On the meaning of the US futures market
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.
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.
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.
Mr. Delaney conceded there had been erratic behavior — including spikes in the direction of Mr. McCain and away from Barack Obama “by up to 10 points.” And he said “trading that caused the unusual price movements and discrepancies was principally due to a single ‘institutional’ member on Intrade.”
“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.
These developments, he said, go against his instinct that a large market like Intrade with millions of dollars in bets — as opposed to the total $250,000 wagered at the Iowa markets — would be less likely to be an outlier in its odds for candidates.
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.
Continue Reading: NY Times
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