Intrade vs. Betfair - Arbitrage Opportunity?

by Michael on Nov 5, 2012

Shortly after finishing my earlier article about how Intrade works, I discovered an interesting discontinuity in election odds across sites. In particular, online gambling site Betfair has Obama as a considerably stronger favorite.

Given this divergence of opinion, people should be able to guarantee themselves a profit by betting on Obama at Intrade while simultaneously betting on Romney at Betfair. A perfect arbitrage opportunity — right?

Here’s what I mean:

As I write this, Obama is a 65% favorite on Intrade and an 78% favorite on Betfair. I’m sure the numbers will have changed by the time you read this, so please just bear with me as I work through things.

At these odds, I could “invest” $1000 (or whatever) in Obama at Intrade while simultaneously betting $220 (to win $1000) on Romney at Betfair.

If Obama wins on Tuesday, I’d pocket $350 at Intrade ($1000 – $650) while losing my $220 bet at Betfair.

If Romney wins on Tuesday, I’d pocket $780 at Betfair ($1000 – $220) while losing my $650 “investment” at Intrade.

Either way, I’d pocket a $130 profit. I’m ignoring fees here, but those aren’t enough to wipe away the difference.

I suppose I’m also ignoring tax implications but, based on a quick read of the tax treatment of gambling income and losses, this wouldn’t make much of a difference, either. Assuming that you itemize, you can deduct gambling losses. Thus, you should only have to pay taxes on the marginal difference (i.e., the profit).

It might get stickier if Intrade winnings (or losses) are treated as investment gains (or losses). Though even there, you can use up to $3k of capital losses to offset ordinary income per year (once you’ve exhausted your gains) so, depending on your circumstances and the amount in question, this might not matter.

I’m sure that part of the reason that this discontinuity exists is that Americans can’t use Betfair. Thus, to the extent that views on the election differ in the US vs. other countries, the odds might be expected to diverge. That being said…

Intrade doesn’t place any geographic restrictions on their customers, so it seems odd that such an inefficiency would persist. Or am I missing something?

P.S. I guess another concern relates to the trustworthiness of the betting platform itself. A failure to collect what’s due would completely flip the script.

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