Brexit: When gamblers scored over financial markets

Gamblers had a better sense of the prevailing mood on June 23, 2016 — the day of the referendum on the UK’s membership of the European Union — than financial markets, according to new research at the University of Cambridge.

The research shows how financial markets should have predicted Brexit hours before they eventually did, and that betting markets beat currency markets to the result by an hour – producing a “close to risk-free” profit-making opportunity.

International finance markets lagged behind punters having a flutter when it came to getting the right result on EU referendum night, the study says, suggesting that gamblers sensed the ‘Leave’ vote coming an hour before the currency experts in the city.

Researchers from the university’s Faculty of Economics compared the behaviour of the betting market and the sterling-dollar exchange rate from closure of the polls at 10 pm, when odds of 10 to 1 were being offered on Brexit.

Both markets were “informationally inefficient”: very slow to react despite the data already available, as well as that flooding in from vote counts across the country. This meant there was money to be made by trading early on either market, say the researchers.

The study shows the betting market moved to a ‘Leave’ result around 3 am, by which time Brexit odds had reversed (1 to 10). Yet the foreign exchange market did not fully adjust to the reality of Brexit until around 4 am. At 4:40 am the BBC predicted a ‘Leave’ victory.

Tom Auld, lead author of the study published in the International Journal of Forecasting, says: “It looks like the gamblers had a better sense that Leave could win, or that it could at least go either way.”

“Our findings suggest that participants across both markets suffered a behavioural bias as the results unfolded. Initially, both traders and gamblers could not believe the UK was voting to leave the EU, but this disbelief lingered far longer in the city.”

The researchers compared their modelling with gambling and currency market data from the EU referendum night. The website Betfair provided data from their exchange platform – the world’s largest betting exchange – between 10 am on June 23 and 5 am on June 24.

More than 182,000 individual bets were placed with Betfair and over 88,000 trades were made in the GBP futures market during this seven-hour window. Trading on Brexit broke records for a political event on Betfair, with over £128 million wagered including over £50 million that was matched on the night of the vote itself.

First Published: Jan 12, 2019 19:48 IST

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