In the wake of a UK betting scandal involving politicians, parallels with financial markets are striking. Accusations of insider betting reflect a growing convergence between gambling and finance, where regulatory frameworks may intersect. As gambling and stock markets blur, lessons from financial compliance — like those barring insider trading — are poised to influence broader spheres. This convergence prompts questions about integrity and regulation across diverse sectors beyond traditional financial domains.”
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By Marc Rubinstein
Everyone in financial markets knows the laws of insider trading. They’re drilled into you day one on the job. If in the possession of material, non-public information (in the US) or inside information (in the UK), you don’t trade, either personally or on behalf of others, nor do you cause anyone else to trade. Regular training pushes home the principle, and a compliance infrastructure polices it.
Now, such measures are likely to become commonplace in other fields — starting with politics. Over the past two weeks, UK politicians have become engulfed in a rolling betting scandal. First, Conservative Party insiders were accused of placing bets on the timing of the general election prior to its sudden announcement. Then, a Labour parliamentary candidate had support from his party revoked after it emerged he had placed a bet on himself to lose.
The Conservative case looks a lot like insider trading. In financial markets, it would be hard to find anything more clear cut. With the chances of a July election quoted at less than 25%, private knowledge guaranteed a surefire profit to any insider who backed the right date. The key difference with financial markets is who sits on the other side of the trade. Insider trading legislation was introduced in the UK in 1980 to improve market integrity after those with privileged information were deemed to be unfairly profiting at the expense of other investors. In the betting scandal, the losers are not so much other bettors but the gambling companies that act as counterparties.
The Labour case is more of a hedge, albeit hardly a perfect one, and although the candidate had scope to influence the outcome, he wasn’t particularly incentivized to do so. In financial markets, insiders can buy and sell their own stock (and that of their competitors) except during blackout periods — which a live election campaign can be considered analogous to.
Underpinning both cases is a convergence between gambling and financial markets. This became noticeable during the pandemic when sports — the largest segment of the betting industry — shut down and punters switched to stocks to fulfill their gambling urges, reflected in the pivot of Barstool Sports founder David Portnoy to day trading, and culminating in the meme stock frenzy of early 2021.
The similarities between both markets is plain: Success comes from the ability to assess probabilities and manage risks. Experience in one field can enhance performance in the other. Mathematician and hedge fund manager Ed Thorp straddled both, taking the Kelly criterion for sizing a bet from the blackjack table to the stock market; David Einhorn became a successful amateur poker player alongside his fund management role; and UK fund managers have a long relationship with horseracing.
Brokerage companies exploit the overlap, too. When Robinhood Markets Inc. was launched in 2013, it parlayed many of the marketing gimmicks used in gambling (for example, free bets) to attract trading clients. In the UK, structuring a trade on a stock as a bet rather than an investment avoids government stamp duty on the purchase of shares, which partly explains the popularity of contracts-for-difference (prohibited in the US). One reason retail stock ownership is less prevalent in the UK than in the US is that gambling rules are more relaxed in the former.
Over the course of their development, the two markets have been regulated separately. In the UK, the Financial Conduct Authority (FCA) oversees financial markets; the Gambling Commission looks after betting markets. In 2005, legislators introduced a gambling version of insider trading laws, making it a criminal offense to cheat at gambling or do anything for the purpose of enabling or assisting another person to cheat at gambling.
As with the introduction of insider trading laws, the new regulation took a long time to bite (insider trading convictions were not prosecuted until the late 1980s). A Supreme Court ruling in 2017 found that poker player Phil Ivey cheated at casino game Punto Banco by using a technique called “edge-sorting” to give him up to a 6.5% edge over the house. The casino deemed it an illegitimate strategy, and the court agreed on the basis that being knowingly dishonest was not a necessary element of “cheating.” The ruling underpins the current investigation into election betting where insiders may not perceive their actions as deliberately dishonest. As in financial insider trading, it need not matter.
The collapse of UK betting platform Football Index in 2021 illustrates the fuzzy middle. The company fashioned itself as a “stock exchange” where customers could buy “shares” in footballers whose value would rise and fall based on performance (and demand). At the time it failed, it was regulated by the Gambling Commission although its business model looked more like a remit for the FCA. An independent investigation into its regulation concluded that ties between the two authorities need to be improved.
As the markets continue to converge, compliance practices standard in capital markets will seep into other areas of life. This week, the BBC stopped offering daily racing tips on its Radio 4 morning news show, consistent with its practice on stock tips. And politicians will learn that just as finance professionals don’t typically trade in their own domain on their personal account, neither should they.
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