As you can see here (for the next few hours, anyway) Intrade and Betfair are showing different odds on the U.S. Presidential election.
For example, as I write, Intrade is showing a bid/ask of $6.71/$6.72 for Obama, corresponding to a 67.1% to 67.2% probability.
Meanwhile, Betfair is showing a back/lay of 1.29/1.3. Take reciprocals to get 76.9% to 77.5%.
This is profoundly strange. “Inconceivable”, one might say.
It would not be strange if these were simply expressions of somebody’s opinion, or even a great many somebodys’ opinion. But these are markets, which means they are subject to arbitrage: A simultaneous bet against Obama on Betfair and for him on Intrade appears to pay off regardless of who wins.
Put another way, anybody doing the opposite — betting for Obama on Betfair or against him on Intrade — is overpaying by 10%. It should be trivial to buy from one of those people and sell to the other, thus driving the prices back together.
The answer is not “liquidity”, because the bid/ask spreads are tight. And even if the volumes are small, there is always some loser willing to waste lots of time on the Internet if it means a free nickel. (And it is a lot more than a nickel. There are over 10,000 contracts at $10 each being offered below 70% on Intrade.)
So why is anybody overpaying by 10%? More to the point, why aren’t hordes of Internet losers arbitraging away the difference? Do the commissions on Intrade and Betfair actually add up to more than 10%?
Markets are sometimes strange, but guaranteed free money? Not that strange.
Maybe someone with deep pockets is pushing hard on one of these markets in ignorance of the other, overwhelming the hordes? But even that does not explain the lack of arbitrage. You would need two entities with deep pockets, one pushing on each market, but in opposite directions… Seems unlikely, but who knows.
Anyway, have any of you have run the numbers on the commissions?
[Update]
For what it’s worth, here is a final tally of predictions from various pundits. The only certainty at this point is that a lot of them are going to be very wrong.
Simple: the Democrats are tilting the board by betting heavily on President Obama. Do you know the volume in each market? If so, you can guess at how much it would take to tilt the odds from 50-50 to its current value.
Happy to help,
Tony Lima
I’m no expert, but the market size is 16 x 16 at Intrade, and at $10.00 a unit, a 5% commission at Betfair, and fees at Intrade WHY BOTHER?
Facts, instead of Tony’s hyperbole, below:
The rules on Betfair are:
MARKET INFORMATION
For further information please see Rules & Regs.
Who will be elected as the next President of the United States of America as a result of the 2012 Presidential Election?
This market will be void if an election does not take place in 2012. If more than one election takes place in 2012, then this market will apply to the first election that is held. This market will be turned in-play with unmatched bets cancelled on the day of the election. If there is any material change to the established role or any ambiguity as to who occupies the position, then Betfair reserves the right to void this market at its absolute discretion. If any doubt exists as to the outcome of the election, then this market will be settled on the official public announcement of the election result from the Federal Election Commission. Non featured individuals may be added to this market on request.
13:40 14 April 2009: For the avoidance of doubt, this market will be settled on the candidate who is projected to be President based on the public vote.
Customers should be aware that:
Transmissions described as “live†by some broadcasters may actually be delayed.
The extent of any such delay may vary, depending on the set-up through which they are receiving pictures or data.
Main wallet
Please note that some runners have been hidden in this market. Should any come back into contention for any reason they may be reintroduced. The market will remain incomplete.
Commission on this market
5% Market Base Rate (minus your discount)
Your Discount Rate explained
Linking directly to this market
http://sports.betfair.com/Index.do?mi=21311313&ex=1&origin=MRL
Intrade charges $4.95/month for account privileges, with a two way market determined by continuous auction- http://www.intrade.com/v4/misc/scoreboard/
Details – from – http://www.intrade.com/v4/misc/howItWorks/theBasics.jsp
Who am I buying from? Who am I selling to?
Intrade is an exchange – like the New York or London stock exchanges for example. When you buy shares you are buying them from another member of Intrade. And when you sell shares, another member of the exchange is buying them from you. You do not buy shares from Intrade, and Intrade does not buy shares from you. You are always trading shares with other members of the exchange – other people who are making predictions, just like you.
It is important to remember that Intrade is a market. This means you may not always be able to get what you want. If you are looking to buy some shares, but nobody is selling, then you can’t buy the shares that you want.
Market Settlement – always $0.00 or $10.00
When the outcome of an event is known, the market is settled. The market will always be settled at either $0.00 or $10.00 according to the actual real-life outcome:
YES, the market event has happened – the market will be settled at $10.00.
NO, the market event has not happened – the market will be settled at $0.00.
For example, we currently have a market for Barack Obama to be re-elected President in 2012. If Obama is re-elected then the market will settle at $10.00. If he is not re-elected the market will settle at $0.00.
