Swamping the 2008 nominations market with outside capital

Bizarre. And blatantly inefficient. Did our good professor Koleman Strumpf get some more money to play around with and research adaptive behavior? I can see him researching something along the lines of “Let’s see how the market behaves to a sustained upward attack followed by an instantaneous downward attack of similar magnitude.” (Title of the next working paper–”Market reaction to movement in the absence of outsider information.”) The craft of a speculative attack, of course, is making it look plausible, which this attacker miserably failed to do–so obviously, in fact, that that was probably part of his point.

Clearly, whether the ulterior motive is research or market distortion to influence outsiders, profit is not the primary motive here, and as long as TS’ media-buzz value outweighs the size of the political futures market that will remain a significant problem. Moreover, I’m having a harder time believing that the recent spikes had anything to do with influencing outsider perception (as opposed to the sustained HRC buy-up, which probably was). The market’s credibility as an accurate reflection of reality has clearly been badly damaged–another possible explanation for yesterday’s irrational behavior. [The markets' bouncing back from that attack does not, imho, fully restore its credibility. If it is so easy to cause that much of an earthquake temporarily, what does that say about longer-term attacks that are not so easy to discern?--ed] But that leaves us with research, whether by an “idle rich dude” (unlikely) or an academic (much more likely). And Prof. Strumpf is my likely suspect, just because that’s his area, and because of the occurrence of a key element of a successful market attack–the widespread dissemination of strategic information, aka the NYT blurb, to work. Phrased differently, it has to be plausible. This has the stamp of either someone who is trading on that, or who is doing his own research. Somebody, at any rate, is pounding these markets for research purposes, or to discredit them–and it’s making us traders dizzy. In a good way, sure–for the short term. But if it costs the markets credibility, then we could have a greater, long-term problem.

The market movement in the absence of information angle is interesting. I don’t think absence of information is the point, however–you can always find, or should I say magnify, existing information to justify pretty significant increases in price. But they can’t be too significant, because after a point it makes more sense to chalk it up to individual error. And in reality, the market converging to your perspective isn’t a matter of what you know nearly as much as a matter of your information reaching players other than yourself, with market-moving capacity.

Because of the New York Times piece, it could have simply been a matter of someone believing that current prices are ludicrous. But people with that kind of money generally don’t take a shotgun-blast approach to markets that they get into, because that is unnecessarily costly, and they know that. They aren’t stupid. Or most of them aren’t, anyway. Or something. But major non-profit motives have been massively distorting this market, to be sure.

(cross-posted at the TS Maven, the original is still on my blog)

Addendum: I didn’t mean to imply that causing and researching these temporary distortions is necessarily a Bad Thing, but the current small size of these markets has obviously made distortions a not-too-infrequent occurrence (because it’s that easy), and the market is now anticipating similarly more-often-than-usual future distortions, which means that it is already behaving abnormally. And research seems the only plausible explanation, just because these attacks were way too obvious to have any staying power–the attacker did not care about how outside observers would read the numbers, or the specific kind of reaction that the markets would have. It was either 1) a blunder, or 2) a test to see the staying power of an instantaneous attack.

Attacks’ staying power are directly proportional to the duration of time (subtlety) of the attack. So instantaneous attacks would have virtually no effect–except that in this case, someone else has been propping up HRC’s contract for a long time (imho), and this attack just made things somewhat more expensive for that individual.