InTrade offers an explanation of strange trading.

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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 &#8220-using our markets in good faith and in the ordinary course of their business.&#8221-

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&#8217-t fully explained.

Whether or not it was Centrist isn&#8217-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&#8217-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&#8217-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 ]

24 thoughts on “InTrade offers an explanation of strange trading.

  1. Chris F. Masse said:

    Is that the same Jason Ruspini, who, 5 minutes ago :-D , wrote:

    The gamble of downplaying manipulation

  2. Jason Ruspini's first guess about who is hedging on InTrade | Midas Oracle .ORG said:

    […] UPDATE […]

  3. Chris F. Masse said:

    Why Centrist Messenger would be the first suspect here?

    Since 2004, we have been all discussing about the hedging promise of the political prediction markets. We envisioned many possibilities and scenarios, involving many different possible actors. And now that it appears that one firm is actually hedging, hop, you point the finger to one startup. There are many, many other suspects, don’t you think? Or if not, then we were wrong thinking of the many hedging possibilities on InTrade.

  4. Chris F. Masse said:


    Could Centrist Messenger do the same with TradeSports and the sport games? Could you think of one idea in that area? Other than what YooNew is doing.

  5. Jason Ruspini said:

    Sure, but it’s the only firm that has issued a press release stating that they hedge on Intrade. Especially since the trader is naturally short McCain, this is just a best guess that i would be willing to offer above 50% so to speak.

  6. Mike Linksvayer said:

    as these markets mature we should expect them to attract more hedging activity, and this might introduce persistent price distortions

    This is not what I want to think, but in the back of my mind I wonder whether prediction markets’ disconnect from the rest of the economy (too small to be interesting, or play money) is good for their accuracy, or at least interpretability — cf oil futures, which AFAIK aren’t very predictive (though this is probably bogus, having mostly to do with oil’s storability, and AFAIK may be totally wrong, bothering to do a search on ‘oil futures prediction’ turns up Do Oil Futures Prices Help Predict Future Oil Prices? which is sanguine about the predictiveness of oil futures).

  7. Chris F. Masse said:

    Jason, please do offer other guesses.

    Mike, thanks for te link.

  8. Medemi said:

    There will not be persistent price distortions as markets mature and become more liquid, IMO.

    Temporary price distortions due to non-informational trading result in value. Some folks will specialize in making value bets under these circumstances (unless someone can convince me people are not interested in making money anymore…) The hard part will be figuring out whether it was non-informational or informational. Not my expertise so I couldn’t comment on that.

    The markets, as they mature, will become more resilient. IF it’s a real money exchange.

    The real trouble ahead of us is in a different area. Expert opinions, analyst upgrades/downgrades, rating agencies and the like (who are responsible for the boom & bust cycles which dominate our lives). You let them gain any influence over prediction markets and you might as well pack your bags. Incidentally, it looks like the penny is finally dropping in the US with regard to the damaging effects on the economy of some of their “activities”. Manipulation, in it’s most accepted form, really can be a bitch.

  9. Medemi said:

    I forgot to mention the polls. :-D

  10. Medemi said:

    Ok ! Now I’ve had enough of this bullshit.

    According to this article (and the polls) Obama is leading by only 3 percentage points. (it’s in Dutch)…..2153.lynkx

    I’ve challenged the site to put their money where their mouth is.

    Watch the new influx of Dutch customers at Intrade. (I mentioned betfair also).

    You may do the same if you care about prediction markets.

    Because ANYONE who believes the polls, can make a lot of money………….

  11. Medemi said:

    I’ve mentioned Intrade 6 times by now. They deserve it.

    Sorry betfair…

  12. Medemi said:

    I think they could be listening to me now. Traffic has halted. :-D

    With a little bit of luck (a lot probably) they’ll do an article citing predictions markets.

    I gave them an incentive 🙂 

  13. Jason Ruspini said:


    Re: other things for Centrist to do, unlike Dave Pennock, I am tempted to keep ideas to myself in this area :) Refunding tickets is a good idea.

    In addition to taxes, it’s easier to think of industries that would be hurt by an Obama win than a McCain win, isn’t it? Also McCain is unlikely to have a cooperative Congress, which is another reason why I would more readily expect hedging against Obama. Clean energy and ethanol are areas that would likely benefit more from an Obama presidency. That’s not news. It’s unclear why they would be such urgent hedgers though.


    Yes all things being equal, liquidity will help and we should by no means swallow Keynesian ideas like the risk premium uncritically. (It’s not clear that it has even ever existed with commodities as Keynes described it.) I still think this is a danger worth mentioning though — at least if most traders are from the same country and all have exposure to higher individual and corporate taxes.

