I saw an interesting article on Slate today: "Why a Single Trader Was Willing to Lose Millions Betting on a Romney Win" It seems that one third of the bets placed on a Romney win in the last few weeks were by one person. The article relies on this paper, titled Trading Strategies and Market Microstructure: Evidence from a Prediction Market.
The paper from Columbia University's Rajiv Sethi and Microsoft Research's David Rothschild found that the single anonymous trader accounted for about one-third of all bets made on Romney during the final two weeks of the campaign. So, regardless of motivation, it's clear the trader played an out-sized role in determining an Intrade line that was all too often used by pundits and political journalists to suggest the presidential race remained a toss-up until the very end.Why'd he do it?
Here's the three possible reasons the authors examined before largely settling on the one that makes the most sense in the world of politics:"Why a Single Trader Was Willing to Lose Millions Betting on a Romney Win"
(i) the trader was convinced that Romney was underpriced throughout the period and was expressing a price view, (ii) he was hedging an exposure held elsewhere, or (iii) he was attempting to distort prices in the market for some purpose.
After analyzing the possibilities, the authors come to the conclusion that he was attempting to distort prices in the market for some purpose:
Assuming the trader was rational and informed, Option 1 can most likely be ruled out because the trader could have bought pro-Romney positions for cheaper on Betfair, another exchange similar to Intrade (although one the authors admit comes with some added headaches for U.S. traders). So, too, is Option 2 unlikely given how the market reacted at other key points during the election, like during the first debate and on Election Day."Why a Single Trader Was Willing to Lose Millions Betting on a Romney Win"
That leaves Option 3 as the most likely explanation for the heavy pro-Romney trading. "This was someone who was extremely sophisticated," Sethi, who also teaches at Barnard College, told the Wall Street Journal. "It was not someone who was dumb or stupid."
Was it worth it? Maybe.
Sethi and Rothschild note, the millions may have actually been money well spent when you consider that their research shows that "a highly visible market that drove many a media narrative could be manipulated at a cost less than that of a primetime television commercial.""Why a Single Trader Was Willing to Lose Millions Betting on a Romney Win"
Just shows that markets by their nature get rigged. Intrade showed nothing but the ability of the wealthy to manipulate the market.
Nate Silver, however, was not bought and he got it right.
Barack Obama easily won re-election.