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.