Friday, 1 July 2016

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 bĂȘte 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 23rd, '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.  Another, longer term bĂȘte noire of this blog is Matthew Shaddick, political oddsman at Ladbrokes.  His job should be to defend political markets, but he does quite the opposite.  He loves to attend highbrow meetings of political scientists, where he routinely announces that his odds are not a ‘reliable guide’ to what may happen, much to the approval of the academics, who dislike betting almost as much as the BBC does.  (It’s a rival interpretation to their clever and very complicated voting models.)  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 Shaddick (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 23rd 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.