Polymarket’s Influence on Wall Street’s Election ‘Game Plan’ Grows Despite Red Flags

(Bloomberg) -- Despite widespread skepticism about how much trust investors should place in the signals being sent by cryptocurrency-based predictions market Polymarket, Wall Street is paying close attention to betting on the platform that shows a high chance Donald Trump will win the US presidential election.

While naysayers argue that outsized bets and pro-crypto bias can skew the probabilities being presented on the site, some smart-money traders and strategists are following Polymarket very closely. Vice President Kamala Harris and former President Trump are basically in a dead heat ahead of the Nov. 5 election based on recent polling, yet wagers on Polymarket indicate a 67% probability that Trump will win.

“People are grasping for any type of edge they have because it’s so close,” Keith Lerner, co-chief investment officer at Truist Wealth, said from Atlanta.

Among big-name financial firms tracking the platform is JPMorgan Chase & Co., which has used the odds from the site to build long and short baskets of stocks that are expected to rise or fall depending on the outcome of the election. Rather than imposing their subjective views on which themes will be most-affected by the election results, the bank’s trading desk said in a note that they are using a model that analyzes moves that align with Polymarket probabilities. A JPMorgan spokesperson declined to comment. 

Digital-asset analysts at Bernstein and Standard Chartered also have cited Polymarket probabilities in recent research notes. 

“Something has to anchor sentiment and thus views, so Polymarket is that proxy or benchmark,” said Frank Monkam, senior portfolio manager at Antimo LLC. “Wall Street does game plan around it.” 

There are many caveats, however, to the implied probabilities reflected on the platform. For one, a small number of heavy bettors theoretically can move the market and distort election odds. Last week, Polymarket revealed that a trader who spent more than $45 million on bets that Donald Trump will win was a French national.

Polymarket isn’t available in the US, so wagers placed on the site don’t reflect the intentions of American voters, as crypto analysts at Kaiko Research pointed out. And while betting on the outcome of the presidential election is currently New York-based Polymarket’s most popular offering, with some $2.7 billion in trading volume on the main market, open interest is only about $330 million, according to an analysis on data platform Dune.   

“The market is highly illiquid and has little predictive value on the outcome of the election,” the Kaiko researchers concluded in an Oct. 24 note, when open interest was less than $250 million. “As polls are too close to call and on-chain prediction markets are still in their infancy, it’s important to consider other markets.”

Bias in the website’s user base is also a concern, since Polymarket is favored by Trump-friendly cryptocurrency investors. Wagers on Polymarket are producing implied probabilities that favor Trump by larger degrees than rival platforms PredictIt and Kalshi, which accept traditional currencies.

Adding to the scrutiny of Polymarket: Researchers say the market exhibits signs of wash trading, which is when traders buy and sell shares quickly to create a false impression of heavy volumes. About one-third of the volume for the presidential election winner’s market appears likely to be wash trading, according to an analysis by Chaos Labs. Polymarket also appears to present share volume, or the number of tokens traded, in dollar terms regardless of their price at the time of the trade, according to Chaos Labs. In other words, one traded share is counted as $1, even if the share traded at a price of 0.1 cent. One user had traded a total of $8 in US contracts at an average price of 0.1 cent to 0.2 cents but Polymarket reports that user’s volume as $5,778.62, according to Chaos.

Fortune reported on the research by Chaos Labs earlier Wednesday, along with a separate investigation by Inca Digital that found wash trading potentially comprised a “significant portion of the volume.” A spokesperson for Polymarket did not respond to a request for comment. 

“While it feels like we have real-time data coming from Polymarket, the credibility of that data should certainly be called into question,” said Art Hogan, chief market strategist at B. Riley Wealth, pointing out the handful of accounts betting big on Trump. “That calls into question the validity of the data, so I think being dependent on that real-time data without questioning the validity of that data is also a big mistake.”

Proponents of betting platforms like Polymarket argue they offer a truer perspective than polls, given that there is cash on the line. At Bernstein, analysts led by Gautam Chhugani wrote in an Oct. 29 note that they believe that market forces are at play on Polymarket rather than an intrinsic pro-Trump bias. While the team at Bernstein acknowledges that a small group of large investors can sway the markets in a specific direction, they argue that critics miss that bettors have real “skin in the game.”

“One group of investors can be easily countered by another group taking a contra bet, and some investors would be hurt in the process,” they wrote.

Either way, the attention being focused on Polymarket highlights a lack of trust in traditional polling following some high-profile failures in recent elections. Although 2024 polling figures show Harris and Trump neck-and-neck, experts have called into question the accuracy of the data since survey engagement has fallen in recent years.

“It’s more accurate, it’s more real-time,” Bryce Doty, senior portfolio manager at Minneapolis-based Sit Investment Associates, said of Polymarket. The way voters across different age groups and genders vote on single issues can stray from how someone may answer a poll, skewing what the surveys reflect, he added. 

“Polymarket kind of just cuts through all of that,” Doty said. “If you had to place a bet on the odds, where do people come down? And so it’s a reflection of the general sentiment out there.”

--With assistance from Emily Nicolle and Olga Kharif.

(Adds details of researcher’s report on suspected wash trading in 11th paragraph.)

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