Midas Oracle .ORG » political hedging

Freakonomics is the latest in a long series of (usually, serious) bloggers who have misinformed the public by stating that the institutional investor is manipulating the US political election prediction markets.

Chris F. Masse — Mon, 20 Oct 2008 16:54:56 +0000

The anonymous blogger (probably the editor, Annika Mengisen) titles the post, “A New Kind of Campaign Advertising?”, and asks:

Will market manipulation for political candidates become the norm as ever-wealthier campaigns try to control the news cycle?

No…!!!…

John Delaney said that that firm has been hedging on InTrade —a normal and beneficial activity on the other (larger and more liquid) financial markets.

InTrade is not liquid enough to weather (quickly enough) the impact made by the hedging activities, at this time, but will in the future, if growth continues.

Manipulation is bad.

Hedging is good.

The New York Times on InTrade’s US political election prediction markets

Chris F. Masse — Mon, 20 Oct 2008 09:41:17 +0000

The NYT writers discusses 2 (different?) issues.

#1. There was market arbitrage opportunies in the recent past between InTrade and BetFair —unlike 4 years ago, and contrary to the laws of economics.

- The price of the Barack Obama event derivative was cheaper on InTrade than on BetFair and the Iowa Electronic Markets. Conversely, the price of the John McCain event derivative was more expensive on InTrade than on BetFair and the Iowa Electronic Markets.

#2. The NYT writer reports (without linking to it) the findings of the InTrade investigation about the behavior of their unnamed “institutional investor”.

- InTrade CEO John Delaney suggests that that institutional investor:

might operate on InTrade at specific times where it might not be able to find liquidity on BetFair and/or IEM;
might be a bookmaker willing to hedge its risks on a prediction exchange (a.k.a. betting exchange).

- Justin Wolfers’ PHD student remarks that that institutional investor is not making an effort to shop around for the best prices, within each InTrade political prediction market.

RELATED: See the comments on Midas Oracle here, here, here, and here.

Economics blogger Zubin Jelveh got it right about the InTrade hedging thing.

Chris F. Masse — Sun, 19 Oct 2008 20:18:45 +0000

“No Manipulation At InTrade“

Exactly.

John Delaney said that that firm has been hedging on InTrade —a normal and beneficial activity on the other (larger and more liquid) financial markets.

InTrade is not liquid enough to weather (quickly enough) the impact made by the hedging activities, at this time, but will in the future, if growth continues.

Manipulation is bad.

Hedging is good.

As a way to thank Zubin Jelveh for his admirable coverage of the prediction markets, please do subscribe to his economics blog, Odd Numbers.

Odd Numbers @ Portfolio â€” category: “prediction markets“
Put that URL in your feed reader:
http://feeds.portfolio.com/portfolio/oddnumbers
Mister Zubin Jelveh, thank you.

Are recent historical charts now useless for short-term prediction market analysis because of the non-informational trades made by that institutional investor hedging its political risks on InTrade’s election prediction markets?

Chris F. Masse — Sun, 19 Oct 2008 19:27:11 +0000

How can you assess the impact of Colin Powell’s endorsement of Barack Obama? You can’t.

A blogger at the New York Times misinforms the public about the alleged manipulations on the InTrade US political prediction markets.

Chris F. Masse — Sun, 19 Oct 2008 06:26:19 +0000

The blogger titles the post, “Cheating the Spread”.

No…!!!…

John Delaney said that that firm has been hedging on InTrade —a normal and beneficial activity on the other (larger and more liquid) financial markets.

InTrade is not liquid enough to weather (quickly enough) the impact made by the hedging activities, at this time, but will in the future, if growth continues.

Manipulation is bad.

Hedging is good.

InTrade offers an explanation of strange trading.

Jason Ruspini — Sat, 18 Oct 2008 17:56:20 +0000

Intrade has made a statement on the unusual trading that many have noted and alleged to be manipulative. The statement suggests that the price action is mostly attributable to a single firm, a hedger “using our markets in good faith and in the ordinary course of their business.”

