Best Trading Interface? Here’s One Possibility.
Robert McLister October 30th, 2006
Alex Kirtland is right on the money when he suggests equating prediction markets with a familiar concept like stock trading. This is often the easiest way to get new users up to speed.
Clearly, building a simple trading interface is critical for generating interest and liquidity among the masses. One area where simplicity is sometimes elusive, however, is with short selling.
In many prediction markets users typically have to “short” a contract if they want to bet against something happening.
The problem is that a lot of retail users don’t understand how short selling works. It is easier for them to put their money on something not happening then to sell a contract based on something happening.
One solution that we’re implementing is to have only one contract but display it in two formats (views) side-by-side:
1) The market FOR the event occurring; and,
2) The market for the event NOT occurring.
The posted bids and offers would be the exact same for both contracts. The market for the event NOT occurring would simply be inverted.
For example, suppose we have a contract for Hillary Clinton winning the 2008 U.S. Presidential election.
The contract FOR Hillary to win might look like this:
| BidSize |
Bid |
Ask |
AskSize |
| 50 | 15 | 20 | 500 |
| 1 | 10 | 25 | 50 |
| 5 | 5 | 30 | 100 |
| 1000 | 1 |
The contract for Hillary NOT to win would simply be the inverse of the above view, or:
| BidSize |
Bid |
Ask |
AskSize |
| 500 | 80 | 85 | 50 |
| 50 | 75 | 90 | 1 |
| 100 | 70 | 95 | 5 |
| 99 | 1000 |
The exchange, or software vendor, could display both views side-by-side and handle the conversion of quotes (or odds) on their back-end servers.
For example, if someone bought 10 contracts FOR Hillary to win at 20:
- The AskSize at 20 would decrement by 10 in the FOR view
- The BidSize at 80 would decrement by 10 in the NOT view
Both would happen simultaneously (since the quotes in each view represent the exact same market participants).
This is one possible solution anyways. Just tossing it out there…
Robert McLister
T2T Technologies, Inc.
www.1stTick.com
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- Comments(7)
Sounds like a terrific idea!
Disclosure: I’m not a market design expert, so my opinion is worthless.
This is the way that NewsFutures presents the interface currently. I wrote about this on the CommerceNet blog: http://blog.commerce.net/?p=249
In my “Introduction to PM Formats”, http://blog.commerce.net/?p=238 I pointed out three foundations for the instruments that underly the concept of short selling. You can do it with a single asset, which is the way that TradeSports works. Foresight Exchange and NewsFutures have complementary assets, which work the way you describe. The IEM has the trader start by buying a basket of coupons, and sell the ones she doesn’t want to keep.
I think complementary assets provide the easiest model to explain to new traders, and don’t have any counter-intuitive implications. (On TradeSports, you really are selling short, and on IEM, you have to buy and sell coupons you never intended to hold.)
I knew someone smarter than us had to think of this before.
And thanks for noting the proper name (”complimentary contracts”)…
P.S. I’m not quite sure if our approach and Newsfutures’ is the same.
In Subcard’s upcoming software there is only one single contract (but two views of that same contract). Is that how Newsfutures works as well?
I’ve found that when casually telling friends what long and short and the bid and ask side of the book are that they pick up the risk-reward characteristics of long-only orders fairly well. But when you talk about shorting contracts, they usually get the risk-reward measure wrong when you ask them “if I short 15 contracts at 35%, what is my risk?” or they get the event wrong with what you’re trying to predict.
This proposal is good from a simplicity perspective, but the user interface has to be very well designed to avoid any potential confusion on whether you’re betting for or against something. Because if you want to short a “not” contract, that’s going long, right? Or was that short…
To answer Robert’s question, yes NewsFutures uses one single contract and displays two views of that same contract. And I’ll join the crowd in agreeing that offering a “buy opposite” option instead of a “short sell” option is likely more intuitive for most novice traders.
People have a hard time even understanding the concept of “shorting”. My dad constantly says why would I short? The company is worth SOMETHING so I know I will never lose all my money. But alas I guess it all is a confusing idea.