A brokerage diving into election betting means the fusion of trading and gambling is complete

Trading platform Interactive Brokers announced that it will be offering forecast contracts on the US election results.

The move is no doubt inspired by a recent court decision in favor of Kalshi, an online prediction market, that essentially give the green light for legal presidential election markets in the US. 

"Forecast Contracts allow investors to act on the most crucial issues shaping our future,” said Thomas Peterffy, Founder and Chairman of Interactive Brokers, in the press release. “These contracts give traders a direct line to market sentiment on elections, helping them manage risk or express views on political events."

Existing customers will be able to access these contracts later today through the ForecastEx exchange using their Interactive Brokers login, according to the release.

I can’t think of any business decision that better captures the current Zeitgeist of America in the 2020s. Americans love to gamble. If you watch any live sporting event, you’ve likely been inundated with ads — both in-game and during commercial breaks — that lay out the odds and where you can go to make a wager.

Americans also love to trade stocks. Retail trading, spurred in part to the advent of commission-free trades, has become at times a dominant force in certain stocks or pockets of the market. Retail volumes spiked during the pandemic, and have stayed above 2019 levels as share of trading volume in US stocks.

Options contracts — and so-called YOLO wagers looking for significant moves in a given stock — have often been a preferred vehicle for retail traders. If you squint, these positions bear a lot of resemblance to prediction markets, because they both have a price and time element: the value of the underlying instrument must be at X by time Y for the bet to pay out.

(Note: at this point, I would be remiss if I did not acknowledge the irony in me writing this, given who signs my paychecks and Robinhood’s role in helping to develop more retail participation in the stock market. Onwards.)

Now, in some respects, the idea of trading as betting is nothing new. There’s no shortage of (usually value-oriented) investor quotes about how the stock market is a casino in the short term and a major wealth-generator for patient capital in the long term. And over at Bloomberg, my old boss Joe Weisenthal has written (convincingly) about how short-term interest rate markets are effectively a prediction market on what the Federal Reserve will have done with its policy rate by a certain point in time.

But what is new, and the common link that really helps define why this has become such a cultural phenomenon, is the ease of access and execution. The barriers to entry have only gone down, down, down.

Historically, you go to the casino, or (since 2018, to any number of these online sports gambling apps), to bet. You go to trading platforms to trade stocks. Now, you can go to a trading platform to do both. This is the next logical step in the fusion of trading and gambling. Any semblance of a wall between these activities is, it turns out, a facade.

I also love the financial innovation here from Interactive Brokers: customers will get paid to wait while holding their bets, an “incentive coupon” of 4.33% annual percentage yield on the value of their position. What a barbell strategy: the safety of having your money effectively in a high-yield savings account with the riskiness of losing it all if the bet doesn’t go your way!

Warren Buffett, the Oracle of Omaha, seems to have called this. Upon reading this announcement, I was immediately reminded of this passage from Berkshire Hathaway’s annual letter (emphasis added):

Though the stock market is massively larger than it was in our early years, today’s active participants are neither more emotionally stable nor better taught than when I was in school. For whatever reasons, markets now exhibit far more casino-like behavior than they did when I was young. The casino now resides in many homes and daily tempts the occupants. One fact of financial life should never be forgotten. Wall Street – to use the term in its figurative sense – would like its customers to make money, but what truly causes its denizens’ juices to flow is feverish activity. At such times, whatever foolishness can be marketed will be vigorously marketed – not by everyone but always by someone.