Summary of the Tradesports DEMS.HOUSE.OVER29.5 issue, and the TS credibility gap

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In the past weeks, there was something of a dust-up over TS&#8217- handling of the DEMS.HOUSE.OVER29.5 contract. According to all American media, the Democrats needed 15 new House seats to gain control of the House of Representatives. And, indeed, in the final days leading up to the election, there an excellent synchronization between the DEMS.HOUSE.OVER14.5 contract and the inverse of HOUSE.GOP.2006, indicating a perceived equivalence between 100 – p(HOUSE.GOP.2006) and DEMS.HOUSE.OVER14.5. Thus, the (presumably overwhelmingly American) market inferred that TS would follow the same convention as all American media, mainstream and otherwise, did. And according to American media, a Democrat replacing independent Socialist Bernie Sanders didn&#8217-t count as a Democratic pickup, because he already caucused with the Democrats anyway. However, TS initially disagreed with that, and counted Sanders as a non-Democrat. (More on that soon.)

Speaking personally, TS reinforced this perception&#8211-that independents who caucused with the Democrats counted as Democratic seats, and if they were replaced by an official Democrat, that wouldn&#8217-t increase the Democrats&#8217- vote total&#8211-by specifically stating, in regards to SENATE.GOP.2006, that a &#8220-loss&#8221- of the Connecticut seat to Joe Lieberman (who had switched from Democrat to Independent) would still be counted as a Democratic seat, because Lieberman already caucused with the Democrats anyway.

The fine print of the Tradesports DEMS.HOUSE.OVERXX contracts was, for most of the time, fairly clear in stating that the Democrats started from 201 seats, and anything over that number would constitute a gain. Judging from the activity of DEMS.HOUSE.OVER14.5, however, I believe that most of the market inferred (as did I) that 201 was the initial starting number of of Democrat seats according to American convention as well as TS, and didn&#8217-t realize the difference between the two systems. A very technical mistake, but not one for which TS deserved blame.

However, TS threw a monkey wrench in the system by telling forummer &#8220-gekko6&#8243- that Bernie Sanders&#8217- Independent seat going Democratic would not count as a Democratic pickup, because Sanders had already caucused with the Democrats in the first place. In this decision, as in its Connecticut Senate decision, TS showed an impressive grasp of the vagaries of the American political system&#8211-namely, that the size of each caucus was the real issue- and Congressional majorities being determined on the basis of caucus, not party affiliation, it only made sense to calculate the shift in power in the House on the same basis.

Unfortunately, that also meant that TS had, at the same time, repudiated its own convention for what constituted a &#8220-gain.&#8221- &#8220-gekko6&#8243- had already been very aware of this issue, because he had pointed out that the actual starting count according to the American system was 203, not 201&#8211-due to Sanders&#8217- being an independent endorsed and unopposed by the Democrats, and the vacancy of Bob Menendez&#8217-s seat after Menendez was appointed to the Senate by NJ Gov. Corzine. (From a foreign, technical perspective, this was defensible&#8211-Menendez&#8217-s seat was vacant, so the winner on Nov. 7 would count it as a &#8220-gain.&#8221- However, the Republicans did not contest Menendez&#8217-s very Democratic seat, so in the American convention, it was never counted as a Democratic pickup.) Tradesports&#8217- convention effectively said that the Democrats gained two more seats than the American convention did, and several days after the November elections, the American convention said that the Democrats had gained 28 House seats with 1 certain to go Democratic in a runoff (in Louisiana), so 29 seats total, while the Democrats had effectively gained 31 seats according to TS. Hence the problem with DEMS.HOUSE.OVER29.5. And while a legalistic interpretation would favor TS, I believe that the synchronization of DEMS.HOUSE.OVER14.5 and 100 – p(HOUSE.GOP.2006) indicated that most trading during the final few days showed that the market was unaware of TS&#8217- own convention for the election outcome.

I sent Tradesports an e-mail about it (apparently they don&#8217-t accept new entrants to their forum anymore, because my application has been pending for about a month), and they replied that the new number of Democrats minus 201 would constitute the number of Democrat gains, thus contradicting what they had told &#8220-gekko6.&#8221- I then publicly denounced TS for waffling the issue. TS did nothing, and apparently hoped the controversy would blow over. A bunch of recounts in close races later, TS appears to have lucked out, because according to the American convention, the Democrats now have at least 233 House members, up from 202-plus-one-Socialist, so the American system now says the Democrats have gained 30 seats and DEMS.HOUSE.OVER29.5 has been fulfilled either way.

