Prediction Markets + Market Predictions = Collective Forecasting That Pays Off
Questions To Trader Steve Roman:
- You have researched and blogged about the Enron trial. Did your analysis help you in your trading of the Enron trial contract at TradeSports / InTrade (if any)? Did you profit from your inklings (if any)? If “yes”, how? And if “no”, why not?
Addendum (October 24): Steve Roman has published a long comment (see below this blog post), documenting his research and his trading. Interestingly enough, the more informed he was, the lousier his trades.
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The Contract:
TradeSports learned from their previous trial contract errors and the Enron ones were made for traders.
Previous trial contracts like the George Ryan case were set to pay off at 100 if only 1 of the charges resulted in a conviction. This was so likely to occur that the contracts didn’t trade at all, there was no market.
The Enron contracts were set up much better. Lay had to be convicted of 4/7 charges and Skilling 16/31 (these changed during the trial as charges were dropped) which gave enough uncertainty to bring traders to the market.
- Research
I had read the books on Enron, all the articles I could find, and during the trial, hours of transcripts. The Houston Chronicle’s resource center was invaluable especially their trial blog. I stopped trading during the trial after several wrong calls but still continued to follow the case obsessively. The constant stream of news and information made it difficult to stop watching.
- Trading the Contracts
I placed several trades on the trial and lost on most of them. My expectations didn’t match with how the contracts moved so I just stopped trading them before I did real damage. Even after I stopped trading I continued to follow the trial and the contracts closer than ever.
My trading was based on two themes:
1. Skilling and Lay were less likely to be guilty than the media assumed and that once the facts came out the contract would respond. There was no smoking gun linking them to the charges and the witnesses against them were all tainted. I thought that the contracts would decline as the trial progressed and the case against them appeared less and less substantial. Of course this was dead wrong.
2. That Lay was less guilty than Skilling. I posted and traded several times on the assumption that whatever the chances of conviction, Lay’s contract should have been trading for less than Skilling’s. Lay was only a figurehead in Enron and had very little to do with the day to day business. He was also known as a friendly guy as opposed to Skillings notoriously nasty demeanor. So I shorted the Lay contract and longed Skilling when they were at parity, and again when, amazingly, Lay traded higher Skilling. The trade looked great at parity and looked even better after Lay moved higher! The market was right, I was not.
Please, Steve Roman, would you mind putting here all your ENRON links, it would make for a good read.
The links to the main posts are below. When I stopped trading my focus shifted from the TS contract to the trial.
Lay is Innocent
http://nastybrutishandtall.com/2006/04/enron-trial-ken-lay-is-innocent.html
Skilling Guilty of Trial Prep
http://nastybrutishandtall.com/2006/04/skilling-guiltyof-preparing-for-trial.html
Berkowitz Victories
http://nastybrutishandtall.com/2006/04/berkowitz-victories.html
Hueston Crushes Lay
http://nastybrutishandtall.com/2006/04/et-tu-mark-hueston-crushes-lay.html
Berkowitz Blows It
http://nastybrutishandtall.com/2006/04/berkowitz-blows-it-enron-update.html
Thanks!