Automated Market Maker for certain Intrade contracts
I have implemented subsidies to encourage trading of some conditional prediction market contracts that may provide useful information about the consequences of the 2008 presidential election, via a simple automated market maker (using an algorithm described near the end of http://hanson.gmu.edu/ifextropy.html). The subsidized market maker ought to provide incentives for traders to devote more thought to these contracts than they would if the liquidity was less predictable.
Intrade has agreed not to charge any trading or expiry fees on these contracts.
Some places to look for extensive description of the motivations behind these subsidies are here and here.
The contracts are:
- DEM.PRES-OIL.FUTURES: Oil Futures and PRESIDENT.DEM2008 prices will move in same direction on Election Day
This will use the change in the December 2011 Light Sweet Crude Oil futures contract from the close before the election (Monday) to the close after the election (Wednesday). PRESIDENT.DEM2008 refers to the Intrade contract for “Democratic Party Candidate to Win 2008 Presidential Election”.- DEM.PRES-T.BONDS: Treasury bond interest rate futures and PRESIDENT.DEM2008 prices will move in same direction on Election Day
This will use the change in the December 2008 30-year US Treasury Bond futures contract from the close before the election (Monday) to the close after the election (Wednesday).- DEM.PRES-TROOPS.IRAQ: Number of US troops in Iraq on 30 June 2010 if a Democrat is elected president in 2008
- NONDEM.PRES-TROOPS.IRAQ: Number of US troops in Iraq on 30 June 2010 if a non-Democrat is elected president in 2008
These are scaled claims whose value will range from 0 if the troop levels are zero to 100 if the troop levels are 200,000 (or more).- DEM.PRES-GOVT.DEBT: Increase in US Government debt if Democrat elected president in 2008
- NONDEM.PRES-GOVT.DEBT: Increase in US Government debt if non-Democrat is elected president in 2008
Note that the change in debt is usually quite different from what is reported as the budget deficit. The debt numbers will be taken from a source such as the St. Louis Fed Series GFDEBTN, Federal Government Debt
These are scaled claims whose value will range from 0 if the debt does not increase to 100 if the debt increases by $1 trillion (or more).Please read the detailed specifications at Intrade before trading them, as one-line descriptions are not sufficient for you to fully understand them.For the first two of those contracts, the market maker will enter bids and asks of 38 contracts, and can lose a maximum of $5187.76 on each contract. For the other four contracts, the market maker will enter bids and asks of 115 contracts, and can lose a maximum of $7906.25 on each contract. The orders may not always show as many contracts as the market maker enters because it doesn’t update orders in response to partial executions. The market maker is designed to maintain a spread of about 2.5 points or less between the bid and ask (unless the price would drop below 0.1 or rise above 99.9, in which case it only maintains an ask or a bid, not both), and it should place new orders within a second or two after one of its orders is completely executed.
Here is a list of the prices at which the market maker might place orders for the 4 contracts where its order size is 115. It will start at a bid of 48.80 and an ask of 51.20. If a bid is completely executed, it will change its orders to a pair of prices one line lower on this list, and if an ask is completely executed it will change its orders to a pair of prices one line higher on this list. For the two contracts where the order size is 38, the spread between the bid and ask will be half the size shown in that list in most cases.
If it appears not to be working this way, please notify me at pcm –at– rahul.net.
Log of trades (updated 4 times a day, times are GMT)
source code (in Python).
Presidential Decision Markets
We have had many prediction markets on who will be elected, but almost none on who should be elected. So far, the only exceptions I know are decision markets on which nominees would most help their party gain the U.S. presidency.
Today, I’m pleased to announce that Peter McCluskey has funded the creation of six now-live InTrade markets that should tell us how a Democratic versus Republican U.S. President will differently effect oil prices, long term interest rates, US government debt, and US troops in Iraq! If enough people trade these assets, then for voters who know which direction they want these parameters to move, InTrade market prices could advise them on how to vote!
Two different approaches will be tried on these four parameters. Two parameters will use a binary shock response futures approach, with one asset each paying based on whether, over the course of election day, oil prices or T-bond interest rates move in the same direction as the probability of a Democrat winner. For example, if you think (speculators think) that a Democrat is more likely to raise oil prices than a non-Democrat, you should be willing to pay more than 50 for the asset that pays 100 if these two move in the same direction. You can cash in these assets a few days after the election.
For the two other parameters, four assets will support simple conditional estimates. Each parameter will have Democrat, Non-Democrat asset pairs. The Democrat asset in the pair pays only if a Democrat is the next president, while the other asset only pays otherwise. Bundling each pair together gives assets whose prices estimate:
- The probability US Govt debt will rise from FY 2010 to 2011 (assets: D, ND).
- The number of US troops in Iraq mid 2010 (assets: D, ND).
Dividing the price of each individual asset by market chances of a Democrat president (or not) produces estimates of these parameters conditional on a Democrat president (or not). The difference between the Democrat and the other conditional estimates say how much of a difference speculators expect a Democrat to make on that parameter. You’ll have to wait up to four years to cash in these assets.
I see four key open questions:
- Can we get precise enough prices to see a Democrat versus not difference?
- Can we convince voters that such prices give reliable non-partisan estimates?
- Can we convince voters these prices show causal effects of the party in power?
- Can enough voters tell which way they’d like these parameters to move for prices to be useful? (I’m not sure which ways I want.)
Added: Peter has been told InTrade will waive all trading fees in these markets!
Justin Wolfers:
Congratulations Robin and Peter – I think that this is a fantastic innovation, and I look forward to tracking these markets.
More Presidential Decision Markets!
Wow. Under “politics,” next to the “US Pres. Decisions” section I announced Friday, Intrade.com now has an “Impact of next Pres.” section, with markets for conditional estimates of these four parameters:
* eco growth to be at least 2.5% over the next three years,
* unemployment rate to be less than 5% at end of 2011,
* number of violent crimes in 2010 to be less than in 2007, and
* Democrats to control House of Rep’s after 2010 mid-terms,given each of these five candidates: Clinton, Edwards, McCain, Giuliani, Huckabee, Romney. Cool! I don’t see any orders in these markets yet though, so it is hard to tell how much liquidity they will have.
Added: This is a research initiative of the University of Westminster.
