Even though the number-crunching team at fivethirtyeight.com gives Obama a 92.5% chance of winning the presidential election, John McCain had consistently out-priced Obama by as much as 10% had been consistently 10% higher on Intrade.com than on similar exchanges (Obama is currently leading 84.3 to 15.4). There were some wild swings the last couple of weeks as an “Institutional” trading firm was trying to corner the market:

Actually, I guess they were taking large positions to “manage certain risks” (whatever that means) From the CEO of Intrade.com:

We are satisfied that they are using our markets in good faith and in the ordinary course of their business and that there has been no contravention of our Exchange Rules. Our investigations lead us to believe that the member is using increased depth in these markets to manage certain risks.

Further, it is apparent that the cost of time in accumulating the desired positions by those “institutional” members responsible for moving the McCain market up and the Obama market down differs fundamentally to loyal “retail” members that Intrade relies on.

The Exchange views this unusual activity as an indication of the increased relevance and traction of Intrade markets as risk management tools coupled with the yet maturing state of the prediction market industry as a whole.

What I want to know is who is bidding 1.1 on Hilary Clinton for President? Why not short it down to zero? Or is this basically the market’s price for the probability that 1) Obama somehow drops out or doesn’t survive until the election, and 2) Hilary runs and wins? I’d still wager to short it down to 0.1 at least.
Are any of you guys trading on intrade? I’ve noticed they have an API.
Check out this guy who has created his own automated market maker on Intrade, using this algorithm. Complete with a log of his trades (updated four times a day). I don’t have enough time to add it all up, but I wonder if he’s making any money?

For the first two of those contracts, the market maker will enter bids and asks of 38 contracts, and can lose a maximum of $5193.84 on each contract. For the other four contracts, the market maker will enter bids and asks of 115 contracts, and can lose a maximum of $7906.25 on each contract. The orders may not always show as many contracts as the market maker enters because it doesn’t update orders in response to partial executions. The market maker is designed to maintain a spread of about 2.5 points or less between the bid and ask (unless the price would drop below 0.1 or rise above 99.9, in which case it only maintains an ask or a bid, not both), and it should place new orders within a second or two after one of its orders is completely executed.

There’s probably some good info about the API and market making on the bulletin boards, also.

This entry was posted on Monday, October 20th, 2008 at 11:00 pm and is filed under stocks, trading. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.