Source: FiveThirtyEight.com

Intrade Betting is Suspicious

There's something funny going on over at Intrade with respect to the pricing of the Obama and McCain contracts.

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That is a huge spread, 51.5 points versus 61.7 points. This is the equivalent of the Giants being 3-point favorites at the Bellagio Sportsbook, and 7-point favorites at the Mirage down the block. Those things just don't happen in efficient, sufficiently liquid markets, because they create arbitrage opportunities: you'd lay $10,000 on the Giants at the Bellagio and $10,000 on their opponents at the Mirage. Any time the Giants win by fewer than 3 points or more than 7 points, you lose nothing, since your two bets cancel out. But any time they win by fewer than 7 points but more than 3, you win both bets, and take home $20,000 (less the casino's vigorish) for absolutely no risk. Pretty good deal, right? That's exactly what's happening with these futures contracts.

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In fact, the Intrade pricing doesn't even seem to be internally consistent. If you look at their pricing in individual states, they have Obama at no lower than 60 percent or so in each of the Kerry states, as well as in Iowa, Colorado and New Mexico. And Virginia, Nevada and Ohio are all at about 50:50. The relationships between the odds of winning any given state and the odds of winning the electoral college are difficult to determine, but I'm pretty sure that Obama should be higher than 51.5 percent given those parameters.

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It's pretty obvious that this is not some sort of random walk. Rather, every so often, some individual trader or some small group of traders are shorting all the Obama contacts in bulk and resetting the entire market. The markets then organically climb back upward until the rogue trader strikes again six or eight hours later. The volumes on these contracts have been very high for the past week as a result.

Most likely, this is just some idiot degenerate gambler who is trying to have some fun. Between the Obama and McCain contracts, there appears to be about $400,000 in contracts changing hands every day, which is a lot by Main Street standards, but minuscule by either Vegas or Wall Street Standards.

Read more: http://www.fivethirtyeight.com/2008/09/int...

Source: John Delaney, CEO, Intrade

Intrade Comment on Alleged Manipulation in the Presidential Markets

There has recently been vigorous discussion of unusual trading activity on our political prediction markets. What could be motivating the activity has been subject to widespread speculation by academics, journalists, our own users and others. Some external commentators have claimed the unusual trading patterns indicate that our markets are being intentionally manipulated for political purposes. Others have gone further yet.

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The trading that caused the unusual price movements and discrepancies was principally due to a single "institutional" member on Intrade. We have been in contact with the firm on a number of occasions. I have spoken to those involved personally.

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Further, it is apparent that the cost of time in accumulating the desired positions by those "institutional" members responsible for moving the McCain market up and the Obama market down differs fundamentally to loyal "retail" members that Intrade relies on.

Read more: http://www.intrade.com/jsp/intrade/misc/bl...

Source: New York Times

Trading Variance in Election Predictions Raises Questions

In the last few weeks, Intrade.com, which is based in Dublin, had consistently given John McCain as much as a 10 percentage point edge in his chances to be elected president compared with other large online overseas betting sites. These include the British-based Betfair.com, as well as the Iowa Electronic Markets, a research project at the University of Iowa that allows bets of $500 on election results.

If this were merely an academic exercise in market behavior, few people besides economists would care. But in this information-saturated election, the candidates’ numbers on Intrade have become another important way to analyze the state of the race. Since 2006, the influential site realclearpolitics.com has included real-time updates of the latest Intrade prices next to the polling results it gathers.

On Thursday, the chief executive of Intrade, John Delaney, responded to allegations that there had been market manipulation — in essence, that somehow Mr. McCain was being favored by artificial means.

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“The surprising thing is not that there was some manipulation, it is that it was sustained,” said Forrest Nelson, who teaches at the University of Iowa and has followed Intrade as well. ... David Rothschild, a Ph.D. candidate in business and public policy at the Wharton School at the University of Pennsylvania, has tracked these markets. He said of the institutional trader on Intrade: “If their job was to hedge bets, they were not doing a very good job at gaining these positions at a minimal cost. They are overpaying for these positions. I don’t know if they are doing it to manipulate the market, but they are not doing a very good job at minimizing their costs.”

The political explanation — that someone was trying to game the system to give Mr. McCain some momentum — has the advantage of at least appearing rational to economists. Increasing a candidate’s perceived standing would be something of value to offset the irrational decision to waste money buying a share in Mr. McCain for more than the absolute minimum price. For example, on Sept. 14, John King of CNN on “This Week in Politics,” said: “Let’s take a look at what the smart money is saying. This is the latest from Intrade.com. It’s the Irish bookmaking site where you could put your money where your mouth is. As you can see, Barack Obama’s big lead — look at that green line — has vanished and he’s now just slightly behind John McCain. You can see McCain, he’s the purple line shooting up just there. That’s the word from the bettors. They think McCain has ascended at the moment.”

Read more: http://www.nytimes.com/2008/10/20/business...