Manipulation can affect prices.
Eric Zitzewitz May 30th, 2007
For the last two weeks a very interesting manipulation has been going on in Intrade’s “Hillary Clinton for President” contract.
1. The contract had been trading between 23 and 26 all year. It has consistently been about half the price of the “Hillary to get nominated” contract price. This ratio implies that, conditional on nominating Hillary, the Democrats have a 50 percent chance of winning the Presidency.
2. Comparing this with the unconditional probability of a Democratic victory (about 56 percent throughout 2007) suggests that Hillary is a slightly weaker general election candidate than the alternatives (Obama, mainly). [Note I say "suggests" because the comparison of conditional probabilities implies a correlation, but not necessarily that a Clinton nomination would cause a better outcome for the GOP. For more see the fifth question in this paper].
3. Around May 12, someone started buying “Hillary for President” pretty heavily, driving the price up to 40. This price is clearly ridiculous for two reasons:
3a. You could sell the President contracts of Hillary, Obama, Gore, and Edwards for a combined 69 (40+17+8+4) and buy the “Democrat to win” contract for 56.
3b. Since there was no movement in the nomination contract, the conditional probability of Hillary was now a ridiculous 40/52 = 77%, while the conditional probability of “Not Hillary” was 16/48 = 33%.
4. Unlike past manipulation attempts, this manipulator isn’t just dumping a ton of money in to move the price once. He (or she) is moving the price, and then providing support to keep the price high. Note that the price stayed at 40 for about a week (on higher than normal volume).
5. I mentioned the manipulation at the end of my talk at the Palm Desert prediction markets conference, figuring that there was no surer way to get a $100 bill picked up than to tell that crowd about it. Someone emailed Greg Mankiw and he blogged about it the next day. (Justin and I also just tipped off Tyler Cowen). Since then there has been some downward price pressure, but the manipulator isn’t throwing in the towel. He/she keeps replenishing the bid side of the order book, albeit giving ground in the process.
6. By my calculation, the manipulator has spent about $10k to push the Hillary contract up around 12 pts on average for 2 weeks, buying about 8,500 contracts in the process. [I'm assuming 26 is fair value and just summing up volume*(price - 26)].
7. So what do we learn from this?
7a. Manipulation doesn’t have to be as ham fisted as the 2004 Bush reelection contract manipulation.
7b. The manipulators are getting smarter. This manipulator was smarter in one sense by providing price support after the fact. But of course, he/she shouldn’t have pushed the price up to such an obviously ridiculous level (and should have bought and sold other contracts to keep the pricing relationships consistent). The same mistake probably won’t be made next time.
7c. By prediction markets standards, manipulation is expensive. But by political spending standards, manipulation could be reasonably cheap. That said, I can find only one media mention of the inflated Hillary price. $10k for one blog mention probably isn’t great value for money, but the Intrade prices get cited a lot these days, so the manipulator may just have been unlucky.
7d. None of this disputes Hanson and Oprea’s point that, if anticipated, manipulation could increase average prediction market accuracy. In their model, traders all have rational expectations about how much manipulation to expect. In the real world, they may need some help (hence this post).
7e. Although the Hillary price is down to 34.5 (bid-ask midpoint at time of writing), there are about 500 contracts bid above 33, so there is still plenty of free money there if you want it.
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Justin Wolfers wants to know
http://www.marginalrevolution......fers_.html
Free Money, Going Fast
http://www.overcomingbias.com/....._goin.html
I posted this comment to MR too. I could be wrong on the margin calculation, but I don’t think the basket trade and PRES(Dem) would be considered identical by Intrade despite that being the implicit intent of the trade.
“First, a lot of liquidity is being artificially blocked from Intrade because of the legality situation. I for one maintain only “beer money” there because of this.
