Adjacent Markets Unveils Battleground State Prediction Indexes Ahead of November Election
Time to weigh in before the main event.
The political side of prediction markets will be more in focus than ever this November as Americans prepare to vote in the midterm election. One startup called Adjacent Markets hopes to showcase their utility as a forecasting tool by aggregating hundreds of political markets into a handful of indexes summarizing each party’s prospects.
There are now 22 such indexes listed on Adjacent Markets’ site, the most recent — and arguably, most interesting — of which focus specifically on battleground states.
There are big-picture “Red” and “Blue” Battleground indexes, plus more selective ones focusing specifically on the House, Senate, Gubernatorial, and Presidential races. Gaming America spoke with Adjacent Markets cofounder Lucas Kohorst about his product.
The long game for Adjacent Markets is to sell data to companies using its indexes as the basis for exchange-traded funds. Already, the CFTC is deliberating on whether to allow prediction market event contracts to be bundled up as ETFs and sold on conventional exchanges.
Kohorst doesn’t see that happening in time for the midterms, however. For now, the focus is on providing election-watches with a useful analysis tool.
“Our main goal is establishing this as a go-to data source,” he said. “It’s a way to see broad-based event-linked moves as part of a theme, trend, or narrative. Financial products based on it are part of the plan, but right now, we’re looking to build interest with the plan of reaping the dividends later.”
Kalshi launched its own political power index, KPOW, in May. However, Kohorst and his partner Doug Crescenzi have emphasized to the CFTC the importance of having such indexes built and managed by third parties.
Weighting is Crucial to a Useful Index
Gaming America had some criticisms of KPOW when it was first announced, including that it appeared not to weight its index based on market volume. Adjacent Markets, per its documentation, weights based on a combination of three factors: volume, time to resolution, and an “importance” factor that depends on the index.
In the case of the Battleground Indexes, that third factor is each state’s number of electoral college votes, while for other indexes, it’s population.
Kohorst explains that volume will tend to increase as the time to resolution gets shorter, so those factors will dominate as the election approaches. The electoral college or population factor is more of a starting point when trading first starts, or in the aftermath of a race.
Those weights can shift quickly when news drives interest in specific markets. Earlier this week, Georgia was the most heavily weighted state in the Battleground indexes. In a few days, North Carolina has caught up as a result of traders adjusting their positions based on the passage of a controversial elections bill, which Democrats have characterized as voter suppression.
By contrast, KPOW’s weights are fixed. That may make the index more consistent in one sense, but also means that a relatively small volume of trading on an obscure market can produce an unreasonably large swing, while individual trades on high-volume markets don’t matter as much.
Getting the Formula Right
Adjacent Markets’ weights aren’t written in stone quite yet. Kohorst and Crescenzi continue to tinker with them during what is effectively a beta period. Kohorst says that once the indexes are in use as the basis for financial products, they’ll be locked into a particular model. The only significant changes will be when certain contracts reach resolution and new ones are created — after an election, for instance.
“When a financial product exists on these, there would be much more care that needs to go into rebalancing,” Kohorst said. “There could be edge cases in which we need to expand the constituent universe, and we would communicate directly with the counterparties.”
The ETF issuers would equally have some logistics to deal with, as changes in market volume would affect Adjacent Markets’ weighting and require the issuers to adjust their portfolios to match.
“The ETF would likely follow a daily or weekly balance in which they’d add and remove contracts to get to the weight we publish,” Kohorst explained.
Momentum Still Favors Democrats, But the Race is Tightening
Another fundamental difference between KPOW and Adjacent Markets’ indexes is that Kalshi’s metric includes the current state of affairs, while the Battleground indexes are strictly forward-looking.
As a result, KPOW currently has the Republicans out in front because they hold the House, Senate, and White House now, regardless of what will happen in the midterms. Adjacent Markets, however, puts the Democrats ahead with a Battleground Index score of 117.9 — with 100 being neutral.
With those Battleground Indexes only having been established this week, there isn’t enough data to spin a long-term narrative. However, a glance at the underlying markets suggests that Democrats’ lead would have been higher a few months ago, at the height of the Iran conflict. Even KPOW gave the edge to Team Blue at that time.
As of this writing, for instance, Kalshi gives the Democrats a 45% chance of winning both the House and Senate in November, and an 83% chance of taking at least one. In April, however, the market odds for both chambers to turn blue were 52%, while a Republican sweep was only 13% likely.
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