Intrade follow-up

Apparently, some Romney supporter was trying to manipulate the Intrade market today.  The market quickly recovered, but I think the movement towards Romney is still a residual effect.  Derek Thompson has details.

But this morning, something very weird happened on Intrade. Mitt Romney began the day trailing the president 60 to 40 (i.e.: his chance of winning was priced at 40%). Suddenly, Romney surged to 49%, and the president’s stock collapsed, despite no game-changing news in the press. The consensus on Twitter seemed to be that somebody tried to manipulate the market.

But the more interesting question might be: Could a campaign re-direct their tens of millions of marketing dollars to bid up the candidate’s stock price for a final month to bolster his Comeback Narrative in the press? We hashed it out with Justin Wolfers, an economics professor at the University of Michigan.

DT: What just happened?

JW: At around 9:57am this morning, I noticed something funny happening on InTrade: Obama’s stock was tanking, and this was happening in the absence of any concrete political news. Barnard College’s Rajiv Sethi alerted me over Twitter that this was really due to some unusual trades in the Romney stock (which then ultimately affect Obama)…

How much might this sort of manipulation have cost?

The total quantity of Romney stock traded between 9:57 and 10:03 was around $17,800. But that’s not the “cost” of this manipulation (if that’s what it was), because the buyer got stock in return. If we value that stock at 41 (rather than the higher price he paid), the net cost of this manipulation/error was about $1,250.

What did the trader get in return?

About six minutes where Romney’s stock rose sharply. Notice though that the effect disappeared very quickly. The Obama Flash Crash disappeared nearly as quickly as it appeared.

Two conclusions follow. First, you can manipulate prediction markets fairly easily. But second, you won’t get much bang for your buck…

How can we trust prediction markets if they are susceptible to this sort of manipulation?

Two observations:

1. Yes, prediction markets are imperfect. But that’s not the point. The question is whether they are less imperfect at predicting elections than the alternative approaches. The evidence so far says that yes they are, and this evidence holds despite previous attempts at manipulating markets.
2. But there are still smarter and dumber ways to read prediction markets. For instance, in this case, the Romney stock moved sharply, even in the absence of news. That should make you suspicious. Also, the Romney stock moved up, even though the Obama stock wasn’t moving down (at first). A more telling issue is that the Intrade prices moved sharply, but those on other prediction markets: the Iowa Electronic Markets, BetFair, and with the British bookies didn’t. That’s a big hint that there may be mischief afoot in the InTrade markets.

My conclusion is that there’s useful information in prediction markets, but you need to be careful in interpreting it.