Gamblers predicted Brexit before the formal markets of the City did, creating a golden opportunity to cash in, a new study has found.
International finance markets lagged behind punters who were having a flutter on the Brexit betting markets.
People were predicting the success of the Leave campaign and this triggered a window of 'arbitrage' - a period of time where the difference in the two markets was manipulated for financial gain.
This provided a peak of up to nine per cent return on the pound thanks to the disparity between the two markets.
Researchers from Cambridge University found there was a 'behavioural bias' at fault for this as both bookies and traders believed Remain would win.
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International finance markets lagged behind punters who were having a flutter on the Brexit betting markets. This created a nine per cent return on the pound thanks to the difference between betting and international markets (stock)
Economists from the University of Cambridge compared the behaviours of the Betfair betting market and the GBP-USD exchange rate at 10pm when polls closed.
Odds of up to ten to one were being on Brexit at this point.
Both markets were described as 'informationally inefficient' which the researchers claim explains them being very slow to react, despite the data being available.
This meant there was money to be made by trading early on either market, say researchers.
It was found that the betting market swayed to favour a Leave result at around 3am and the odds had flipped to one to ten.
It took until 4am, 40 minutes before the result was formally announced, for foreign markets to fall in line with the domestic ones in accepting the fate of an imminent Brexit.
This difference between the two markets created a window of an hour where selling £1 and hedging the result of the referendum on Betfair would have made up to nine cent profit.
The research found that this could have, in theory,made astute traders millions.
Researchers say the findings support the idea that gambling, or so-called 'prediction markets', might provide better forecasts of election outcomes than either experts or polls.
'Clearly, punters trading on Betfair are a different group of people to those dealing in FX for international finance. It looks like the gamblers had a better sense that Leave could win, or that it could at least go either way,' said Dr Tom Auld, lead author of the study.
'Our findings suggest that participants across both markets suffered a behavioural bias as the results unfolded.
'Initially, both traders and gamblers could not believe the UK was voting to leave the EU, but this disbelief lingered far longer in the city.'
Authors of the study say their model would have predicted the final result from around 1:30am had it been deployed on the night.
'It looks like the gamblers had a better sense that Leave could win, or that it could at least go either way,' the study's lead author Dr Tom Auld said on Friday.
Dr Auld said both betting and financial markets were in fact slow to react, given the information flooding in from vote counts.
He said this showed there was a 'behavioural bias' at work as both markets had believed Remain would win before the votes were counted.
'Our findings suggest that participants across both markets suffered a behavioural bias as the results unfolded. Authors of the study say their model would have predicted the final result from around 1:30am had it been deployed on the night (stock)
'Initially, both traders and gamblers could not believe the UK was voting to leave the EU,' Dr Auld said.
'But this disbelief lingered far longer in the City.'
The Cambridge economists also created their own forecasting model for predicting Brexit, drawing on data that was publicly available prior to the vote and adjusted as results came.
Many market theories discount publicly available information because it is deemed not to provide an edge, the study said.
But the economists said their model would have predicted the final result by 1.30am that night, while the betting market moved to a Leave result at about 3am and currency markets at about 4am.
'We show that the financial markets were very inefficient, and should have predicted Brexit possibly over two hours before they actually did,' Dr Auld said.
If there was a second referendum, the vote should be better understood by markets and 'primed to profit' from any inefficiencies, Dr Auld said.
The study was published in the latest International Journal of Forecasting.