With prediction markets, advisors have a potential investing tool but also another risk to flag for certain clients.Moor Studio/iStockPhoto / Getty Images
Advisors are likely hearing from curious clients about prediction markets, now that these fast-evolving marketplaces for wagering on real-world events have established a beachhead in Canada’s investment marketplace.
U.S.-based prediction markets, such as Polymarket and Kalshi Inc., are already a multi-billion-dollar industry. They offer participants the ability to wager on yes/no outcomes on a variety of subjects, including financial markets, the weather and the economy. More recently, though, these markets have come to Canada.
Interactive Brokers Canada launched its prediction market last year, while Wealthsimple Inc. received regulatory approval last month to launch a prediction market platform. Questrade Inc. could have its own platform by this summer.
News of Wealthsimple’s approval caught the attention of Josh Olfert, founder of Haven Wealth Management Ltd. in Winnipeg, whose practice serves primarily millennial and Gen Z clients. He says he’s not surprised the industry is seizing on the trend.
“Friends and clients around my age are often offering their predictions about where the world’s going,” says Mr. Olfert, a certified financial planner in his 30s.
“They always have some thesis on what’s going on with Trump, Iran or where the Canadian housing market is headed,” and many often engage in informal wagers amongst themselves.
Still, Mr. Olfert says he has not come across clients or friends using prediction markets. But he believes some will soon enough.
“There’s clearly a demand for putting money behind your thesis on the world, and seeing if you get rewarded.”
While prediction markets in Canada allow investors to place wagers on inflation, the direction of the stock market and even whether Canada will become the U.S.’s 51st state, their scope is more limited than those available in the U.S.
The Canadian Securities Administrators issued a notice in 2017 prohibiting binary options to deal with rising fraud related to unregulated binary options on online platforms – essentially, contracts involving yes/no outcomes.
“At the time, crypto prediction markets likely were not on regulators’ radar,” says Calgary lawyer Matthew Burgoyne, a partner at Osler, Hoskin & Harcourt LLP and chair of its digital assets and blockchain practice.
“But the types of contracts traded on crypto prediction markets do fall squarely within the definition of a binary option.”
The rule does provide an exemption, permitting contracts with terms to maturity greater than 30 days, he adds. Yet, it only applies to those predicting outcomes for financial markets and economic data. In that respect, legal prediction market contracts bear similarities to futures contracts.
Given prediction markets’ limited scope in Canada (wagers on sports and elections so far aren’t allowed, as they are in the U.S.), the current regulation is likely insufficient because Canadians seeking to engage in speculation on a wider range of events can use “VPNs to circumvent geographical restrictions” to access platforms such as Polymarket, Mr. Burgoyne says.
Last year, the Ontario Securities Commission cracked down on Polymarket for operating in the province. Provincial and territorial securities regulators can still block a company from operating in their jurisdictions.
He likens the current landscape to the challenges regulators faced with cryptocurrency trading. Ultimately, regulators were forced to adopt a framework similar to other nations because Canadians would otherwise access international platforms operating outside of Canadian regulation, Mr. Burgoyne says.
Prediction markets also pose a challenge for Canada’s fragmented regulatory system because they seemingly straddle two activities: investing and gambling, which involve separate regulatory frameworks.
For prediction markets to offer similar exposures as in the U.S. – and appeal to more Canadians – “you would likely need permission not only from securities regulators but also the blessing of the provincial gaming commissions,” Mr. Burgoyne says.
A tool for investors
Prediction markets may be useful for the investment industry, says Philip Petursson, chief investment strategist with IG Wealth Management Inc. in Toronto.
“We’re looking at how we can use Polymarket data, for example, to gauge sentiment on economic data,” he says.
Consumer sentiment surveys aren’t as useful as they used to be because getting responses from people has become more difficult, he says.
Mr. Petursson says prediction markets may offer a novel avenue for insight into sentiment about markets, politics and the economy because people are backing their viewpoints with money. Still, how useful they are remains to be seen, he adds.
A lesson in humility
As these platforms become more commonplace, Mr. Olfert sees another potential upside for advisors.
“People generally believe they can understand cause and effect in very complex systems, like the stock market,” he says.
That level of confidence is especially prevalent in the “Manosphere” – a social media realm often attractive to younger men, “where gambling behaviour is essentially seen as a ticket to getting wealthy fast,” he says. That’s in contrast to true investing aimed at building wealth long-term.
A working paper published in early April that analyzed trades on Polymarket found that sophisticated users are reaping almost all the profits while most participants lose money.
Prediction markets are likely to lead many people to be overconfident in their ability to predict the future, “to realize quickly that the world is not as simple as they think,” Mr. Olfert says.
“Sure, they might pay a little tuition for that lesson, but that ultimately might do some good when it comes to understanding how investing really works.”