BetFairs Mark Davies (the Prince of betting exchange PR) has just gotten a second omelet in the face.

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First, the Financial Times &#8212-and, now, Freakonomics.

The journalistic rule should be that, if you cite one prediction exchange, you should cite the one that is the most liquid on the market you are writing about. For UK politics, it is clearly BetFair.

BetFair has clearly a PR problem.

Allegedly, an idiot pressed the wrong button on March 16s InTrade ObamaCare prediction market. Do you buy it?

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Marcus Shea:

Here’s the most likely scenario as to what happened here:

Somebody had a decent short position. Say they had about 65 shares (the volume bars indicate that this was likely a &lt- 100 share transaction, ie, &lt- $5 worth of commissions for Intrade, so mentioning commissions / greed as a motivator is pure ignorance). They wanted to put up a buy of 65 shares at say 5%, so that if the price ever dips that low, they can close their short position and wind up with a nice profit. And then, big mistake, they hit sell instead of buy. The market plummets. Mystery solved. It&#8217-s called human error.

InTrade prediction markets got health care wrong… – dixit Daniel Gross of Slate, a site I will no longer read.

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Slate&#8217-s Daniel Gross:

Don&#8217-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&#8217-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 &#8220-investors&#8221- in this market were skeptical of the Obama administration&#8217-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&#8217-t very good at predicting what actually will happen in the future?) I think so. And it&#8217-s this: Don&#8217-t short Obama. In fact, that&#8217-s been the lesson of Obama&#8217-s entire career so far.

[Stock market stuff inserted here.]

On some level, it&#8217-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&#8217-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&#8217-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&#8217-d do it in a hurry.)

The conventional wisdom market has not yet internalized the message that it&#8217-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&#8217-t learned anything.

I agree with Dan Gross that prediction markets are a &#8220-conventional-wisdom-processing machine&#8221-. Prediction markets incorporate expectations (informed by facts and expertise) just like the mass media do.

Prediction markets can&#8217-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 &#8212-by comparing archived media articles with the historical InTrade prices.

ADDENDUM: To answer Hutch&#8217-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:

Does InTrade participate on its 2012 Republication Nomination prediction markets?

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A mysterious InTrade forum user (could be a trader or could be John Delaney) has posted this:

*****
Newbie

Joined: 24/01/2010 15:58:35

Messages: 1

Original thread at midasoracle.org:

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 &#8211- 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&#8217-m aware Intrade is not competing with me.

Ah.

Paul Krugman Makes a Boo Boo.

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In Paul Krugman&#8217-s blog entry, Done, at 4:39pm (EDT) on March 21, 2010, he commented: &#8220-OK, nothing is sure in this world. Intrade is still giving Obamacare a 2.2% chance of failing, …&#8221-

He was talking about the InTrade market on Health Care Reform. In theory, the market price in such a derivative market should equal the expectation of the underlying event coming true. However, Paul Krugman (and many others) forgot one of the most basic assumptions of the market model! Transaction costs.

When the market price is over 95, InTrade charges a transaction fee of 3 cents per contract (real money). While market prices are quoted in percentages, the payoff for a winning ticket is $10 (real money). Therefore, the transaction fee is 0.3% of the winning payoff. In addition, InTrade charges 10 cents per contract on expiry (if you &#8220-win&#8221-). That&#8217-s another 1.0%.

So, when the market was quoting 97.8% likelihood of the HCR bill passing before June 2010, this didn&#8217-t really mean that there was a 2.2% chance of the bill not passing. A winning ticket would be subject to 1.3% transaction fees. The real likelihood of failure was 0.9% &#8211- approximating the uncertainty that Obama would be &#8220-hit by a bus&#8221- before signing the bill into law.

No rational investor would wish to purchase a share for more than 98.7, given the transaction costs. In a sense, this is the market&#8217-s &#8220-100%&#8221-. Interestingly, at 1:49pm GMT today (March 23), there are 695 bids at 99.1 and 413 asks at 99.2. Clearly, some traders are not subject to the full transaction fees at InTrade. More about that here.

[Cross-posted from Toronto Prediction Market Blog.]

The Real Arithmetic Of The Health Care Reform

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The Real Arithmetic Of The Health Care Reform &#8211- NYT &#8211- by a former CBO director.

Required reading for Paul Hewitt. :-D

Prediction Market Chart

ADDENDUM

More info on health care reform on Memeorandum, Politico and Slate.