Honestly, I was impressed that TS understood the American system as well as they did. Unfortunately, TS&#8217- subsequent &#8220-flip-flopping&#8221- showed that it did not, in fact, understand its own contract specifics. It also fit a larger pattern of cavalier disdain for its clients, often interpreting an ambiguous outcome significantly contrary to that of the market-majority (Harriet Miers confirmation, NK missile test contract) without appropriate compensation, setting up a joke &#8220-Arbitration Committee&#8221- that, if it even exists, has done nothing except infuriate customers, and most recently expiring sports contracts before the games were even concluded &#8211-and coincidentally raking in tons of expiry fees from people who weren&#8217-t given a chance to liquidate.

The latter, in fact, has happened with enough cavalier consistency that one can only wonder whether TS simply plans on milking its American consumers for as much as possible before closing the site to new American participants as a result of the recent US legislation. SportsBook has downgraded Tradesports to a C+ rating, which is at the very low end of what SportsBook can vouch for.

If TS plans on more effectively structuring its futures contracts, it should structure them along the lines of, &#8220-At 11:59:59 PM GMT on dd/mm/yyyy, Democrats will control ON or OVER XXX seats in the US House of Representatives.&#8221- If it wants to undertake a broader effort to restore its own credibility, it needs to stop the caprice that is fast becoming the norm for how it adjudicates contract outcomes&#8211-whether that adjudication occurs before or after the outcome has actually occurred. [added:] TS&#8217- infrastructure and trader base are both excellent, and there&#8217-s no point in wasting those assets on sloppy legalese and interpretation.

&#8211-Alex Forshaw

Tradesports forum homepage:

Addendum: As for 100 – p (HOUSE.GOP.2006) vs DEMS.HOUSE.OVER14.5, I remember them consistently mirroring one another, and thinking to myself, &#8220-Aha! Efficient markets at work.&#8221- However, what little historical data TS makes publicly available makes it hard to judge that, and there were snapshots when the two were de-coupled, so perhaps a minority of perceptive traders _did_ trade on the differences in the rules. But in the sample of snapshots that I looked at, the two were coupled (within 2 points) much more often than not during the final days, when liquidity was high enough to make arbitraging the two contracts a worthwhile use of capital.

The five minutes on my 15 minutes of WSJ fame.

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Coming from a politics-obsessed family, we (family and I) have been fans of predicting election outcomes for as long as I can remember. We are all conservative-libertarians of one hue or another, and I began writing &#8220-wingnut&#8221- screeds in eighth grade for my junior-high newspaper. What with the Florida Bush recount and 9/11, a superpoliticized era had dawned. My first forecast was 2002, and I got all the Senate races right but for one. Uncanny, I thought. Then came 2004, and I nailed that one too. Really uncanny&#8211-but then again, every clock was right twice a day, and this being the high and higher tide of &#8220-my side,&#8221- my predictions didn&#8217-t seem so uncanny in retrospect.

Fast forward to October 2006, and I was a junior in college with a mediocre academic record in finance and Chinese. An election was gearing up. I wanted to put my forecasting ability to the test. I also realized that, by blogging the rationales for my trades, it could become a valuable tool in my quest for a summer internship/job, to represent a side of me that my GPA didn&#8217-t represent at all. Not exactly lacking confidence, I put $2500 where my mouth was, and soon afterwards plowed in another $1000. I shifted in and out of many positions, but the common denominator was (as I said on my own blog some days ago) that I believed the market was underestimating the intercorrelation between congressional races, and especially Senate races all over the country. In other words, I bet very heavily on the Democrats taking both houses.

Three or so weeks into my blog, I was getting scattered, but very positive feedback about my material. People in Tradesports threads began quoting it, and a major Tradesports speculator asked me for some further opinions regarding the direction of the 2008 US presidential nominations markets. (I told him not to do anything other than short Hillary, but to especially not short Barack Obama, until after the election, and I couldn&#8217-t have any &#8220-gut feeling&#8221- until I had gauged what a Dem election victory would mean.) So I knew my material was good, but I was still pretty surprised, not to mention ecstatic, when WSJ reporter Jim Browning contacted me for information about election prediction markets. So I happily gave him everything he asked, and the superb WSJ article was the result. (That&#8217-s the non-$$, Pittsburgh P-G version.) But as our conversations continued into election night, I begain to despair about my positions&#8230-