Second, right now it looks like you could sell PRES(Clinton|Obama|Edwards|Gore) for 62.3 and buy PRES(Dem) for 57. I would guess the required margin on this would be 37.7 (worst case scenario for the individual basket sale) + 57 (worst case scenario for PRES(Dem)), so even before transaction fees, you are looking at a 5.3 gain on 94.7 total margin over one year out?? That could just be a result of discounting. You can make 5% risk-free in that time.”
The underlying problem, if there is one, is Intrade’s primitive (non-combinatorial) technology.
Jason,
Five thoughts:
1. If you have the margin feature on your account, you would only have to hold $1 against the long DEM and $3.77 against the short HC/AG/BO/JE position, for $4.77 total, not +/- $9.47.
2. It’s possible you could get a better deal from Intrade, given the intent of the trade. The only way it would lose is if HC, AG, BO, JE run and win as an independent, which is pretty far fetched for those 4.
3. I think Intrade pays interest for large enough balances.
4. Planning to hold to expiry is a worst case scenario; market efficiency may reassert itself in the meantime and then you could unwind.
5. If one doesn’t insist on pure arbitrage, one could just take the one position that offered the best expected value-to-funds tied up tradeoff.
Thanks,
1) I’m not sure where the $1 (10%) margin comes from for the dems to win piece, unless this has to do with Intrade lowering margin requirements for long-term contracts (which would then climb over time). I have never been completely clear on Intrade’s margining. Once I asked them for the exact formula they use for longterm politcal markets, but they couldn’t provide it.
2) Yes maybe you could but Intrade may not have the luxury of exposing themselves to “pretty far fetched” scenarios.
3) Yes, but this comes back to my first point. That legal risk might cancel the 3% or whatever Intrade pays for $20k+ deposits. (It does seem like a non-US trader would take advantage of this though. Chris, how many non-US traders do you estimate Intrade has?)
4) Yes, the two pieces of the trade will converge when the market becomes reasonably sure who the candidate will be, so this will take 9-12 months, not 18 months, although i did only use a one year rate before.
I really have no disagreements per se though. My gut reaction was just that it’s hard to extrapolate anything general from these prices about manipulation, etc (while seeing so much brainpower thrown at it) with the legal situation as it is. If it is one manipulator, the unfettered pockets (so to speak) of everyone else should overwhelm him or her.
“Chris, how many non-US traders do you estimate Intrade has?”
–> I’d say 20%.
Does Alex Forshaw agree with my number??
Is there manipulation in the Hillary Clinton Intrade market? - by Koleman Strumpf
http://www.midasoracle.org/200.....de-market/
Chris: I am not sure. A few months ago I would have thought your figure would be too high. Now, who knows?
I think somebody with deep pockets has been propping up Hillary’s nomination contract for a long time, actually. Pure speculation on my part, but whenever there is any downward pressure on dem.nom.hillary, somebody simply freezes it with a huge bid of 500 or so Hillarys, at 50-52. Maybe said individual has extended the pressure to the PRES.HILLARY contract.
Who knows.
How many non-US traders do you estimate Intrade has?
–> Gimme your number, man.
Next question is: what’s the % of American money at InTrade? Which is a better question, maybe.
—
Is there manipulation in the Hillary Clinton Intrade market?
http://www.midasoracle.org/200.....de-market/
Is there manipulation in the Hillary Clinton Intrade market? Redux.
http://www.midasoracle.org/200.....ket-redux/
Win Justin’s Money? (re: Is there manipulation in the Hillary Clinton Intrade market? Redux.)
http://www.midasoracle.org/200.....ket-redux/
Intrade: Obama and Clinton at near-parity
http://www.midasoracle.org/200.....ar-parity/
CAT GOT PROFESSOR KOLEMAN STRUMPF’S TONGUE????
http://www.midasoracle.org/200.....fs-tongue/
PROFESSOR KOLEMAN STRUMPF STILL DOUBTS THAT THERE HAS BEEN MANIPULATION OF THE HILLARY CLINTON EVENT DERIVATIVES.
http://www.midasoracle.org/200.....rivatives/