The first company that comes to mind is Centrist Messenger. Centrist is an interesting firm that re-sells political ad time and refunds sales to customers whose candidate loses. Centrist has stated publicly that it uses Intrade to hedge this exposure.* If Centrist had something to do with the unusual trading, it suggests that they sold more Obama than McCain ads, creating exposure to a GOP victory, resulting in McCain buys and Obama sales on Intrade. Why such a firm would be such urgent price-takers isn’t fully explained.

Whether or not it was Centrist isn’t important, but as these markets mature we should expect them to attract more hedging activity, and this might introduce persistent price distortions. Indeed it makes sense for people in the top tax bracket to be long Obama apart from considerations of his chances of victory. This is another uncomfortable subject that I’ve warned about in the past. When these markets become deeper and more widely available, the odds of the high-tax candidates might begin to show an upwards bias, a risk premium. Interestingly, Musto and Yilmaz predict that such markets will eventually lead to increased promises of redistribution by candidates. Talk about unintended consequences.

Intrade is doing the right thing here though, dealing with tough issues realistically and with as much transparency as possible. They provide valuable information, for free, even in places where they are not necessarily welcome. The depth of this information helps us to evaluate Intrade prices and have more confidence in them. Here is an example below, based on Obama’s market over the past two weeks. Some have noted that the purported attacks occurred in hours where the market was unusually thin. This chart measures such price manipulability. The red line represents the ease of a downwards attack. It is the 100 x the amount of margin required to sweep the top fifteen bids divided by the difference between the highest bid and the fifteenth highest bid. (That is, how much the probability of an Obama victory can be moved by risking $100. Commissions are not taken into account but would of course would be vital.) The green line is the ease of an upwards attack. This is a very preliminary study and I will leave it to others to voice initial impressions. The fact that we can gauge to what extent traders are exercising market power is in itself important and encouraging however.

* Technically another firm does the trading. Centrist is incorporated in the US, and the trading firm is incorporated in St. Kitts. Through this arrangement, Centrist cleverly avoids violating UIGEA.

[Cross-posted from Risk Markets and Politics ]

The blogger at Marginal Revolution misinforms the public by repeating the misinterpretation thrown around by liberal hack Paul Krugman about the alleged manipulation on the InTrade prediction markets.

Chris F. Masse — Sat, 18 Oct 2008 16:05:09 +0000

Alex Tabarrok writes that “someone was manipulating Intrade to boost John McCain’s stock price”.

No…!!!…

John Delaney said that that firm has been hedging on InTrade —a normal and beneficial activity on the other (larger and more liquid) financial markets.

InTrade is not liquid enough to weather (quickly enough) the impact made by the hedging activities, at this time, but will in the future, if growth continues.

Manipulation is bad.

Hedging is good.

Liberal hack (and Nobel Prize winner) Paul Krugman totally and completely misunderstands what InTrade CEO John Delaney said regarding the non-informational trades made on their US political prediction markets.

Chris F. Masse — Sat, 18 Oct 2008 10:40:27 +0000

Paul Krugman writes that “one large institutional investor was manipulating the Intrade presidential odds”.

No…!!!…

John Delaney said that that firm has been hedging on InTrade —a normal and beneficial activity on the other (larger and more liquid) financial markets.

InTrade is not liquid enough to weather (quickly enough) the impact made by the hedging activities, at this time, but will in the future, if growth continues.

Manipulation is bad.

Hedging is good.

Jason Ruspini’s first guess about who is hedging on InTrade

Chris F. Masse — Fri, 17 Oct 2008 07:45:30 +0000

His first guess: that firm.

UPDATE

There is no manipulation going on in the InTrade political prediction markets.

Chris F. Masse — Thu, 16 Oct 2008 21:53:42 +0000

- InTrade CEO John Delaney has conducted an investigation on the alleged manipulation. The suspicious moves in prices were in fact caused by the buying and selling made by an “institutional” trader (a hedge fund, I presume) who has been managing “certain risks” (hedging).

- Jason Ruspini, who wrote before this report came out, does believe that manipulations “non-informational” trades have been prevalent on InTrade. (We will see whether Jason changes his mind in light of InTrade’s debunking report.)