Posted on 10/02/2005 11:03:05 PM PDT by dangus
HOW TRADESPORTS AND OTHER OUTCOME STOCK EXCHANGES WORK
Tradesports is a stock exchange which sells "shares" of "stocks," which can be traded just as if they were business stocks... except that rather than paying dividends, their value is based on the perceived likelihood of an outcome, and instead of business shares, the shares of possible outcomes to current events are sold. When one of several outcomes occurs, the stock of that outcome becomes worth 100 units (=$10). All shares of stock of other outcomes become worthless, once it is known that the outcome will not occur.
The theory is that this an indication of what people really think about the likelihood of an event. Actually, in theory, there are two factors in a stock price: how likely people think an event is to occur, and how confident they are in that prediction. Their confidence is expressed through their willingness to stake money on an event.
WHAT PEOPLE ARE GUESSING
One set of outcomes that are available as competing stocks is the set of possible Supreme Court justices. (Traders can apply to have any outcome they expect to happen to be added, if they are willing to bet enough.)
The most favored candidate is KAREN WILLIAMS. Her stock is presently valued at 20, up strongly, and higher than any I've ever seen for this set of outcomes. But skyrocketing in value and closing in fast on Williams is MICHAEL LUTTIG, up an incredible 15.6 as of late to 19.7. (Has there been some rumor about him?)
ALBERTO GONZALEZ's stock has rebounded strongly as of late, doubling, but he is still way back, at 12. HARRIET MEIRS stock had exploded, than collapsed as rumors came and went that the White House was strongly considering her. The rumors have abated, but they did put her into people's minds. Lately, she has rebounded moderately strongly to return to 8.
Other people who are apparently considered by some to be strong possibilities include JANICE ROGERS BROWN, at 6.5; SAM "Scalito" ALITO at 6.5; CONSUELO CALLAHAN at 6; PRISCILLA OWEN at 4.9; and EDITH CLEMENT, MAURA CORRIGAN MIGUEL ESTRADA, MICHAEL MCCONNEL and LARRY THOMPSON at about 4.1;
UPDATE: As I am writing this, someone dumped an amazing amount of Luttig stock at 14.7; others are still demanding 19.7 to sell.
Presidential-race stock exchanges were tarnished by rumors that some big-money players (such as George Soros) were trying to create momentum for given candidates by pumpig their stocks up. I can't imagine a motive for doing this for a USSC pick, but I can't figure out the way some outcomes trade, such as dumping Luttig 25% recent asking prices.
"I'd like to buy Anthony Kennedy."
"Too late. It's been done already."
I don't know much about Karen Williams. How is she?
I assume, like any listed stock with enough float, these "Shares" can be sold short? (Assuming the requisite deposits are retained in order to satisfy the order)
Ah, Tradesports. I made a hefty chunk of change last election, most of it from day-trading on Election Day after people dumped GWB when early exit polls were released.
You assume correctly. Tradesports is completely zero-sum; for every long position there's a corresponding short position.
"I'm SUPER! Thanks for asking!"
O wait, no, that's Big Gay Al. (Not Gore... he's just Bug Metrosexual Al; there's a differece.)
I don't know a heck of a lot about Williams. All I know is that her buzz last week didn't trigger any alarm in many conservatives, or any particular "DONT YOU DARE"s from Democrats.
Yes, Tradesports can be sold short, I believe. But that doesn't affect the theoretical validity of Tradesports; someone being certain a candidate will NOT be chosen is as indicative as other being certain that candidate WILL be chosen... Or are you speculating that maybe someone is trying to purposely drive down the price of Luttig?
Wanna piss off some liberals and create a rumor that ARMSTRONG WILLIAMS is a leading candidate?
Well, like any market, this would appear to be vulnerable to manipulation by a deep pocket, especially if shorts are present. In this case though, the risk is finite since the max value is 1.00 so maybe just your normal whipsaw manipulation would be present.
I don't object to their charging a trading fee, of course. I do object to the clear and obvious game theory mischaracterisation you offered.
The 'Rat faction subsequently sold the Bush contract heavily, all the way down to 23 bid at one point, iirc. This cannot have been simply bad trading judgment; the volume was too heavy (to quote Mr. Casey Stengel, ''Ya could look it up.'').
Well, any time there's THAT much of an underlay, one simply has to take a piece of it, and I did (no credit to me; I was planning on laying it off at even money at a local pub, turned out I didn't have to (shrug)).
Yes yes, it's zero sum less the house rake. I thought that was obvious enough to go without saying; apparently I was mistaken.
Tradesports is not zero-sum. And its variation from zero-sum is a good indicator of the rationality of the traders:
Consider an event with two options, A and B. In a rational and huge environment, selling shares of A would have an equivalent effect of buying shares of B. If I believe A is more likely to win than the investing indicates, I will buy shares of A. But in doing so, I drive the price up. The higher I drive the price, the more people SHOULD be willing to compete with the sellers by becoming sellers, and thus, with new sellers coming, the price moderates itself from rising further.
Or I could sell B, or even sell it short. The lower I drive the price, the more people SHOULD be willing to to compete with the buyers by becoming buyers, moderating the price away from the bottom.
That's if people are rational and intelligent.
Suppose everyone who owns A becomes absolutely convinced that A will win. Why sell at 99 if you are sure your stock will become worth 100?
Now let's look at a field like judges. It's nearly impossible to intelligently determine the likelihood of a judge being selected. Several people becoming convinced Karen Williams will be chosen in no ways dissuades people from owning stock in Luttig. Sure enough the value of all nominees does total more than 100.
The only way to make it truly a zero-sum game, given the fact that some people are inevitably going to behave irrationally, is to fix the number of total shares each investor owns at the beginning of the game. That would ensure that each dollar invested in A meant an equal amount of divestiture from B.
Incidentally, if anyone can show me that the buying price of Bush plus the buying price of Kerry is less than 100, I will believe that people were selling candidate A short when they would have made a better investmet by buying candidate B.
Given that a few weeks earlier, the majority of the money on Tradesports predicted a Bush win, and given the "fan" nature of that election, I cannot see how that many people who had invested in Bush could have divested from him... except for the unlikely scenario that Bush supporters were as likely as Kerry supporters to believe silly polls spread by Kerry supporters. If you want to truly invest in a Bush loss, the sensible thing would have been to have bought Kerry enough that Bush+Kerry=100. Any significant variation from that, or a sudden move in that total would seem to signal foul play
You are treating the house take as if it had a NET effect of zero; the only loss being a predictable constant. Suppose that the election created a roller-coaster in popularity for each candidate. That would generate a lot of buying and selling, no? Then the house's share of the total value would be large.
Or suppose everyone became convinced that a given candidate was 96% likely to win. According to a zero-sum game, the value of that candidate's stock would be 96. But suppose the house takes 10% of each transaction. Who would buy at 91, costing 9, when the most they could get to sell was 100? Even though the seller suspects that buying at 91 would probably result in a profit aside from the fees, he knows for a certainty that the profit could never surmount the cost of his trading fee.
I am here to explain to all why Luttig's stock is soaring: it is because he WILL be nominated. Luttig, Luttig, Luttig, Luttig, Luttig! That is all.
You're making this more complicated than it needs to be. Tradesports is zero-sum in a way that commodities futures markets are and stock exchanges are not. If the value of a commodities contract goes up a dollar, somebody has made a dollar and somebody has lost a dollar. This is not the case with a stock exchange, where long positions are not necessarily exactly balanced with short positions. That's all I was trying to say.
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