Influencing a prediction market

Skewing a prediction market: somebody plunged a lot of money into Intrade’s US presidential election market right before voting day.

At around 3:30 pm, I noticed that the order book for both Obama and Romney contracts on Intrade had become unusually asymmetric, with a large block of buy orders for Romney in the 28-30 range, and a corresponding block of sell orders for Obama in the 70-72 range.

Why that combination?

If one really wants to manipulate a market, it has to be done by placing large orders that serve as price ceilings and floors, and to do this across complementary contracts in a consistent way.

The hundreds of thousands of dollars spent (!) didn’t seem to have an effect.  But they could have.

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Prediction market on the US presidential election

One of the most visible prediction markets now calls the US presidential election for the incumbent.  President Obama to win is now trading at 57.1, while Romney is valued at just about 40.

Prediction market gets it wrong

Popular prediction market Intrade thought the US Supreme Court would nix Obamacare, but got it wrong.  Shares of “US Supreme Court to rule individual mandate unconstitutional” traded high right up to the decision, ending up between 70 and 80:

Interesting to see that spring swing, from rather low on up to high.

Barry Ritholz thinks this reveals a classic weakness of prediction markets, “[f]utures markets are really a focus group unto themselves”.

Further,

 When the group is something less representative of the target market, they get it wrong with alarming frequency. Indeed, the further the traders are as a group to the target decision makers/voters, the worse their track record.

(thanks to Steven Kaye)

Futuring water

Interesting post about the future of water.  For one thing, the author worries that we’re not futuring hard enough about it:

As yet, there’s no futures market for water. (is that true?)

For another, Lisa Margonelli notes the possibility of water-driven geographical transformation:

He sees businesses shifting out of areas that fail to reach agreements around water, and towards areas with easy water. And when the jobs go, the people will follow. What area “in the U.S. is best positioned for water? The Great Lakes. I see the Rust Belt flourishing over the next 30 years, while people will leave places like Colorado.”

That “he” is “Bill Brennan, a principal at the water hedge fund Summit Global Management.”  How many water hedge funds are there?

Note, too, the possible rise in old tensions: inter-regional, rural vs urban, environmentalists vs developers.

Intrade-ing towards 2012

A good example of using prediction markets for forecasting purposes comes today from the American political left.  Talking Points Memo consults the Intrade futures site to suss out the US presidential election.

Some good criticism of prediction markets there.  Be sure to check the reader response email, included in the post’s second part.

For historical flavor, here’s a shot of Intrade 3 years ago:

Intrade in 2008