IOWA MARKET TAKES STOCK OF PRESIDENTIAL CANDIDATES
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Monday, August 28, 1995
By STANLEY W. ANGRIST
Staff Reporter of The Wall Street Journal
Want to take a flier on who will be elected president next year or who the Republican nominee will be?
Sign up to buy shares on the Iowa Electronic Market, the University of Iowa’s political stock market, where speculators bet on the fortunes of potential candidates. The market, run by the university’s business school, has three submarkets: the General Election market that pits Bill Clinton against unnamed Democrats or Republicans; the Republican Nomination market that offers shares on Robert Dole, Phil Gramm, Jack Kemp, Patrick Buchanan and Dan Quayle; and a thinly traded market that allows speculators to buy “yes” or “no” shares on whether retired Army Gen. Colin Powell’s name will be placed in nomination at the Republican convention.
For the moment, the prices in the IEM presidential market bode well for Mr. Clinton. His stock has enjoyed a 19% rally since May 1, climbing to 45.1 cents last week from the May 1 price of 37.9. If Mr. Clinton wins re-election, holders of his stock will receive $1 a share. If he loses, his backers will get nothing.
Meantime, in the market for speculating on who will get the Republican presidential nomination, Kansas Sen. Dole’s stock is enjoying a sparkling rally. His shares are up nearly 30% since the beginning of May, largely at the expense of Texas Sen. Gramm, whose shares have dropped about the same percentage.
Traders are betting against Mr. Powell’s name being put in nomination at the Republican convention. “No” shares have risen in price to 65.3 cents from 55.1 cents when they began trading in early July.
According to Joyce Berg, one of the IEM governors and an associate professor of accounting at the university, 3,700 people have open accounts with total equity of more than $54,000. As the 1996 election draws closer, Ms. Berg says the number of traders playing and the amount of money on the line will grow substantially.
The premise behind the IEM, which was first used in the 1988 presidential election, is that voters don’t have any incentive to tell pollsters the truth. But when their own money is on the line, people will act on information that affects the chances the candidates have of winning or losing an election.
“There is a strong incentive for players in these political markets to process information about the candidates and their conclusions are revealed to us through the markets’ prices,” says Steven Feinstein, an assistant professor of finance at Boston University’s School of Management. The IEM works on the same principle as any futures market, he says.
But don’t get the idea that Mr. Feinstein is a long-term player. He has profited so far on the Clinton shares he bought last spring, but he adds that “I expect to dump them when they get to 47 or 48 cents. I definitely don’t want to stay in until Election Day. It’s just too risky.”
Sheryl Ball, an assistant professor of economics at Virginia Polytechnic Institute and State University, says the electronic market is particularly useful because shareholders can react quickly to developments.
“By watching the political stock market it is possible to gauge the effect of an ad, a policy announcement or an alleged affair on the part of a candidate almost instantaneously,” she says.
Ms. Ball has been trading the “rest-of-field” candidates in the Republican nomination market. “With these shares selling for more than 20 cents it tells me that a large number of traders believe that Dole does not have a lock on the nomination.”
She buys the shares when they get near the bottom of their trading range (16 to 18 cents) and sells them when they get close to the top of their range (above 24 cents).
Shares on the IEM can be traded by anyone who wants to open an account. And people can play for a lot less money than securities brokers demand. Accounts can be opened for as little as $5 and as much as $500. Though trading is commissionless, traders do have to overcome a bid-ask spread as they try to profit.
In order to trade these markets, traders need access to a computer, with either a DOS, Windows or Macintosh-based operating system and a modem that allows the computer to communicate over phone lines. Traders gain permission to trade by completing a one-page application and sending the market operators a check.
Though anyone can play, the primary purpose of these political markets is education — most traders are students in finance and accounting courses. The market also provides a continuous stream of data to its creators for research purposes.
The small number of players, the research aspects and the low maximum investment has allowed the IEM to receive a “no-action” letter from the Commodity Futures Trading Commission exempting it from federal regulation. In fact, the IEM market is a couple of 486 personal computers, operating 24 hours a day, seven days a week, that match players’ trades on a real-time basis.
Jonathan Cohodas, a graduate student in econometrics at Virginia Tech, is one of the most successful players in the electronic market. After starting with about $50, he has been able to remove $150 from his account to “pay some bills.” He is taking a sizable position in Kemp shares in the Republican nomination market in hopes of a big payoff. “This is a ‘lottery ticket’-type trade,” he says. “If something unexpected happens, it could pay off big.”
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