Posted on 10/17/2004 11:17:52 AM PDT by drangundsturm
Tradesports.com Bush Election Futures: Bid: 54 Ask: 54.9
IEM Winner Takes All Bush two-party vote market (combined): Bid: 57.5 Ask: 58.9
(Excerpt) Read more at tradesports.com ...
The IEM Bush election futures have seriously diverged from the Tradesports.com Bush election futures following a single large trade that occurred on Friday. In the trade, approximately 10,000 Bush contracts were sold, driving the price temporarily to a low of 10. The price of this market corresponds to the percentage probability of Bush being re-elected president this November, so a price of only 10 would represent a 10% chance of a Bush victory, which is obviously too low given current publically available information.
The Tradesports market quickly recovered, and within 30 minutes was trading in the low 50s. However, the large trade continues to be felt two days later, and the Tradesports market has now diverged from the Iowa Electronic Markets two-party vote share winner take all market, whose price corresponds to the percentage chance that Bush will garner more of the two-party vote than Kerry.
Normally, the IEM market trades a few points under the Tradesports market, because the two markets have slightly different pay-off parameters. The Tradesports market pays off if Bush wins the presidency, while the IEM market pays off if Bush receives the majority of the two-party popular vote. As seen in the 2000 election, Bush may be able to win the presidency while losing the popular vote, therefore the Tradesports market typically has traded 2 to 4 points higher than the IEM market recently, representing the market's view that there is about a 2 to 4 percent probability of Bush taking the presidency electorally while losing the popular vote.
So currently, Tradesports is approximately 6 points too high as compared to IEM. Normally, the two markets are kept in sync by market players who use a technique called arbitrage to lock in small guaranteed gains when markets differ too much to be mathematically plausible.
However, in this case the markets have remained divergent for two days. One reason is that the IEM limits players to only $500 in their positions. The large trade that sparked the divergence was nearly 100 times larger than this limit, making it impossible for just a few players to correct the markets through arbitrage plays.
The Tradesports market also continues to feel the reverberations of the large negative trade. To see how a single large trade could continue to affect the market days later, it is only necessary to look at the market trading activity from the point of view of the players who had Bids outstanding at the time of the large sale of Bush futures. The large trade allowed all of the outstanding bids to be satisfied, even ones that were ridiculously low. This temporarily dried up the pool of people who were willing to bid in the market. But an even bigger effect then occurred: people who had bids in at 10, 20, 30, 40, and other low numbers suddenly found themselves with windfall profits as the markets quickly recovered into the low to mid 50 range. Those players naturally wanted to lock in their unexpected gains, not wishing to take the chance that the player who initiated the original large trade "knew something" that they did not (perhaps some news that would be negative for Bush that was not widely know instigated the large sell trade). So, many of those players were perfectly willing to put in Asks in the low to mid 50s to lock in their newfound profits. As the saying goes: "Bulls can get rich, Bears can get rich, but Pigs can't get rich."
The way the large negative trade went down has sparked some speculation of market manipulation. A normal way to place a large bet would be to accumulate the position over time so as to maximize profits, not dump the entire position in a few minutes. A wealthy individual who wished to create the feeling that Bush was in trouble might initiate such a trade to drive down the market. Rush Limbaugh, a popular conservative radio host, had been speaking about the Tradesports market showing Bush leading just a short while before the large trade occurred, which fueled speculation that market manipulation was the goal of the trade, and not profits.
However, there are other possible explanations for this trade, so nothing is certain about its motivation. The trade may, for example, simply have been a book maker hedging a large private bet. Other explanations are also possible, including an insider who knew some very bad news was about to air that would hurt Bush. If that news was time critical, there may not have been time for the trader to accumulate his position gradually, it may have been necessary to quickly establish the position. However, since no such bad news has appeared two full days later, this theory is starting to look implausible.
What is certain now is that a small profit can be made by arbitraging the IEM vs. Tradesports markets, and that fact will likely bring the markets back into alignment soon ... unless another large trade takes place this week and starts the negative cycle all over again.
Dumping Bush stocks... maybe it was Martha Stewart with more insider info.
> What is certain now is that ...
... these markets are not reliable indicators of anything.
And even if they were, 99.9918435% of the voting public
has never even heard of them anyway.
However, if you can make money playing them, by all means
do so.
I'll take 54.8 to 45.9 any day!
I love seeing George Soros waste his money.
See the analysis at http://www.poorandstupid.com/chronicle.asp
That was last year's number. This year, it has edged up slightly to 66.29%, thanks largely to increased citations of bogus global warming numbers in letters-to-the-editor by people who don't have any idea what they're talking about.
:)
So, you can buy at 54.9 and sell at 57.5? I'd like to move a million contracts at those prices, please.
Also, the markets are ever so slightly different, one is the Bush winning the presidency, the other is that the republican ticket takes more popular votes than the democrats. But that factor should place tradesports a bit higher than IEM, not the other way around, since it's pretty clear from demographics that bush has an electoral college advantage vs. the popular vote, as was proven in 2000. (Since 2000 the electoral college is even "redder" since red states picked up votes while blue states lost them).
If so, one thing that might help make the IEM's graphs more meaningful would be to either plot (closing bid+closing ask)/2 or else plot median(closing bid,closing ask,closing market). Some other figures would be even better, but the above should be doable with available data.
If you total all Tradesports.com 50% states and up,the President has 291 in EV's.I like those odds!
I own 200 dollars worth of Kerry.
I'm voting for Bush, so come Nov 2, I win either way!
Rush mentioned this site on his program Friday and I think that has something to do with this weird trade.
Sounds like George Soros peeled off a few bucks of pocket change and placed his bet on Kerry. Does sound like a good opportunity to make a few bucks, especially if it happens again. Next time, assuming there will be more of these, my guess is that the arbitraging will sop up the price change in minutes rather than days. This could get interesting.
No indicator is perfectly reliable, but the IEM is more reliable than any of the pollsters' results. Tradesport.com and others like it are more helpful than the MSM "information" sources, which may not be saying much, but every little bit helps. So, it's not clear what you are "certain" of.
As you note, one nice feature of these manipulation attempts is the opportunity it gives to make the manipulators pay, and pocket a few bucks in the process. Sweet. And the more attempts like this, thwarted by profit-takers, the more volume the markets will have, and the less imprecise their prices will be relative to actual outcomes. Note to George Soros, and like-minded manipulators: "Bring it on, suckers!"
BTW, why should it matter if Joe or Jane voter knows about these markets, or follows them? The point is having a useful mechanism for hedging events of various types, and these developing "political event", "weather event", and "economic event" markets are a good step in that direction.
= = = = = = = = = = = = = = = = = = = = = = = = = = = =
> What is certain now is that ...
... these markets are not reliable indicators of anything.
And even if they were, 99.9918435% of the voting public
has never even heard of them anyway.
However, if you can make money playing them, by all means
do so.
This is a nice "free intro" to event options contract trading, but without "real money" at stake, one would expect minimal predictive capacity. Still, to the extent that the players "get into" accumulating credits, it may do OK as a toy predictive scale.
Hopefully, once tested, the proprietors will go foward (in spite of "onorous SEC paperwork") and turn this into a tool where real hedging can take place.
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