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I have lately noticed some foolishness going on over at Intrade.  I believe I see evidence of "painting the tape" on the Obama and McCain contracts.  "Painting the tape" is a method of manipulating the value of a traded security -- I explain more about it below.  It would appear that the plan is to adjust the prices so they favor Obama less, and then  have your favorite pundits remark that the famous prediction market Intrade thinks Obama is less likely to win.  As if anybody cared.

I think this is a silly thing to do, and if some fanatical and rich right-winger wants to waste his money this way, I say, ok with me.  Better this than doing something effective.

On the other hand, if you had noticed the Intrade drop and were concerned, don't be.  The numbers are baloney.  More details below.

Last Friday, the morning after McCain's acceptance speech, I noticed that the Obama contract on Intrade had dropped several points.  It had been basically constant at 60 since he wrapped up the nomination, but that morning it had dropped a few points.  So I looked at the detailed trading data.  Here's what I saw.  About 7:00 am EDT, there was a sudden surge in volume, with a rapid fire series of trades with dropping prices.  This was followed by a gradual drift upward on normal volume.  Then another abrupt drop on heavy volume, and then another gradual drift up on normal volume.  This pattern has repeated since then, with an overall gradual trend downward.  (And of course there has been parallel activity on related contracts, e.g. McCain to win, Dems to win, and Repubs to win).  The immediate explanation that popped in mind was, somebody's painting the tape.

I had occurred to me some time ago that, since the total volume on Intrade is so low, your average rich person would have no trouble manipulating the price.  And since Intrade is widely quoted as a prediction market, one could imagine a scenario where someone would be willing to spend some money to have Intrade change its mind.  I believe that's what we're seeing here.

First, I should explain what "painting the tape" means.  Suppose there's an issue that you, for whatever reason, wish had a higher reported price.  Basically, you buy up shares at whatever price they're offered; as you do this, the price will rise.  To make this more concrete, many exchanges (including Intrade) have an open order book.  It lists blocks of shares for sale, and the asking price; and blocks that people want to buy, and the bidding price.  So to make the price rise, you just start buying your way through the book of sell orders, until you get to the price you want.  To lower the price, you sell your way through the book of buy orders.

This costs money.  First, you are either buying things for more than they're worth, or selling them for less than they're worth.  So in the end, you'll be taking a loss.  In addition, some capital outlay is required.  But how much capital, and how much loss, depends on the typical daily trading volume of the security.  On Intrade, typical trading volume (before last Friday) on these contracts was a few thousand dollars a day.  There are people for whom a few thousand dollars is pocket change.

You might wonder, why the heck would anybody want to do this.  On the stock market, you might have a CEO whose bonus depends on the closing stock price on a particular day.  Or you might have a fund manager who unwisely invested heavily in an issue, and wants to make the quarterly report look better by improving the closing price on the last day of the quarter.  Or you might have a McCain supporter who's annoyed that the prediction markets are saying McCain is likely to lose.

You might ask, why the manipulation theory -- perhaps the market really is losing confidence in a Obama win.  The first thing I would ask is, on what new information.  The Obama and McCain contracts have basically stuck at 60/40 for months.  What changed?  Was is the Palin nomination?  That was a week old.  Was it McCain's great speech?  Well, it wasn't a great speech, but even that was about 10 hours old -- trading on Intrade is around the clock.  Was it secret inside info?  If so, it's still a secret.  Also, if a group of investors had lost faith in Obama's chances, they would've sold gradually, to prevent a sudden drop in price, because they would want to sell at the highest price possible.  They wouldn't suddenly start selling as fast as possible, which gets them a lower price.

Now that there are several articles out there basing predictions on the per-state Intrade contracts, I wonder if we'll next see tape painting on them as well.  There are many of them (of course, 100); but the volume on them is even lighter, so they are even easier to manipulate.

UPDATE: I took a look at the per-state presidential election markets.  Sure enough, there's evidence of tape-painting there as well.  Swing states CO, OH, and VA show price drops on unusually heavy volume just this morning.  (Relatively heavy -- these are very thinly traded contracts.)  There is no new polling in these states to support this.

Originally posted to My Stupid Opinion on Mon Sep 08, 2008 at 11:53 AM PDT.

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Comment Preferences

    •  There has been a bit of movement... (1+ / 0-)
      Recommended by:
      My Stupid Opinion

      ...in the Iowa Electronic Markets as well.

