Am finally listening to the Yahoo conference; I love the shoutout to Chris there (around the 49 minute mark)

But I don’t think huge information asymmetry is “good for the market.” It’s kind of an apples and oranges situation, intuitively — if a market’s peculiars give rise to asymmetry, then the end point of that market, assuming no rent seeking (ha, yeah right) is simply going to be very different from the “long run equilibrium” of a conventional market.

Jason — for sure. If a market has become disproportionately momentum-driven (due to information asymmetry or groupthink), then that would mean that traders are taking other people’s trades as new information, not subjective distillations of the same information.

In this case, you have massive information asymmetry and lots of non-monetary payoffs for the people who are advantaged by that very same asymmetry. The result is somewhat analogous to a poker table of anonymous players, and someone makes an anonymous raise. There’s no way to judge the credibility of the raise, so theoretically the “dominant strategy” is to make the raise, or fold to someone else’s raise.

You could make the same argument for stocks and bonds, but the trader of a stock, for example, is really trading on a huge collection of events. Even if he’s just trading a single stock, his “unsystematic risk” is still much lower than the event trader’s, because the equities trader knows that there will be a distribution of events in which the good ones will largely cancel out the bad ones — except in the case of a single “major pricing event,” i.e., a quarterly report, when one piece of information is so important that it overrides all others. When you are just trading on a single person, you only have one stream of events to trade on, so the fluctuations are that much higher. (A multinational publicly traded company has tons of streams of events to affect its price, most of which end up canceling each other out).

In the cases I linked to, I judged it to be the same individual based on size and suddenness of the bet — really just groping for some consistency with which to identify the raiser. Plus, it was not “intelligent” trader behavior, because it incurred lots of unnecessary costs.

It’s so conjectural. Even if I was correct, that person has surely learned to better hide his tracks.

Silly me, grasping for fame and recognition only to give the game away

That said, I do think some of the literature on manipulation understates its viability because it doesn’t consider what happens when traders take the manipulated price as new information. And this is separate and primary to the actual self-fulfilling aspect, where some parties get non-monetary payoffs from price action, and that price action can have an effect on campaign decisions.

Historical Presidential Betting Markets
http://www.unc.edu/~cigar/papers/BettingPaper_10Nov2003_long2.pdf