In Virginia, George Allen had about a 12,000-vote lead with about fifteen counties remaining to vote. I knew they were in the pro-Webb counties (Fairfax, Loudoun, Richmond City&#8230-) but those precincts ranged from barely better than even to 72-28 (Richmond). Webb would have required statistically&#8230-.unlikely turnout and/or margins in order to win. A lot of people on DailyKos and other communities emotionally invested in a Webb victory, processing new updates literally seconds after they came, had given up on Webb. Harry Reid came on TV and his body language screamed, &#8220-I don&#8217-t think the Senate is in play anymore, even though I thought it was a couple of hours ago&#8230-but that was too much to ask, anyway.&#8221- Without Virginia, the calculations for the Democrats&#8217- taking the Senate became very grim, very fast.

Final polls (which I had spent the previous weekend trashing) showed VA breaking for Webb, comporting well with my own intuition. As the returns came in, however, Allen seemed to have an insurmountable lead with about 96% of precints reported. I concluded that Allen would win re-election, barely. Michael Barone&#8217-s forecast to the contrary, I noticed that the remaining precincts to report were healthy-majority Democrat (about 60-40, 65-35), but I didn&#8217-t think that Webb would be able to cut Allen&#8217-s lead in half&#8211-well, maybe half, but not zero it out. (I learned only later that when Virginia says &#8220-precincts reporting,&#8221- it apparently does not include absentee ballots when it says that. Or it reported them before it started tallying up the actual votes from the voting booths on that day. Or something. But a bunch of absentee ballots flowed into Fairfax later that netted about 7k more votes for Webb.)
However, rewinding to that despairing moment, the Democratic machines in Richmond City, Fairfax and Loudoun had waited until all other precincts had reported before reporting. Now, I don&#8217-t know about Virginia, but I know that in Missouri, the urban Democratic machines in STL and KC have a certain notoriety (in some circles, anyway) of waiting until every other precint has reported, and then releasing surprisingly high results (that usually imply incredible voter turnout&#8211-certain STL precincts reporting 97%, 100+% turnout isn&#8217-t unheard of), magically pushing the Democratic candidate over the top by a fraction of a percentage point. (I don&#8217-t want to start a flame war here&#8211-I think American politics is a blood sport, both sides have their different ways of playing dirty, and this was just something I didn&#8217-t factor in.) And six to twelve months after the election, some low level Democrats get a year in jail for voting fraud. It happens like clockwork, except that this time around I don&#8217-t think the MO Dems will need to resort to that. But I digress&#8230-

So I figured VA was lost when it wasn&#8217-t, and I puked up all the SENATE.GOP shorts. At one point, over 50% of my entire principal was gone. Then, after despairing for about ten minutes, I went back to the TS markets intending to try and make back what I could. Then I realized that Webb had magically jumped into a 2200 vote lead in VA with 100% of precincts counted. I had already looked at the counties and their turnout/margin statistics and figured that couldn&#8217-t have happened, but it had. So after losing over a couple grand&#8230-not to mention feeling like a complete idiot for throwing away $8000 by buckling at the last possible second, I hopped back on the SENATE.GOP train and rode it down to zero, and made back that entire original investment, plus about $150 left over.

So a lot of lost hair, Wheat Thins, NoDoz, bad grades and exhaustive political analysis later, I felt pretty vindicated, even though I had managed to squander 90% of the potential compensation. (I did indeed lose hair.) I had staked 1,000 shorts against SENATE.GOP.2006, well against the majority view of the market. As I recall, total volume going into the election was 35k or 40k trades, but because some significant fraction of that was the same positions being flipped back and forth between a stagnant pool of traders before I&#8217-d arrived, it was probably closer to 5% of outstanding positions. If my money hadn&#8217-t buttressed the market-minority&#8217-s view, the price would have been even more inaccurate&#8211-before election day, the price hovered around 70 percent, and without my heavy position on the &#8220-minority&#8221- side, it would have been closer to 80-20 in favor of the GOP holding onto the Senate. Plus, going into the election, I had stuck by my calculations even as the market had continued to erode my investment. Having that kind of confidence and analytical precision vindicated meant much more to me than $8-9000 in potential winnings lost.

&#8211-Alex Forshaw

P.S. On that non-mercenary note, I&#8217-m seeking an internship this summer involving event derivatives trading/research or options trading, either academia- or finance-based. If you&#8217-re interested, please e-mail to: [email protected]