

17 hours ago, UK said:

This was a good video, maybe it would fit under market top thread, where I also posted about the possible implications of elections on the markets and it seems so far no one objected (or maybe Sanjeev was just too busy to notice it yet:)).

yeah. I thought it was highly pertinent as it was a business audience. But also nothing particularly new. 
 

 

[Xerxes]

I am surprise this was not posted. 
 

 

[backtothebeach]

Part 2 below.

 

He's one of the original "Market Wizards", no? I hadn't heard him speak. Very well spoken, but I'm surprised he didn't mention spending. Musk and the DOGE Department of Government Efficiency to the rescue, ha!

 

As far as election markets, I think he is correct that there is a conservative bias on Polymarket and others. Current odds:
 

 

[lnofeisone]

I'll be the tester. I bet on Kamala on Polymarket. 2 decent bottles worth of wine that might turn into 6 just in time for Thanksgiving and New Year's.

 

No other poll is showing her this off. This might also motivate her base to come out and vote. The r/r is there. I'll let you all know if Polymarket fails on their smart contract end of the deal. 

[bennycx]

As soon as AP, Fox and NBC mention that Trump is "leading the race" or "likely to win" as votes as collected, they can resolve the result to "Yes". That's why the odds on Trump are much higher.

[lnofeisone]

8 hours ago, bennycx said:

As soon as AP, Fox and NBC mention that Trump is "leading the race" or "likely to win" as votes as collected, they can resolve the result to "Yes". That's why the odds on Trump are much higher.

AP, Fox, and NBC have to call the race to this contract to materialize. Statements like "leading the race" or "likely to win" is not the same as "call the race." So it doesn't make sense for this to be the reason for the odds.