Yearly Archives: 2008

Political prediction markets should move beyond mere horse-race forecasts to demonstrate larger social value.

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I agree with that.

The key, now, is to go beyond the accuracy issue and to move on to the utility issue.

It&#8217-s a much complex problematic, which those who have been over-selling the prediction markets are unwilling to undertake. [*]

Maybe a small bunch of prediction market people, maybe assembled in a new prediction market structure, might go for that lofty goal of fingering the specific instances where prediction markets create real social utility.

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[*] Yelling across the harbor, like an illuminated Jesus Christ, that prediction markets can help &#8220-avoiding future [financial] crisis&#8221- is a sign that some prediction market practitioners have lost their intellectual compass. To my knowledge, InTrade hadn&#8217-t had any prediction market focused on the &#8220-looming credit crunch crisis&#8221-, last summer. Its CEO should be careful about making any grand statement. As I wrote many times, at best, the prediction markets are the best umpire you can have between either the mass media and the politicians, on one hand, and a group consisting of the best experts, on the other hand. An umpire is only useful during critical times, in a game. But, other than that, most of the times, the umpire is not the determinant of the game &#8212-the players are.

The researchers and practitioners should make a solid case for each of these critical instances where the prediction markets have a real social utility.

Stop the over-selling. Let&#8217-s start the real work.

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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?

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How can you assess the impact of Colin Powell&#8217-s endorsement of Barack Obama? You can&#8217-t.

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 ]

The gamble of downplaying manipulation

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Whether it is GOP bias, manipulation, or simply confident well-funded traders, there is some agreement that the Intrade presidential markets have been affected by &#8220-non-informational&#8221- trading. To be clear, this is not a condemnation of Intrade. The exchange&#8217-s liquidity and trader diversity are hamstrung by archaic laws in the U.S., the continuation of which will frustrate a fair assessment of market accuracy. The point is that arguing for legal and regulatory change while downplaying the viability of manipulation and other market pathologies is counterproductive.

That prediction markets may be manipulated with some persistence should be no surprise to anyone who has followed the subject in the past couple of years. Here is a sampling of some of the warnings:

The HRC attack, part 2
The Giuliani manipulator buyer is back.
Manipulation can affect prices.
Is there manipulation in the Hillary Clinton Intrade market?
Is there manipulation in the Hillary Clinton Intrade market? Redux
Measured Enthusiasm For Prediction Markets

We now even find some academic papers that admit that manipulative trading may be profitable given certain assumptions. It is up to readers to decide which papers contain the most &#8220-stylized&#8221- assumptions.

No-one argues whether, in the long run, in general, manipulation is a losing proposition that subsidizes other traders — but is it really prudent to deploy that message, in comments to CFTC for example?

First, if Obama wins the election, based on the other available markets and poll projections, it would seem that an error had been introduced into the largest and most widely-cited of prediction markets. When comparing market and poll accuracy over time we are usually talking about only a few percentage points difference, so this error isn&#8217-t trivial. Furthermore this is a market that takes place only once every four years, so long-run arguments ring a little false. There&#8217-s no reason why something similar couldn&#8217-t happen in 2012. At least, one is optimistic that the regulatory situation will improve and Intrade&#8217-s traders will be more numerous and less capital-constrained at that time, which should make manipulation more difficult on average. Those who downplay the dangers of manipulation risk such goals by sacrificing their general credibility. It&#8217-s a negative skew proposition.

Second, some markets can irreversibly affect the outcome they predict. This happens infrequently and requires some fundamental basis, but specific cases can spectacularly undermine a general argument. This is the old bit about trying to cross a river that&#8217-s three feet deep on average. An example we&#8217-ve seen recently: when a business is predicated on maintaining a deposit base or borrowing short-term at certain rates, manipulation might be irreversible if it targets confidence or attacks the business&#8217-s funding costs. In essence, the manipulator forces the (possibly quite liquid) market to &#8220-settle&#8221- as the firm approaches insolvency, and prices do not snap back. Breaking a currency peg has a similar dynamic. Now, there is currently no real analog to these situations in prediction markets as such, but either these markets will continue to be relatively small and not widely-followed, or &#8230-.

Kenneth Arrow and Intrade CEO John Delaney are making the right arguments here: transparency in the form of more public markets, along with less concentrated risk, would have helped avoid this crisis. But don&#8217-t try to sweep uncomfortable subjects under the rug. That won&#8217-t end well.

[ Orginally posted to Risk Markets and Politics on Wednesday, 10/15 ]

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.

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Alex Tabarrok writes that &#8220-someone was manipulating Intrade to boost John McCain&#8217-s stock price&#8221-.

No&#8230-!!!&#8230-

John Delaney said that that firm has been hedging on InTrade &#8212-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.