      Latest Quotes:  2008 Presidential Election Markets

      Price Graph:  2008 US Presidential Election Winner Takes All Market (This is the one most similar to Intrade)

      However, the IEM itself noted that there hasn't been much movement as a result of the conventions.

      Release: September 05, 2008

      After two weeks of convention speeches, rallies, confetti, and fireworks, vice presidential selections, a hurricane and various and sundry controversies, traders on the Iowa Electronic Markets said, "eh."

      Prices on the IEM's presidential election markets are pretty much in the same place where they started two weeks ago. As of 9 a.m. CT Friday, the morning after the Republican National Convention wrapped, a contract for Barack Obama was trading for 58.5 cents on the IEM's Winner Take All market. A contract for John McCain was trading for 41.9 cents.

      The figures mean that investors on the IEM believe Obama has a 58.5 percent probability of winning the popular vote in November's general election, while McCain has a 41.9 percent probability.

      Those prices are largely unchanged from prices on Monday, Aug. 25, the day the Democratic Convention opened. Prices that morning were 60 cents for Obama and 40.1 cents for McCain.

      The latest quotes I'm seeing for the Winner Take All Market are $0.562 for Obama shares and $0.438 for McCain shares.  Looking at the rest of the figures, especially the average, indicates that the spread has actually widened during the past 24 hours, so whatever bounce McCain is getting is already deflating.

      "Iraq: the bravest 1% fighting for the richest 1%." ~ An Unknown Kossack.

      by Neon Vincent on Mon Sep 08, 2008 at 01:31:42 PM PDT

      [ Parent ]

  •  The final GOP insult (1+ / 0-)
    Recommended by:
    Neon Vincent

    Manipulate one last commodity before getting kicked out.

    Oh the humility of it.

  •  If true (1+ / 0-)
    Recommended by:
    Neon Vincent

    then buy Obama.  Actually sell McCain - the spread between buy and sell is smaller for him.

    You'll make a few bucks when the correction comes.

    "Undecided voters are the biggest idiots in the world." - Brian Griffin

    by stunzeed on Mon Sep 08, 2008 at 11:57:48 AM PDT

    •  There's probably money to be made here (1+ / 0-)
      Recommended by:
      Neon Vincent

      especially the way it keeps bouncing up and down.  You could just keep sticking in a buy order at 50 and a sell order at 55 and collect on each cycle.  But I'm not putting my money there (particularly due to lack of money) and I wouldn't recommend anybody else do it either.

  •  I've been noticing this as well (3+ / 0-)

    I have followed Intrade for awhile and noticed the downward trend.  I'm familiar with the stock market and "painting  the tape" as I used to trade in the OTC quite a bit and it runs rampant there.  Interesting theory and sadly, probably correct.

  •  On the other hand (3+ / 0-)

    Maybe it's just tracking tighter with national polls.

    "Economics is not something I've understood as well as I should." John Sydney McCain III

    by thefretgenie on Mon Sep 08, 2008 at 12:01:38 PM PDT

    •  Could be (2+ / 0-)
      Recommended by:
      Neon Vincent, thefretgenie

      I did omit that in my list of possible new info.  You know anyplace that has a good history of nationwide polling?  Kind of like electoral-vote.org, which only keeps a list of per-state polling.

      Still, there's my argument about the pattern of rapid selling.  If you want to get the best price for your shares, you sell gradually.  If you want to drive the price down, you sell fast.  I guess an alternate to my theory would be a series of panicked individual unskilled investors, worried about the polls.

  •  Maybe McCain's convention bump? (2+ / 0-)
    Recommended by:
    Jon Bird, Neon Vincent

    Intrade is a trailing indicator.  McCain's USA Today/Gallup triumph may have sparked a lot of trades.

    The trade pattern is suspicious, though.

  •  I have followed Intrade (1+ / 0-)
    Recommended by:
    Neon Vincent

    for a while, I can say that there are 2 things to consider:

    1. The volume is way to low to make this a good indicator
    1. As others have said, it tend to react AFTER things happen, not before (which the stock-market often does).  Today we could see that McCains "stocks" went up after the USAtoday/Gallup was released but that it went down again after Rasmussen/CNN/Hotline had the race tied.  

    The market is often right, but Intrade as way to low volume to be "right".  As others have said, it could easily be manipulated when the volume is so low. Intrade actual have Hillary Clinton (as president) traded at 3, which is laughable...

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