Betting on Democracy: How Robinhood's New Contracts Transform Political Wagering

Robinhood has rolled out a new feature that blurs the lines between investing and wagering: ‘Event contracts’ that lets users bet on real-world outcomes. While event contracts themselves aren’t new, they are not a tool that has been traditionally used in the context of financial markets. It is a derivative contract whose value is derived from the occurrence of an event, ie, if the event happens you make money and if it doesn’t you lose money (50:50 odds). Now you might be wondering how it differs from gambling and spoiler alert…..it doesn’t.

The newly introduced contract allows users to bet on the candidate they believe is going to win the US presidential election. The value of the contracts is determined purely by demand and supply factors.

The payout of one contract will be $1 and the price for purchasing the contract will be determined by the market. Right now the market is in favour of former president Donald Trump and hence the contracts in favour of the former president are the highest ($0.64 per contract) followed by the Democratic nominee Kamala Harris ($0.45).

If the event predicted in the contract happens for eg, if Donald Trump wins then the buyer of the contract betting on him gets a payout of $1. Here the difference between the payout price and the contract price is the profit of the contract holder ($0.46 per contract). 

If the market expectations are not in favour of an event happening then the payout will be higher. In the above eg, if Kamala wins the presidential race then the contract holder in favour of that event will get a payout of $0.65 per contract which is significantly higher than the Donald Trump contract.

To limit degenerate gambling Robin Hood has capped the maximum contract value an individual can purchase to $5000.

The Robin Hood launch was unexpected by the market as they didn’t mention anything about it in the recent Robin Hood summit. The result was a surge in the Robin Hood stock ($HOOD) which took it to a 52-week high (Still down 50% from IPO lol). 

While there are only 3 days to go before the US Presidential election, the scope of this contract is huge. Robin Hood launching a new segment of contracts which can have a huge impact on the way retail participates in the market is pretty exciting. 

THE WAY EVENT CONTRACTS CAME INTO PLAY

Event contracts were legalised in the United States in September 2023 after Kalshi Inc. won a hard-fought legal battle against the Commodity Futures Trading Commission (CFTC). The CFTC argued that the so-called event contracts were purely a tool for gambling and that it could hurt public interest, but the court was of a different view and said the activity was not unlawful and hence allowed the trading of the contracts.(Capitalism at its peak, Right guys?)

Kalshi allows its users to wager bets on anything from Economics and Interest rate changes to what you think the weather is going to be like tomorrow. To make things more insane they allow you to wager as much as $100 Million on a single contract (Yeah you heard that right) and the most insane thing is that this is all legal. It's like a regulated casino where you can bet on just about anything happening in the world

The entry of Robin Hood into all this is interesting, as they’ve seen a drastic fall in its userbase after the trading events in January 2021, concerning Gamestop stock ($GME). Unlike Kalshi which is purely an event contract platform, Robin Hood is one of the biggest brokerages in America with over 24 million funded customers and if they are successful in increasing the level of retail participation then they can print money from these contracts as they will be adding a whole new segment for retail to participate in.