Prediction Markets, Collective Intelligence, Innovation and Growth
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 InTrades election prediction markets?
I’d say that short term market analysis is always a hazardous business – witness the front page headlines of the WSJ over the past few weeks as it tries to interpret bounces in stock market prices. So what does “non-informational trading” have to do with anything, other than temporary price moves associated with large purchases/sales in a less than fully liquid market?*
If traders as a group tend to think Powell’s endorsement as a market moving event, the market will end up at a new level after endorsement-related trading finishes. But isn’t it possible that Powell’s endorsement was already anticipated in the market, based on recent statements?
By the way, I think Delaney/Intrade’s opening about the situation is useful all around (to “informed” traders, to Intrade and prediction markets generally, and even to the hedging customer, whoever it is). Now that “informed” traders know that there is a sizeable amount of “information-less” money coming into the market, they can trade with a diminished worry about the adverse selection problem. In fact, they might be more attentive to the market in order to take advantage of hedging-related trading. This attentiveness would benefit the hedger, since the hedging demand would produce less of a market move if there were a large number of traders ready to take the opposite side of the deals the hedger wants.
Well Betfair has moved from 1.19 (84%) to 1.14 (88%). It was anticipated that Powell might endorse Obama but not definitely. Both the media and the market (Betfair) consider this to be significant (as do I).
Excellent comments, guys. Thanks for publishing good content for free on Midas Oracle, on a Sunday.
Mike, I am not sure that the endorsement was anticipated by the market, as some weeks ago, a rumor went out that Colin Powell would endorse Barack Obama, and then the General sent out a denial, at the time. So, the traders might have been cautious, these last days, about yet another Colin Powell rumor.
Nigel, I agree on the significance, and happy to see that the BetFair prediction market reacted that way… taking account Mike’s advice on being cautious about short-term prediction market analysis.
“So what does “non-informational trading” have to do with anything, other than temporary price moves associated with large purchases/sales in a less than fully liquid market?”
Good, so we don’t believe in normal backwardation? Or by “fully” do you mean infinitely, i.e. not real?
And no possibility of any other persistent price effects related to market structure?
For example, a few years back Greenspan referred to the conundrum of relatively low long-term interest rates. A common narrative was that the BRIC’s demand for US treasuries pushed yields down. Now it perhaps seems that the markets were correctly predicting lower rates of return!
Another common narrative attributes part of the rise in stocks in the 1990s to money flowing from bank accounts to mutual funds.
I can’t rule out all such possibilities in the future (also define “temporary”), but at least we might be able to identify them with some ease.
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