Economists at the University of Cambridge have completed a study which shows gamblers sensed the Leave vote would win up to an hour before currency experts in the City.
They claim this created a window of “arbitrage” during which the price difference between betting markets and foreign exchange markets would have yielded a 7% return on the pound.
However they also found that both markets were what economists call “informationally inefficient”, meaning slow to react to the data already available to them.
This meant there was money to be made by hitting the bookies or foreign exchange markets earlier than traders actually did.
According to the study, the betting market was prepared to move to a Leave result by around 3am in the morning – flipping from 10/1 to 1/10 in odds.
Yet, the foreign exchange market hadn’t adjusted to this until an hour later at 4am, and it wasn’t until 4.40am that the media began to predict a Leave victory.
Because of the differences in efficiency between the two markets, this golden hour meant that selling £1 and hedging the result of the referendum would have made up to seven pence of profit per pound sterling.
This was what the economists called “a significant ‘unleveraged return’ that, in theory at least, could have seen astute traders make millions”.
According to the researchers their findings support claims that gambling, or “prediction markets” as economists call them, may provide more accurate forecasts of election results than experts or polls.
“Clearly, punters trading on Betfair are a different group of people to those dealing in FX for international finance,” said Dr Tom Auld, lead author of the study.
“It looks like the gamblers had a better sense that Leave could win, or that it could at least go either way,” said Dr Auld, who published his study in the International Journal of Forecasting.
“Our findings suggest that participants across both markets suffered a behavioural bias as the results unfolded,” Dr Auld added.
“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.”
“If there is a second referendum, the vote should be better understood by markets – in line with a theoretical concept called the adaptive markets hypothesis,” added Dr Auld.
His team’s study found more than 182,000 individual bets were placed with Betfair and over 88,000 trades were made in the GBP futures market during the night of the referendum vote counting.
“Trading on Brexit broke records for a political event on Betfair, with over £128m wagered including over £50m that was matched on the night of the vote itself,” said the team.
Dr Auld said that betting exchanges are an “incentive compatible” way to measure the private opinions of voters, as people are putting money where their mouths are – rather than chatting cheaply to pollsters.
“Prediction markets could in theory be used to help value or price financial assets during events such as major votes. This is an area I will be focusing on for future research,” Dr Auld went on to say.