It's not just election betting: Why one expert thinks prediction markets will become bigger than stocks

MW It's not just election betting: Why one expert thinks prediction markets will become bigger than stocks

By Gordon Gottsegen

Event contracts give markets a way to price in an uncertain future, says Interactive Brokers founder Thomas Peterffy

Donald Trump's victory in the U.S. presidential election will have myriad effects on the finances of Americans - from taxes, to tariffs, to stocks and more. But for those who placed bets on the outcome of the election, it had an even more direct impact.

The election-betting markets provided a large-scale test run for event contracts. Event contracts are financial instruments that allow traders to place a binary wager - either a yes or a no - on whether they think an ambiguous future event will happen. Hundreds of millions of these contracts were traded in the month leading into the election. But just because the presidential election is over doesn't mean that these event contracts are.

Thomas Peterffy, the founder and chairman of Interactive Brokers Group Inc. $(IBKR)$, has said that he believes the event-contracts market will become bigger than the equities market in the next 15 years.

"The reason I think that is because the utility it provides to society is well beyond just the investment area," Peterffy told MarketWatch. "It's a vehicle to generate a consensus estimate as to where people think we are going. And as various events occur, people can see the likely influence of those events on the future."

Event contracts can be used to trade on all kinds of future events, including political, economic, climate and cultural events. For this reason, the prediction markets can act as a way to track people's sentiment towards those events before they happen. Peterffy said there is value in knowing what people think about upcoming events, and value in giving them a way to express those feelings.

"Everybody has an axe to grind basically, and everybody has an opinion," he noted. "With these markets, people will enjoy the fact that their opinion matters."

However, there has been some pushback against the belief that prediction markets provide an unbiased gauge of what people think. As investor-advocacy group Better Markets pointed out, people who use these prediction markets tend to skew younger and male. On top of that, people who wager more money have a larger impact on the market, giving wealthier people a louder voice on these platforms.

"Saying that markets for election betting can forecast the future better than others is to say that gamblers are better at predicting the future than most Americans," a Better Markets representative wrote in an email to MarketWatch. "If that were true, why do most gamblers lose money?"

But while bias can certainly creep into the event-contracts market, that's not to say that these prediction markets are going away.

"[The election] certainly publicized the availability of these markets. A number of people who signed up are now participants. Even though the elections are over, they will probably look at other contracts," Peterffy said. He told MarketWatch that he hopes "basically everybody" participates in these markets eventually. With wider access, some of that bias may be removed.

Peterffy expects prediction markets to grow in popularity because of their simple nature: Traders pick a topic they know or care about, and put their money on whether something will or won't happen. This binary nature means that there are less variables to keep in mind when compared to other financial instruments like stocks, bonds or options. On top of that, Peterffy noted that traders can engage with topics they care about, and ignore the ones they don't.

Interactive Brokers offers event contracts through its exchange subsidiary ForecastEx. Other brokerage firms have also partnered with ForecastEx in order to offer these contracts, including Robinhood Markets Inc. (HOOD)

As more investors try their hand at event contracts, Peterffy believes they will come to expect their own brokerages to carry such contracts - just like Interactive Brokers and Robinhood do.

"They just have to hear about it," Peterffy said. "It's going to be a slow process, but it's going to continue to get greater and greater participation. Not only in the United States, but all over the world."

-Gordon Gottsegen

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

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November 14, 2024 06:00 ET (11:00 GMT)

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