In an excellent comment on my previous post, a forex trader from a non-trivial firm points out that, for the past several months, there has been a systematic difference between the odds on Intrade and every other betting market in the world. As I write, the difference stands at 12%; it has actually grown since yesterday.
I am not sure the trader is right that Intrade requires a U.S. account to fund, since it is located in Ireland… I was under the impression that any resident U.K. citizen would be able to perform this arbitrage pretty easily to pick up a few thousand dollars/pounds/Euros. But maybe not.
Anyway, there really are only a few possible explanations for the markets diverging like this:
- The contracts on Intrade and elsewhere might differ in some subtle way — like whether they pay on an electoral college tie or if the President-elect dies before assuming office or whatever — and the market is pricing significant odds on such outcomes
- The cost of the arbitrage itself might be too high, and each market’s community is too stupid to move its trading to a more profitable venue
- Every market on the planet except Intrade is being manipulated by big money in Obama’s favor
- Intrade alone is being manipulated by big money in Romney’s favor
I report; you decide.
[Update]
OK, so there is at least one other explanation:
- Intrade is easier for (say) U.S. residents to access, and that betting community disagrees with the rest of the world
Still, I find your lack of arbitrage disturbing.
[Update 2]
The Obama contract on Intrade has just over 2 million in open interest; the Romney contract, just under 2 million. (Click on the Info tab on each page to see for yourself.) Each contract is a $10 bet, so that is almost $40 million in active opposing bets on Intrade alone. “Liquidity” is definitely not the answer to this conundrum.
[Update 3 – 20:27 U.S. Eastern]
Betfair has crossed 90%; Intrade still at 70%.
[Update 4 – 21:10 Eastern]
Shortly after 21:00 Eastern, the depth of market on Intrade vanished. (That is, whoever had $100,000+ bids lodged against Obama and for Romney withdrew them.) No point manipulating with all the swing state polls closed, perhaps? Anyway, Intrade is finally starting to converge with Betfair at 85-90% Obama.
[Final Update – 23:02 Eastern]
It looks like Nate Silver’s model called every single state correctly, even the split decision in Florida. Have a good night.
Are any of these markets liquid enough to justify your faith in arbitrage? Liquidity being another name for: “is anybody really paying attention anyway”?
@Seth —
If the markets were illiquid, then even a little bit of arbitrage would drive them together.
Roughly 4 million shares in open interest on Intrade (just over 2 million on the Obama contract; just under 2 million on the Romney contract). That’s around $40 million in currently-active bets between opposing viewpoints, and that is just Intrade.
Here are the travails of an econ lecturer and blogger aiming to attempt this arbitrage: http://offsettingbehaviour.blogspot.co.uk/2012/11/documenting-arbitrage.html
Maybe manipulation of Intrade markets was a better use of superpac funds than relentless TV ad bombardments. But who has more to gain from manipulation of ‘bama lower, GOP or Dem?
There was definitely an attempt to hold Romney above 28 (Obama below 72) for several hours on election day, at a cost of about $240,000, from mid-afternoon till polls closed in Colorado:
http://rajivsethi.blogspot.com/2012/11/prediction-market-manipulation-case.html
My recollection is that Intrade is *difficult* to access from the USA, in that you can’t just poke in a US credit card. You have to send them a bank draft by mail if you want to open an account.