Photo-Illustration: Intelligencer; Photos: Getty Images
On Wednesday, a Washington, D.C., court ruled that betting markets were legal in the U.S. — the first time in about a century that the practice was allowed in the country. The road to that ruling, however, was far from a sure thing. In June, Chief Justice John Roberts wrote an opinion that overhauled how a large segment of the federal government operates. The case, Loper Bright Industries v. Raimondo, was one of the more quietly momentous decisions of a historic summer session, overturning the so-called Chevron deference precedent and effectively restraining regulators from interpreting the laws and regulations they are tasked with enforcing. Last week, one of the first major lower-court decisions to come out of Roberts’s ruling dropped, clearing the way for people in the U.S. to gamble on elections for the first time in nearly a century.
The case pitted a New York online betting market against a federal regulator, the Commodity Futures Trading Commission. The betting market, a company called Kalshi, claimed that the CFTC had wrongly stopped trading of contracts on political elections under a mistaken interpretation of gambling laws that equated elections with games. On the side of the betting-market firm was right-wing think tank the Cato Institute, where one of Donald Trump’s largest donors, trading firm Susquehanna International Group co-founder Jeff Yass, is the vice-chair. After a short trial, a Biden-appointed judge ruled that Kalshi, which allows betting on anything from earthquakes to bitcoin, could allow people in the U.S. to gamble on elections. In her decision allowing election-betting to go forward, Judge Jia Cobb cited the decision in Loper Bright, and how it changed how she could consider the law.
One of Kalshi’s biggest investors? Yass’s trading firm, Susquehanna.
Nobody knows how open and legal betting American politics will play out — especially if it kicks off during an election that is hardly in short supply of extreme drama. The Washington D.C. appeals court cleared the way for Kalshi to open up gambling on elections, with just 34 days to go until the U.S. election. The ruling was made in part because of colossal changes to the way that federal agencies can oversee industries, but also because regulators “failed at this time to demonstrate that it or the public will be irreparably injured” by the spread of rampant election betting. Offshore gambling, through sites like Polymarket and Predictit, have been predicting winners and losers for most elections this century, but generally with very light and sparse trading. This decision would likely represent a mainstreaming of the practice.
Not that political-betting markets don’t have some usefulness — they can reflect shifts in popular sentiment and election dynamics faster than scientific polls. Still, how they will actually impact an election once they are fully unleashed remains to be seen.
These political markets all generally work the same way: They allow bettors to put money down on, say, Kamala Harris or Donald Trump winning on November 5, and the balance of both sides ends up being either candidate’s odds of winning. The companies collect fees on each trade, so the more people trade, the more money the company makes. Kalshi has made it clear that the demand for legal betting is an important part of its underlying business. “The election is now 50-some-odd days away,” Yaakov Roth, a lawyer for Kalshi, said during a court hearing in September, according to a transcript. “These markets are time bound. They’re going to disappear in a matter of weeks. So there’s obviously the loss of the business over the next period of time.”
Kalshi is not the only betting market that stands to enrich a major political backer. Polymarket, whose main market on the presidential-election outcome has seen nearly $1 billion in bets placed, received funding from Peter Thiel, as well as venture-capital firm General Catalyst, where Ken Chenault, the former CEO of American Express who backs Kamala Harris, is managing director.
Already, concerns that the markets could be used to manipulate public sentiment are rising. That question looms large among opponents of political betting. Democratic senator Jeff Merkley, of Oregon, told Politico that the decision is a “nightmare” that could allow for wealthy backers to paint a preferred candidate as more likely to win. “Think about that anonymous political power or that anonymous corporate power that says, ‘Not only do we want this candidate to lose or that candidate to win, we’re going to bet on the person that we want to win,’” Merkley told the outlet. “It’s a deeply corrupting combination of dark money and election bets.”
How that would work is less clear. Political-betting markets were a routine part of the elections going back to the founding of the country, before the advent of scientific polling, and were only outlawed after a series of state and federal laws started to clamp down on the practices, said Koleman Strumpf, a political-economy professor at Wake Forest University. “In the early 20th century and the 19th century, these markets were humongous,” Strumpf said. “There is very little evidence in the historical record of market manipulation.”
The CFTC was only able to produce examples of potential manipulation on betting markets, including one apparent attempt that was erased from the markets in about 30 minutes. And highly regulated markets where there is more trading tend to be less susceptible to manipulation than dark offshore ones where relatively small sums of money can move prices around.
Even before the ruling last week, the odds on political-gambling sites have moved more or less in line with those published by FiveThirtyEight or Nate Silver, which use models based on polling data. (To underline how similar polling and betting can be, this summer, Silver joined Polymarket as an adviser.) “The choice is not, do we have prediction markets or not,” Strumpf said. “These markets will exist. One of the lessons from prohibition is that when there’s demand, the supply rises to meet it.”
That doesn’t mean there won’t be problems. The U.K. has recently been going through a series of mini-scandals about political betting, the most egregious of which appears to come down to a political aide to former prime minister Rishi Sunak placing a 100-pound bet on the date of an election before it was publicly known. To that extent, the court has kept open the possibility that problems may arise, and election-betting markets in the age of DraftKings would once again need to get reined in. “Ensuring the integrity of elections and avoiding improper interference and misinformation are undoubtedly paramount public interests, and a substantiated risk of distorting the electoral process would amount to irreparable harm,” the court ruled. However, it acknowledged that troubles could arise from foreign donors, shady campaign-donation practices, or voter confusion and left the door open for the CFTC to find some evidence and try again. “Such a showing is not out of reach.”