Tag Archives: prediction markets

The New York Times on InTrades US political election prediction markets

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The NYT writers discusses 2 (different?) issues.

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#1. There was market arbitrage opportunies in the recent past between InTrade and BetFair &#8212-unlike 4 years ago, and contrary to the laws of economics.

– The price of the Barack Obama event derivative was cheaper on InTrade than on BetFair and the Iowa Electronic Markets. Conversely, the price of the John McCain event derivative was more expensive on InTrade than on BetFair and the Iowa Electronic Markets.

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#2. The NYT writer reports (without linking to it) the findings of the InTrade investigation about the behavior of their unnamed &#8220-institutional investor&#8221-.

– InTrade CEO John Delaney suggests that that institutional investor:

  1. might operate on InTrade at specific times where it might not be able to find liquidity on BetFair and/or IEM-
  2. might be a bookmaker willing to hedge its risks on a prediction exchange (a.k.a. betting exchange).

– Justin Wolfers&#8217- PHD student remarks that that institutional investor is not making an effort to shop around for the best prices, within each InTrade political prediction market.

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RELATED: See the comments on Midas Oracle here, here, here, and here.

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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 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.

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.)

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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InTrade CEO John Delaney states that prediction markets can prevent the next financial cataclysms. Surely. Prediction markets can also restore womens virginity, and treat mens baldness.

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John Delaney states rightfully that the prediction markets are a mechanism that aggregates information dispersed among the population. Then, he goes on at full throttle and states that prediction markets can help &#8220-avoiding future [financial] crisis.&#8221-

Jesus, Mary, Joseph, that&#8217-s quite an extraordinary statement.

John Delaney writes that crucial information is buried deep in the accounting books. That&#8217-s true, but that&#8217-s up to the financial analysts to decipher this problematic &#8212-our event derivative traders can then just pick up on what those experts conclude. The financial experts were unable to prevent the current financial cataclysm. Adding more event derivative traders and more prediction markets won&#8217-t solve any problem.

Prediction markets are only a reflection of the current knowledge of the best experts in town. At best, they are the best umpire you can get between, on one hand, the mass media or the politicians and, on the other hand, the best experts. But when nobody knows anything (or when nobody listens to Nouriel Roubini), the prediction markets are of no help.

What the prediction market industry needs right now is not an ill-informed, bragging rant.

What the prediction market industry needs is a way to discriminate between accuracy and utility.

What we need is more of Robin Hanson.

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UPDATE:

Transparency is an Imperative, but so are Speed, Access and Understanding.

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InTrade:

Transparency is an Imperative, but so are Speed, Access and Understanding

Tuesday, Oct 14, 2008

TRANSPARENCY IS AN IMPERATIVE, BUT SO ARE SPEED, ACCESS AND UNDERSTANDING
Prediction Markets Have a Big Role to Play

Historic volatility, unprecedented coordinated bailouts, nationalizations, and bankruptcies of some of the doyennes of the financial elite are just some of the new realities we are all faced with.

Many may well be impressed with the speed and scope of the response to this crisis. I am, but it seems to me that Intrade and all in the prediction market industry have an increased obligation and opportunity to contribute to solutions in avoiding future crises.

Since Enron, WorldCom, Tyco et al and again since this crisis ignited we are being told that maximum transparency, disclosure, and better risk management tools are the answer. These solutions are exactly what prediction markets look to and can deliver.

But is something really transparent if it is buried within a 200 page document or if you need a degree in accounting to decipher it? Likewise, if the costs of producing or gaining access to the information is such that only a few benefit, is that maximum transparency and disclosure?

The Sarbanes-Oxley Act (SOX) introduced after the Enron / WorldCom debacles is considered a success by most. However, in light of recent events and comments from Henry Paulson, John Thain and even former AIG chief Hank Greenberg, who all believe SOX threatens the US competitive position in the global marketplace, it hardly seems a panacea.

This is where prediction markets can really help now and in the future. We offer real-time aggregated collective intelligence that is easy to access and interpret. E.g. recession, tax rates, unemployment, offshore drilling, OPEC actions, bank failures, etc. Prediction markets provide a single number &#8212- the probability or risk of something happening. Right now there seems to be a 75% probability that the US will be in recession in 2009.

To get the best predictive information barriers to entry for participants and providers must fall so that adoption and diversity can grow. To contribute their maximum to society (which we expect will befit Intrade and other leaders in our industry) prediction markets need to be embraced, encouraged, and considered part of a solution to managing risks and change. Only when this happens will there be such diversity and adoption that the markets can reach their full potential in aggregating information on the most important issues.

In addition to new and revised regulations, the time is right for expanded coverage of those regulations to include prediction markets and the innovative solutions they offer. If ever there was a time to embrace innovative solutions for assessing and managing risk it seems that time came before I started to write this short note.

Prediction markets are far from perfect, but they typically deliver incentivized real-time, efficient, aggregated probability estimates on uncertain future risks and events. They have never had a more important role and potential than right now.

I welcome your comments.

John Delaney

CEO

Intrade

[email protected]

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Previously: What John Delaney told the CFTC.

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