Let’s say you predict Obama will win re-election, so you buy shares. If Obama is re-elected the market will settle at $10.00 and you will have a profit. How much of a profit will depend on the price you paid for the shares. But if Obama loses the election the market will settle at $0.00 and you will lose.
The opposite applies if you sold shares because you predict Obama will not be re-elected. If he is re-elected then the market will settle at $10.00 and you will lose. But if he fails to be re-elected the market will settle at $0.00 and you will have a profit.
I’m no expert, but the market size now is 16 x 16 at Intrade, and at $10.00 a unit, a 5% commission at Betfair, and fees at Intrade WHY BOTHER for such small money?
Facts, instead of Tony’s hyperbole, link:
Betfair – Commission on this market
5% Market Base Rate (minus your discount)
http://sports.betfair.com/Index.do?mi=21311313&ex=1&origin=MRL
Intrade charges $4.95/month for account privileges, with a two way market determined by continuous auction- http://www.intrade.com/v4/misc/scoreboard/
Details – from – http://www.intrade.com/v4/misc/howItWorks/theBasics.jsp
@RichL —
I updated my post. There are easily thousands, maybe tens of thousands of dollars sitting there waiting to be picked up by anybody. Perhaps you would not stoop down to pick up a $1 bill, but somebody would.
$5/month (InTrade) is nothing. 5% (Betfair) is bigger than I thought. (And thank you for doing the research.) But that still leaves 5% for the taking, on a one-day commitment of capital, for anybody with an Internet connection and living in the right jurisdiction.
Something is very wrong here.
We’ve spent alot of time at work (FX desk) trying to figure this out, as Betfair has consistently had a higher probability of an Obama win over the last 2-3 months. There are two questions to answer: 1, why does this exist? 2, how can one profit?
2nd question first – in monetising the trade, it comes down to who can actually access the sites to transact. As a regular Betfair user, I can assure you, Betfair doesn’t charge 5% to its account holders, far from it (unfortunately I can’t access the link RichL posted, silly work firewall – I suspect that 5% might be a fee for wagers from those who aren’t regular account holders to compensate Betfair for the risk). The transaction costs for funded Betfair accounts are equivalent to the bid/ask spread.
Most importantly on the Betfair side, liquidity is only available to non-US bettors (this is also the case for all of the UK/European bookies, who are all posting similar odds to Betfair). I am a US expat in London and, even though I have a UK bank account, I can not wire money to my Betfair account – my bank, even though it is a UK branch of an American bank, knows I am a US national and blocks any attempt. I therefore have to make a debit or credit card transaction if I want to fund my account. Also, as liquid and large as Betfair is, it is still a small market compared to financial markets. I can take out all the Obama offers, which currently go up to 1.30, by laying about £38,000 worth of bets. Assuming new offers enter the market, I can probably bet more, but surely the market is going to start giving me worse odds, right? But let’s assume I only bet the entire offer side of the current market at an average lay of 1.285. If I were to then invest a similar amount on Intrade contracts, I would also move the market for a small outlay. But let’s assume a perfect world of no transaction costs and static Intrade markets – end of the day, I could probably extract about £6-7k for my troubles. Not bad.
Here’s the rub – to do this particular trade, I need the following:
1) A UK/European bank account with at least £38,000 to fund my Betfair account
2) A US bank account with at least the equivalent of £38,000 to fund my Intrade account
3) A cable trader who will let me trade retail size for no transaction costs (Betfair does not make bets in $)
4) A really good accountant who can hide my large gambling winnings from a US taxman who generally frowns on foreign bank accounts and offshore sports betting
It’s a great trade, but a huge ballache.
1st question, why does this spread exist? I don’t have a great answer other than the fact that non-US markets are much easier to trade and less subject to manipulation. On that note, I actually agree with TonyLima’s notion that one market is being manipulated, but in the other direction – Intrade is far more likely to be maniuplated by a US-based campaign to influence voter sentiment in the US, simply because it is the only betting site where a US-based bettor can legally place wagers. But, obviously, if it’s being manipulated, it is being manipulated to understate Obama’s probability, not to overstate it, given Intrade underprices the Obama probability relative to every other betting market in the world.
On that note, Betfair is not alone in its odds that give Obama a 77%-ish probability – similar odds are available from William Hill, Ladbrokes, Bwin, Bet365, etc. (see http://www.oddschecker.com/specials/politics-and-election/us-presidential-election/winner for the complete list). So all of those markets, from huge bookies, would have to be manipulated as well.
Thanks for posting, it is a great concept that we’ve spent alot of time thinking through, but unfortunately it’s not worth the tax/accounting risk.