Platform Metrics (More Soon)
Platform operational: Since 2001
Total Predictions: 619,141,899
Average Daily Predictions: 169,589

This is just a preposterous misrepresentation of the volume of activity on the site.

The average number of contracts traded per day for the year to date is 9k, with a median of 8k. Those numbers are way up from 2010, before the change from high transaction fees to a small, flat monthly fee.

Since there is someone on both sides of each trade, it’s could be fair to say that each trade represents two predictions so you can double the trading volume if you are counting “predictions” instead. But counting predictions raises another problem.

If I think Sarah Palin will run and I place an order to buy 100 contracts, I have not made 100 predictions. I have made one prediction. (Even if I place an order today, and another order tomorrow, unless I am buying or selling at a very different price from the first order it’s a stretch to say that I’m making new predictions with every order.)

So there are at least two problems:

One is that it’s silly to call every contract a separate prediction when a single person, acting on a single point of view (e.g., Palin has a 25-30% chance of running) can buy or sell many individual contracts (buying at 24, selling at 31, for instance, without changing their “prediction” at all). And of course these trades often happen in blocks of 10 or 100 or 1000 contracts anyway.

Two is that whether you are counting, trades, contracts traded, or “predictions” you don’t get anywhere near the 170k daily “somethings” that Intrade is claiming. Unless…

Perhaps they are not only counting each contract as a separate “prediction,” even if a single order is for many contracts. Perhaps they are also counting every order, whether it is executed or not. That is, I put in an order to buy 100 contracts of Palin at 24, and they count 100 “predictions.” Then I put in an order to buy 500 at 10, and another for 1000 at 1, and another for 5000 at .1, and a sell for 1000 at 99… and by Intrade’s math I’ve just made nearly eight thousand predictions. and when I change the order for 100 at 24 to 100 at 24.1, that’s another 100 predictions. And when some bozo puts in an order to buy 5000 shares of something for a penny after the event has already happened, that’s 5k more “predictions.”

The urge to publish big, impressive numbers about activity on Intrade is understandable. Venturing into fantasyland to get there is just embarrassing.

Speaking of math, my very rough estimate is that Intrade is collecting twice as much per month in fees via the $5/month charge than they would have been based on the pre-2011 transaction fees.

This is good for Intrade, good for active traders, and horrid for smaller accounts. It’s also a short-term situation with a bad ending. Once the small accounts are mostly closed out or leeched down to a zero balance, then what? How many mid- or large-sized, reasonably active accounts are there? Within 2-3 years can one really expect there to be more than a few thousand accounts left? Some new big players may come into the mix if they see the good deal, but each one is only worth $60/year.

Even if you think Intrade will have 15k active accounts in a few years (which I don’t), that’s still less than a million dollars of top line revenue. Larger traders will probably tolerate an increase in fees at some point, but still I do not see how Intrade gets from the current situation to a future as a solid, profitable, growing company that is more than a flea compared to BetFair.

Markets are impressive mechanisms for information aggregation but they’re not magic. The information has to come from somewhere, and markets are inherently always living in the phase transition between stability and instability. (It is the stability that makes prices informative and the instability that allows the market to be liquid.)

Makes no sense at all.

The BetFair PR boys have an omelet on their face. They should work harder.

DISAMBIGUATION: The “illiquid” adjective refers to the UK political markets on InTrade —not the US political prediction markets.

I acknowledge you are a little InTrade fanboy, and that flies OK in my book. You say there are 3,000 daily transactions on the daily DJIA prediction markets. (It was much higher than that before the CFTC fined InTrade.) While I reckon that this liquidity is enough to generate trustworthy predictions, it is very small compared to the liquidity of the financial markets or BetFair’s liquidity. For your information, BetFair handles more transactions than the London Stock Exchange. InTrade’s liquidity is small compared to BetFair’s, and is certainly too small to generate profitability. That’s what counts.

An excerpt from “Bovine Scatology”:

Ten years ago, your mutual fund manager would have to use Goldman or a competitor’s block desk to move 100,000 shares of Proctor and Gamble. And they would have to trade an eighth wide, i.e. 12.5 cents per share. The financial intermediaries would take that spread, or more, if another customer was willing to trade through your manager’s limit to take the other side of the trade.

No one pays those types of commissions any more. Tick sizes have shrunk over 90%, and as have costs to the retail investor.

The fact that Duhigg had to quote a dinosaur, Bill Donaldson, tells you something. I’ve spoken to the founder of DLJ and SEC chair on one of his lecture circuit gigs, and the guy is from a different age. His research driven business model was fantastic back in the 70s and 80s, but its a woolly mammoth now. His appointments since cashing out have been largely political; those who can’t do teach, and those who can’t teach must regulate …

There are a lot of grizzled Wall Street veterans who pine for the days of tick sizes an eighth wide, and funneling trades to a single market maker on a trading floor. That’s because a monopoly is great if you are on the right side of it.

Price discovery is improved with liquidity. There is more liquidity because of high frequency trading.

Right now, GE is quoting $11.97 x $11.98, half a million shares a side. I guess Donaldson and Duhigg are pining for the days when it would be quoting $11.875 x $12.000, and we retail investors would be paying Merrill $300 to sell 1,000 shares, in addition to giving up $95 extra in the day of eighths, in that we would be selling at $11.875 rather than $11.97.

As usual, the good ol’ days aren’t as good as they seem, once you realize you are giving up your clean running water for the outhouse.

Prior to the Wikipedia community vote on adopting CC BY-SA it crossed my mind to set up several play money prediction market contracts concerning the above outcomes conditioned on Wikipedia adopting CC BY-SA by August 1, 2009, for which I did set up a contract. It is just as well that I didn’t — or rather if I had, I would have had to heavily promote all of the contracts in order to stimulate any play trading — the basic adoption contract at this point hasn’t budged from 56% since the vote results were announced, which means nobody is paying attention to the contract on Hubdub.

Blame yourself, Mike. I blogged 10 times about the concept of “X group” —the symbiosis between a set of prediction markets and a set of bloggers.

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Here’s what I wrote in October 2008:

InTrade are going to open prediction markets on the future price of art. These innovative prediction markets will fail miserably.

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The InTrade prediction market on the Mei Moses Fine Art Index has attracted only 6 trades, so far.

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In November 2007, I said that the BetFair prediction markets on global warming (HSBC Investable Climate Change Index & ECX CFI Futures Contract) were “flawed products”. A few weeks later, they disappeared. Even the BetFair prediction markets on the highest and lowest UK temperature (which I was a bit more positive about) have now disappeared —and the “Climate” sub-category (under their “Special Bets” category) has totally disappeared in cyberspace.

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In both cases, I explained to my readers why those prediction markets would fail. Read my archives if you are curious.

NO PRIMARY INDICATORS = NO PREDICTION MARKETS

I even made the suggestion, one day, that the creator of any prediction market should be compelled to list the related primary indicators and their URLs —as a barrier to prevent futile prediction markets to be put on the Web.

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Previously: Emile Servan-Schreiber on InTrade’s volatility