Americans wanting to gamble on the country’s next president – or how many tweets the former commander in chief would post – have flocked to a website run by a Kiwi university. But PredictIt now faces closure after falling foul of regulators, Sam Sachdeva reports
A world-leading political predictions market led by a New Zealand university is set to close its doors after American regulators concluded it was breaching its terms of operation.
PredictIt, which has been provided by Victoria University of Wellington since late 2014, is a research project designed to collect data on the accuracy and functioning of prediction markets.
Users (who must be United States citizens or residents) can buy shares on the outcome of a future event, such as whether former US president Donald Trump will be indicted by the start of September, with the ‘winning’ option paying out at $1.
The company had now fallen afoul of the Commodity Futures Trading Commission, which has ordered it to close its remaining markets by mid-February next year.
In a letter earlier this month to vice-provost for research Dr Margaret Hyland, the commission said the university had “not operated its market in compliance with the terms” outlined when it was granted permission to operate in 2014 through what is called a ‘no-action letter’.
Among the restrictions were that the market be small-scale and non-profit, operated for academic and research purposes only, and overseen by the university’s faculty without receiving separate compensation.
PredictIt was also required to impose a limit of 5000 traders per contract, with a US$850 investment limit for any participant in a single contract, and set any fees at a level to cover operating and regulatory costs only.
Mixed accuracy and market manipulators
The market has grown significantly since its launch in late 2014, with tens of millions of dollars in annual trading volume according to Slate and over 115 million shares traded on the outcome of the 2020 presidential election.
However, election night also brought embarrassment when the website crashed for several hours, leaving traders unable to buy or sell shares.
While the university does not make any money from trades, US data and technology company Aristotle manages the market and collects 10 percent on any profits from a trade.
That has led some to question whether PredictIt is fulfilling its non-profit requirement, while others have suggested the high fees may distort the accuracy of markets.
There has also been some debate about whether the outfit has expanded beyond its stated purpose of contracts for political events and economic indicators; during Trump’s term in power, markets were offered on the number of tweets he would post across any given week.
One 2021 paper comparing the accuracy of PredictIt’s markets for the 2020 presidential election with poll-based modelling from The Economist found an average of the two forms of prediction was more accurate than either in isolation.
In a 2018 piece, The Ringer reported on the lengths some traders went to in an effort to manipulate PredictIt’s markets.
One group reportedly created a fake polling company with a made-up poll about Kid Rock’s chances of winning a Senate seat in Michigan, which they shared on PredictIt to move up the price – but was then reported by mainstream media as if it was real.
In another case, a trader had reportedly posed as a polling company insider to send US political news site RealClearPolitics a Photoshopped screenshot of internal information, which it then used in its polling average.
iPredict, a New Zealand-based forerunner to PredictIt also created by the university, ran into its own legal problems.
“Event contract markets are going to expand, they’re here to stay. It’s unnatural to say, well…you could do it [run a futures market] on pork bellies, but you can’t do it on a presidential election – it doesn’t make sense.”
– John Phillips, Aristotle chief executive
Set up ahead of the 2008 New Zealand election, iPredict was forced to close after the Government refused to grant it an exemption from laws against money laundering.
In a statement provided to Newsroom, Hyland said while the university recognised the commission’s authority, “we respectfully disagree with the decision to withdraw the no-action letter and the allegation that the market was not operated in compliance with the terms of the no-action letter”.
“The university believes that it has acted in good faith at all times and that the market was operated within the terms of the no-action letter,” Hyland said.
PredictIt would continue to run its existing markets until the commission’s shutdown date, with no decisions yet made on how markets with end dates after that period (such as the outcome of the 2024 US election) would be settled.
The university had received assurances from PredictIt that traders’ funds were safe, Hyland said.
In an interview with US podcast Star Spangled Gamblers, Aristotle chief executive John Phillips said his company and the university had “tried to adhere to the spirit and the text of the no-action letter”, and he was hopeful a resolution could be found.
“Event contract markets are going to expand, they’re here to stay. It’s unnatural to say, well … you could do it [run a futures market] on pork bellies, but you can’t do it on a presidential election – it doesn’t make sense,” Phillips told the podcast.
A rival predictions site is offering a market on PredictIt’s odds of survival past its current closure date; ‘No’ is currently leading, with 80 percent.