Comments on: Election Markets

By: alexis

alexis — Fri, 04 Jan 2008 10:41:54 +0000

@23, market prices are always reliable indicators of supply and demand in a given market. The markets show what supply and demand is, rather than being indicators of some noumenal quantity.

It would be more useful to say “the market is not liquid enough for price discovery to be reliable. I.e. pace considerations in @24, a trader cannot usefully enter into transactions at observable prices that (ceteris paribus) generate a better return than ‘risk free’ investments, for the same risk. They can smell lunch, and it appears to be free, but it isn’t.

Secondly, of course you will see a ‘negative time value of money’ when there are no arbitrage opportunities. Observing a tractable arb opportunity is equivalent to observing a ‘risk free’ bond portfolio that is offered at a better price than ‘risk free’ bonds in the market. Did you ever fix that spreadsheet?

By: Brian

Brian — Thu, 03 Jan 2008 15:56:42 +0000

By the way, some of the biggest arbitrage possibilities are gone now. Guiliani is now down to 0.220/0.224 on Intrade. Josh Marshall thinks that this is because of Guiliani's late tanking in the Iowa polls. But those polls were all out 24 hours ago, and his numbers were much higher. I think it is because of some active CT readers! This is one more reason why I don't take these arbitrage chances. It requires acting quickly and getting the math right. Last time I tried to do that, I wrote post 7.

By: Brian

Brian — Thu, 03 Jan 2008 15:51:59 +0000

Sorry about getting the math wrong in the earlier cases. There was an arbitrage possibility, but not the size of one I suggested. My apologies for the mistake.

By: caveat bettor

caveat bettor — Thu, 03 Jan 2008 15:43:24 +0000

A 1% difference (either for a contract probability priced under 10% or over 90%) is not much of an arbitrage opportunity. Besides the liquidity issue which has been mentioned several times, there are a couple of other significant factors:

1) cost of carry (which reduces liquidity), and
2) credit risk, namely the increasing difficulty of making withdrawals, given the increasing regulatory constraints

By: dsquared

dsquared — Thu, 03 Jan 2008 13:22:19 +0000

20, 22: if there isn’t enough liquidity to make arbitrage worthwhile, then that establishes Brian’s larger point a fortiori; if there isn’t enough liquidity to make arbitrage worthwhile, there certainly isn’t enough liquidity for the market prices to be treated even as reliable indicators of the supply and demand in that particular market, let alone anything else in the real world.

Digging up my old spreadsheet, I notice that these exchanges are still apparently operating on a pricing convention which implies a negative time value of money, btw. (for example, on IEM, to get $1 with certainty in eight months’ time would cost you $1.018 now).

By: ato chiffre

ato chiffre — Thu, 03 Jan 2008 10:28:15 +0000

There is simply not enough liquidity on these websites to make arbitrage worth while; moreover, I would check whether you have actually got the Betfair percentages correct.

By: Divergence between InTrade and BetFair political prices?? | Midas Oracle .ORG

Thu, 03 Jan 2008 08:34:57 +0000

[...] F. Masse January 3rd, 2008 I have been inundated by e-mails asking me to comment on the Crooked Timber posting on arbitrage possibility between InTrade and BetFair on US presidential e…. My answer: I would rather see such a study on long series —as Justin Wolfers and Eric [...]

By: jim

jim — Thu, 03 Jan 2008 00:56:12 +0000

There isn’t enough volume on IEM to sustain arbitrage. I originally bought some RROF. When Thompson split off, I sold the Thompson. When Huckabee split off, I went to sell the RROF. I found that on each uptick, I could only unload 5 or 10 at a time at the current bid price. So the notion that you’d buy $500 worth of Giuliani at .224 is unrealistic. There’s maybe $5 or $10 worth available at that price. Anyone who came in with the idea of buying $500 worth would bid up the price massively.

By: stuart

stuart — Thu, 03 Jan 2008 00:11:47 +0000

Robin, I have no idea whether people try to influence betting markets in that way, and I didn’t think I was responding to any post about that. I wouldn’t have thought that the results of these markets are generally widely enough publicised to be worth the effort: this may be changing as online betting becomes more commonplace, or maybe it has and I am behind the times.

I was commenting on the point by Brian that suggested there is a bias towards the right wing in betting markets once you account for size of bets. This might well be true in general, but I was just thinking this effect would be much smaller, if it exists, in the US primaries because you have mostly left wing candidates competing with each other, and the same for the right wing candidates (obviously there is probably some overlap). Are there significantly right wing Democratic candidates, and left wing Republicans in each race that this effect would happen to any noticable degree? Or are there going to be Republican bettors putting lots of money on the Democratic candidates in some significant pattern (but which candidate(s) is likely to attract Republican bets?)

By: dsquared

dsquared — Wed, 02 Jan 2008 23:03:31 +0000

13: yes, Brian, I think you’ve misunderstood the pricing conventions or something. You buy and sell the same amount at two different prices.

By: Robin Green

Robin Green — Wed, 02 Jan 2008 22:23:55 +0000

Stuart, what are you saying, primaries aren’t important enough for anyone to spend any money on? Er…

Or perhaps you’re saying that betting markets aren’t important enough for anyone to spend any money on to try to influence?

By: stuart

stuart — Wed, 02 Jan 2008 21:59:02 +0000

Brian, aren’t we talking about Primaries here? The effect you postulate might affect a competition between a Democratic and Republican candidate, but surely would be fairly minor even if it existed in this case, I would think.

By: Brian

Brian — Wed, 02 Jan 2008 21:12:59 +0000

I don’t set up accounts on betting sites because I’m not confident I would use them wisely. Not having accounts is one of the best tying myself to the mast strategies I know of. It is sorely tempting to und the knots when the siren song involves free $$.

By: GreatZamfir

GreatZamfir — Wed, 02 Jan 2008 21:08:13 +0000

@ Brian: have you actually made that bet you describe? If not, why not?

By: Hedgie

Hedgie — Wed, 02 Jan 2008 21:06:29 +0000

Brian, not sure I agree with your math. Also, your example isn’t really arbitrage (riskless profit), it’s simply a long and a short position on two exchanges with substantial risk. If I buy $500 of Guiliani at $0.224 that’s 2232 shares. If I sell $1500 of Guiliani at $0.285 that’s 5263 shares. If Guiliani loses you are correct, you win $1000 (short $1500 minus long $500). However if Guiliani wins you must cover your shorts at $1. You’re paying out net $0.715 to cover for a total of $3763, then net out your $1732 gain on the long position. Therefore if Guiliani wins you lose $2031, which intuitively makes sense since you took a short position 3x your long position. Of course that assumes you hold the shorts til Guiliani wins.