Our prediction market network at LinkedIn

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1. How To Join Us

  • From within LinkedIn, FaceBook, or Google Reader / Google Mail, send me an invite and I&#8217-ll accept it.
  • I can introduce you to another member of our business network. Just ask me (Chris Masse), and I&#8217-ll do.
  • You are also invited to join the Prediction Markets group at LinkedIn.
  • [As for joining Midas Oracle as a commenter or poster, see this other webpage.]

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2. LinkedIn Network

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The Prediction Markets group at LinkedIn.

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Chris Masse&#8217-s network at LinkedIn.

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Our Prediction Market People – (from the two networks listed just above)

– Bernd Ankenbrand (Gexid Manager)

– Maurice Balick (NewsFutures CTO)

– Pierluigi Buccioli (Entrepreneur and Betting Exchange Trader- Owner of Bookmakers Review)

– Jason Carver (Entrepreneur and Engineer)

– Yiling Chen (Professor at Harvard University)

– Norris Clark (Vice-President of Sales at NewsFutures)

– Tyler Cowen (Economics Professor at George Mason University)

– Bo Cowgill (Quantitative Marketing Manager at Google)

– Eric Crampton (Senior Lecturer at University of Canterbury)

– Noam Danon (Qmarkets CEO and Founder)

– Pedro Da Cunha (Exago Markets CEO)

– John Delaney (InTrade CEO)

– Juan Manuel Ducler (Founder, BestChartsOnline.com / Trader &amp- Financial Consultant)

– Nigel Eccles (HudDub CEO)

– Leslie Fine (VP of Market Design at Xpree)

– Matthew Fogarty (Prediction Market Consultant – Xpree CEO and Founder)

– Lance Fortnow (Professor of Computer Science at Northwestern University)

– Nick Garner (SEO / PPC / Search Manager at BetFair)

– Cedric Gaspoz (Research and Teaching Assistant at University of Lausanne)

– Michael Giberson (Energy Economist at Texas Tech University)

– Sean Glass (Founder, Chairman, Chief Strategy Officer at Pikum Holdings)

– Andrew Goldberg (Intern at Media Law Resource Center)

– Robin Hanson (Professor of Economics at George Mason University)

– Tim Harford (Journalist at The Financial Times)

– Chris Hibbert (Software Architect, Project Lead at Zocalo)

– Donna Hoffman (Professor and Co-Director, Sloan Center for Internet Retailing)

– Panagiotis Ipeirotis (Assistant Professor at New York University)

– Max Keiser (Entrepreneur, Journalist, Co-Founder of the Hollywood Stock Exchange)

– Alex Kirtland (User Experience Consultant)

– Ken Kittlitz (Software Architect, Foresight Exchange, Consensus Point)

– Greg Knaddison (Developer and Sys Admin for PingVision)

– Nathan Kontny (Inkling Markets CTO)

– Kriss Monaco (Director of New Product Development at International Securities Exchange)

– Dean LeBaron (Independent Investment Management Professional)

– Heidi Levin (Director of Business Development at Inkling Markets)

– Mike Linksvayer (Vice-President of Creative Commons)

– Rory Mackay (PredictionsMarkets.com Co-Founder and Owner)

– Chris. F. Masse (Founder and President of Midas Oracle)

– Tracy Mullen (Penn State Professor of Information Technology)

– Jesper Muller-Krogstrup (Managing Director of Nosco)

– David Pennock (Principal Research Scientist at Yahoo!)

– David Perry (Consensus Point President and Co-Founder)

– Daniel Reeves (Yahoo! Research Scientist)

– Steve Roman (Financial Analyst at FXCM)

– Jason Ruspini (Financial Research Analyst, Vice President at Conquest Capital Group)

– Mike Sankowski (Product Development and Market Operations Manager at US Futures Exchange)

– Emile Servan-Schreiber (NewsFutures CEO and Co-Founder)

– Brian Shiau (The Sim Exchange CEO and Founder)

– Adam Siegel (Inkling Markets CEO and Co-Founder)

– Ashish Singal (Capital Markets Professional)

– Erik Snowberg (Assistant Professor of Economics and Political Science at California Institute of Technology)

– Brad Stewart (Reality Markets Founder)

– Brent Stinski (Media Predict CEO and Founder)

– Karim Tahawi (MyCurrency Founder)

– Jason Trost (Co-Founder of Smarkets)

– George Tziralis (Doctoral Researcher at National Technical University of Athens, Co-Founder of AskMarkets)

– Robert Wilburn (Rimdex CEO and Founder)

– Gerry Wilson (YooNew CEO and Co-Founder)

– Justin Wolfers (Professor of Business and Public Policy at the University of Pennsylvania)

