I disagree with Max that a prediction market quote can change perceptions that much.
Don’-t Short Obama
Why political futures markets got the health care bill so wrong.
By Daniel Gross
Posted Monday, March 22, 2010, at 6:05 PM ET
It would be very difficult to tote up all the times pundits pronounced the health care bill dead, and the prospects for the Obama administration dire—especially after the election of Scott Brown in January. Intrade, the political futures market, which functions as a conventional-wisdom-processing machine, also got health care wrong. Check out this chart for the contract on health care reform being passed by June 2010. The contract is worth 100 if it is passed, zero if it is not. After Brown’-s election, it slumped to as low as 20. As recently as March 17, it was below 40. Even as late as Friday, it was trading in the mid-80s. These trading data show that “-investors”- in this market were skeptical of the Obama administration’-s ability to pass significant health care legislation, right up until the end.
Is there a larger lesson here? (Aside from the obvious one, which is political futures markets usually aren’-t very good at predicting what actually will happen in the future?) I think so. And it’-s this: Don’-t short Obama. In fact, that’-s been the lesson of Obama’-s entire career so far.
[Stock market stuff inserted here.]
On some level, it’-s tough to blame the Intrade crowd for getting Obama and health care wrong. The type of people who trade there, folks who think they’-re quite savvy about money, the market, and politics, are the same conventional wisdom hawkers who were so monumentally wrong before the financial crisis. If you’-ve tuned into CNBC or Fox Business Channel, or read the Wall Street Journal since January 2009, you would have been subject to a constant stream of money managers, pundits, talking heads, and policy wonks declaring that the U.S. economy is becoming a socialist hellhole that is hostile to business and investors. (If there were a way to short Fox Business Channel, I’-d do it in a hurry.)
The conventional wisdom market has not yet internalized the message that it’-s dangerous to your financial and professional health to short Obama. Judging by the debate in the House last night, by the talk on cable news shows this morning (full of talk about how this is going to kill Democrats in November), and by the chatter on the business networks this morning (full of talk about how the tax increases in the health care bill will destroy the markets and the economy), the shorts haven’-t learned anything.
I agree with Dan Gross that prediction markets are a “-conventional-wisdom-processing machine”-. Prediction markets incorporate expectations (informed by facts and expertise) just like the mass media do.
Prediction markets can’-t look into the far away future.
In the ObamaCare case, prediction markets have just been summarizing objectively, dynamically and quantitatively (day in, day out) what the political media were reporting about the health care reform, and about the prospect of its passing in Congress and of its signing by the President.
It would be easy for a scientist to verify that —-by comparing archived media articles with the historical InTrade prices.
ADDENDUM: To answer Hutch’-s question, the only trouble I saw in the history of this contract is the brief manipulation that happened on March 16, 2010.
UPDATE: Funny video:
Joined: 24/01/2010 15:58:35
So the actor has to a) not care about the transaction fee and b) have limitless margin. Intrade fits the bill for both of these. a) they don’t care about transaction fees because they are ultimately collecting them and b) if you only short when the bids are summed to over 100, it’s essentially an arb.
Until mid-April 2010, Intrade will refund market taking and expiry fees for arb trades –- details here.
Some products with a single guaranteed outcome are linked for cross-margining purposes. If you collect at least $10 by shorting all three contracts for the 2012 presidential election, then you will not have any funds frozen. The contract rules will tell you if a product is not linked (e.g. 2012 republican presidential nominees).
Intrade provides an API for developing trading applications. I am running a bot to take out market imbalances and as far as I’-m aware Intrade is not competing with me.
One (anonymous) InTrade trader:
I am utterly convinced Intrade participates in its own markets. Every few hours some kind of API hits the bids on the GOP 2012 nomination contract when the bids sum to more 100. It will even short bids at 0.1, which is a money losing proposition when you figure the transaction cost alone of 0.3 (since the price is below 5). Also, the amount of margin required to short all of these bids is in the millions of dollars.
So the actor has to a) not care about the transaction fee and b) have limitless margin. Intrade fits the bill for both of these. a) they don’-t care about transaction fees because they are ultimately collecting them and b) if you only short when the bids are summed to over 100, it’-s essentially an arb.
The trader also tells me that, on the InTrade forums where those questions were asked many times, InTrade never denied that they trade on their own prediction markets.
[…] I asked John Delaney and his tech team when I was doing my due diligence on InTrade a couple of years ago in Dublin – about the firm’s own participation in making markets – and the potential to ‘manage’ prices in ways that were outside of the normal price discovery mechanism. I came away from that meeting not convinced at all that adequate checks and balances were in place to protect against manipulation. […]
I am calling all my Deep Throats. Contact me. Tell me more.
Max says that the political prediction markets are “-routinely manipulated”- and we often see “-price rigging”-…-
Joe is going off the deep end. Market noises are now interpreted as the intergalactic battle between the pro-HCR and the anti-HCR, who are both seeking to manipulate the InTrade prediction markets. No evidence whatsoever is displayed.
P.S: I am not picking on Joe, who is a good web curator, and a nice chap. Just disagree with him (and Andrew Golberg) that prediction market journalism is easy to do. Good prediction market journalism is very hard to do. Requires scoops and pertinent analysis. Scrapping exchange probabilities and aggregating it with re-written news is not enough.
More info on health care reform on Memeorandum.