First, the Financial Times —-and, now, Freakonomics.
The journalistic rule should be that, if you cite one prediction exchange, you should cite the one that is the most liquid on the market you are writing about. For UK politics, it is clearly BetFair.
BetFair has clearly a PR problem.
The British Republicans (“-the Tories”-) have dipped a bit more at BetFair, yesterday, and everybody is wondering why. (See the first comment in the second link.) Expect Max Keiser to weight in. We are going to have fun this spring, I kind of feel that in the air. 
UPDATE: Bad poll for the Tories.
Here’s the most likely scenario as to what happened here:
Somebody had a decent short position. Say they had about 65 shares (the volume bars indicate that this was likely a <- 100 share transaction, ie, <- $5 worth of commissions for Intrade, so mentioning commissions / greed as a motivator is pure ignorance). They wanted to put up a buy of 65 shares at say 5%, so that if the price ever dips that low, they can close their short position and wind up with a nice profit. And then, big mistake, they hit sell instead of buy. The market plummets. Mystery solved. It’-s called human error.
A mysterious InTrade forum user (could be a trader or could be John Delaney) has posted this:
*****
Newbie
Joined: 24/01/2010 15:58:35
Messages: 1
Original thread at midasoracle.org:
So the actor has to a) not care about the transaction fee and b) have limitless margin. Intrade fits the bill for both of these. a) they don’t care about transaction fees because they are ultimately collecting them and b) if you only short when the bids are summed to over 100, it’s essentially an arb.
Until mid-April 2010, Intrade will refund market taking and expiry fees for arb trades –- details here.
Some products with a single guaranteed outcome are linked for cross-margining purposes. If you collect at least $10 by shorting all three contracts for the 2012 presidential election, then you will not have any funds frozen. The contract rules will tell you if a product is not linked (e.g. 2012 republican presidential nominees).
Intrade provides an API for developing trading applications. I am running a bot to take out market imbalances and as far as I’-m aware Intrade is not competing with me.
Ah.
In Paul Krugman’-s blog entry, Done, at 4:39pm (EDT) on March 21, 2010, he commented: “-OK, nothing is sure in this world. Intrade is still giving Obamacare a 2.2% chance of failing, …”-
He was talking about the InTrade market on Health Care Reform. In theory, the market price in such a derivative market should equal the expectation of the underlying event coming true. However, Paul Krugman (and many others) forgot one of the most basic assumptions of the market model! Transaction costs.
When the market price is over 95, InTrade charges a transaction fee of 3 cents per contract (real money). While market prices are quoted in percentages, the payoff for a winning ticket is $10 (real money). Therefore, the transaction fee is 0.3% of the winning payoff. In addition, InTrade charges 10 cents per contract on expiry (if you “-win”-). That’-s another 1.0%.
So, when the market was quoting 97.8% likelihood of the HCR bill passing before June 2010, this didn’-t really mean that there was a 2.2% chance of the bill not passing. A winning ticket would be subject to 1.3% transaction fees. The real likelihood of failure was 0.9% –- approximating the uncertainty that Obama would be “-hit by a bus”- before signing the bill into law.
No rational investor would wish to purchase a share for more than 98.7, given the transaction costs. In a sense, this is the market’-s “-100%”-. Interestingly, at 1:49pm GMT today (March 23), there are 695 bids at 99.1 and 413 asks at 99.2. Clearly, some traders are not subject to the full transaction fees at InTrade. More about that here.
[Cross-posted from Toronto Prediction Market Blog.]