  14. Medemi said:


    we’ve had a debate on betdaq about the effects of firms hedging with the exchanges on market accuracy. Keep in mind that in sports there are many events which are informational in nature (announcement of injured players, tactics etc.) which makes it hard to distinguish them from non-informational trades, for traders. Also keep in mind that most bookmakers will be hedging their risk in the same way (since the mug money flowing in will be the same). That’s my personal view.

    The conclusion (no one objected so far) is that markets will self-correct close to ”true price” (prior to the bookmaker’s interference) if the market is strong enough, and given some (enough) time. That’s encouraging to me and confirms my personal experiences. FWIW, because I had some doubts there myself for a while.

  15. Chris F. Masse said:

    What’s the point of political hedging since we all know that it’s 2 different things:

    – running for president

    – making decisions as president

    In other words, politicians lie during their campaign. So why hedging against lies?

  16. The New York Times on InTrade's US political election prediction markets | Midas Oracle .ORG said:

    […] See the comments on Midas Oracle here, here, here, and […]

  17. Medemi said:

    From that article :

    “David Rothschild, a Ph.D. candidate in business and public policy at the Wharton School at the University of Pennsylvania, has tracked these markets. He said of the institutional trader on Intrade: “If their job was to hedge bets, they were not doing a very good job at gaining these positions at a minimal cost. They are overpaying for these positions. I don’t know if they are doing it to manipulate the market, but they are not doing a very good job at minimizing their costs.”

    What the hell does he know ? Did he ever invest sums like 300K or 1M with a sense of urge ?

    There is a possibility the “firm” in question was able to make a bet with someone who trusted the polls, and maybe didn’t know about the existence of prediction markets. I would love to hedge my risk on the exchanges, but I would have to do it quickly to reduce my risk and lock in a profit.

    There must be idiots out there who put great faith in the polls.

  18. Chris F. Masse said:

    That guy is the little protege of Justin Wolfers.

  19. Jason Ruspini said:

    If it’s a bookmaker that still points to an unusual amount of McCain demand somewhere (making the bookmaker short McCain) so that just pushes off the question. Do any online bookmakers show inflated McCain odds?

    Anyway I think the more interesting question is when we might expect persistent distortions from hedging and other structural factors.. I have the same fear that Mike Linksvayer has.

    Medemi, what if, for example, the “mug money” just keeps flowing? This is part of what happens during bubbles. These situations should be rare of course, but when the content of a market is political or otherwise affects many people in the same way, I more readily expect these structural issues.. there is no infinite liquidity, and how much time is enough?

    Chris, re: “In other words, politicians lie during their campaign. So why hedging against lies?” Prediction markets can help to cut through the lies and omissions of course when they disagree with what a candidate says.

  20. Medemi said:


    if what you’re saying is true then it should follow that the closing prices are overpriced or underpriced, when we look at soccer markets (which are pretty strong).

    They’re not, when you do a comparative analysis of favorites vs outsiders for instance, or any other simplistic strategy. You’ll find that markets are bloody efficient. They have become efficient over time, despite the activity of bookmakers, of which we know they are doing a lot of business on the exchanges.

    I know about these things. I’ve analysed the lot. Betfair provide all the data, free of charge.

    It’s the volatility that offers traders a chance to make money.

    I know of a poster called Muqbil (an honest guy) who had the horse racing data turned upside down and inside out. These markets are amazingly accurate as well. You need a different strategy/edge to make money, like superior knowledge (form) – only a few succeed in this area – or an edge that is being “handed” to you by the operator, because of the way their shitty platforms work. (we’ve talked a lot about this).

    There is absolutely NO WAY you can compare the effects of sentiment and other disturbing factors in the stock market to prediction markets. For now, at least. Very interesting stuff in itself.

    How long does it take ? When looking at match odds in soccer, 3 to 6 hours before the off, sometimes the markets self-correct instantly, “usually” it takes about 1 hour, sometimes it does not self-correct and the price drifts away further (if you can call it that, because everything is relative). I’m assuming, in the latter case, that the initial trade was informational, although I can never be sure of that. But the fact remains, the closing prices are extremely accurate (on average, in the long run) when you look at the more obvious strategies. This is not what we should find, if your concern is justified.  And it is not justified, because in a strong market, when you throw money at people, they will take it !

    Better to focus on making these markets stronger and stronger, so I agree with Chris on this (see other page).

    Making it socially accepted to place a wager (or even legal for starters!) would certainly help.

  21. Jason Ruspini said:

    Yes but I’m not making a claim about the average market.  I wouldn’t expect to see the kind of issues I’m thinking about in short-term sports markets without a lot of pre-existing exposure.  I agree that the focus should be one  having these markets regulated.. I am just trying to set realistic expectations.

  22. Medemi said:

    I think prediction markets can have many more enemies than most can imagine.

    Also setting realistic expectations.

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