– Matt Youill (Chief Technologist at Betfair)

– David Yu (BetFair CEO, Former CTO and COO of BetFair)

– Eric Zitzewitz (Professor of Economics at Dartmouth College)

– Plus, many, many more&#8230-

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Other Prediction Market People At LinkedIn

– Russell Andersson (Chief Operating Officer, Third Ave Beach)

– Paul Architzel (Counsel at Alston &amp- Bird)

– Adrian Asher (Global Head of Security at BetFair)

– Henry Berg (Group Manager on Information Markets at Microsoft)

– Matt Carter (Director of the Advanced Technology Group at BetFair)

– Alexander Costakis (Managing Director of Hollywood Stock Exchange)

– Jonathan Cumberlege (Former Director of Registrations &amp- Payments at BetFair)

– Mark Davies (Managing Director of Corporate Affairs of BetFair)

– Mike Dooley (Vice-President of Engineering at NewsFutures)

– Sean Dunbar (Former Head of Technology at Hollywood Stock Exchange)

– Mathias Entenmann (Exchange Managing Director of BetFair)

– Brian Galebach (Freelance Computer Programmer and Owner of Probability Sports)

– Carol Gebert (Former Founder at Incentive Markets)

– Christian Hellmers (Director of US Business Development of BetFair)

– David Jack (TradeFair Director)

– Nicholas Jenkins (Owner of Betcha.com)

– Ajit Kambil (Global Director at Deloitte Research)

– Alam Kasenally (Xpree CTO)

– Dawn Tevekelian Keller (Director, Services Business Group &amp- Prediction Markets at Best Buy)

– Amy Lamare (Former Operations and Content at the Hollywood Stock Exchange)

– Heidi Levin (Director of Business Development at Inkling Markets)

– Robin Marks (Head of Media at BetFair)

– Hunter Morris (Co-Founder of Smarkets)

– George Neumann (Professor of Economics And Applied Mathematics and Computational Sciences at the University of Iowa, Co-Founder of the Iowa Electronic Markets)

– Sean Park (Founding Partner at Sixth Paradigm)

– Todd Proebsting (Director at Microsoft, Former Group Manager on Information Markets at Microsoft)

– Don Reynolds (Site Administrator at NewsFutures)

– Felix Salmon (Financial Journalist at Portfolio)

– Bimal Shah (Product Manager at TradeFair)

– Martin Spann (Professor at the University of Passau)

– Will Speck (Director Business Development &amp- Market Research at Financial Times &amp- FT.com)

– Martin Thompson (Engineering Director at TradeFair)

– Geoffrey Tso (Engineering Manager at Xpree)

– Andrew Twaits (Corporate and Business Affairs Director of BetFair Australia)

– Mark Wood (Head of Programme at TradeFair0

– Plus, many, many more&#8230-

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3. FaceBook Network

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Chris Masse&#8217-s network at FaceBook.

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Our Prediction Market People

– Maurice Balick

– Caveat Bettor

– Bo Cowgill

– Nigel Eccles

– Mat Fogarty

– Robin Hanson

– Tim Harford

– Panos Ipeirotis

– Max Keiser

– Greg Knaddison

– Mike Linksvayer

– Chris. F. Masse

– David Pennock

– Marc Rose

– Jason Ruspini

– Emile Servan-Schreiber

– Erik Snowberg

– Jason Trost

– George Tziralis

– Justin Wolfers

– Plus, many, many more&#8230-

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4. Google Network

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– To share feed items with me (Chris Masse) within Google Reader, go to GMail, click on &#8220-Add Contact&#8221-. Paste my e-mail address there (chrisfmasse +++at&#8212- gmail +dot&#8212- com). Once I receive your invite, I&#8217-ll accept it.

– Alternatively, send me your GMail e-mail address, and I will activate the relationship.

– You will then see my shared items and I&#8217-ll see yours within Google Reader.

– Don&#8217-t worry, you can hide me later on, if you don&#8217-t like what I share. Just put your mouse cursor on my name on the list, &#8220-HIDE&#8221- appears, and click on it, and you won&#8217-t hear from me anymore.

– I share only the very good stuff on politics (facts + opinions, but coming from multiple horizons, not only from one camp), information technology, business, marketing, finance, prediction markets, etc.

– Chris Masse&#8217-s Shared Feed Items at Google Reader

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

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– 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 &#8220-institutional&#8221- trader (a hedge fund, I presume) who has been managing &#8220-certain risks&#8221- (hedging).

– Jason Ruspini, who wrote before this report came out, does believe that manipulations &#8220-non-informational&#8221- trades have been prevalent on InTrade. (We will see whether Jason changes his mind in light of InTrade&#8217-s debunking report.)