Prediction Markets Manipulation, now and in 2004

Yesterday, newly minted Nobel Laureate Paul Krugman pointed out in his New York Times article “Manipulating the future” that evidence had surfaced to the effect (for the 2008.PRES.OBAMA and 2008.PRES.McCAIN Intrade contracts anway) that

“… someone … was manipulating the Intrade presidential odds, trying to drive up the price of a McCain win and thereby influence political perceptions.”

This brings to mind a similar controversy during the 2004 election. As is documented here and here, an apparent manipulation effort took place in the Tradesports 2004 presidential markets. According to Donald Luskin’s account at the time,

“There have now been four separate “speculative attacks” on the market in futures contracts on Bush’s reelection probabilities… The attacks on the Bush futures have involved massive sell orders placed by a single individual — the same individual all four times — according to a spokesman for Tradesports.com, the Dublin-based futures-trading website. Each attack caused a massive temporary drop in the price of the Bush reelection futures. The most recent attack came last Friday at about 1:30 p.m. Eastern time. It whacked the Bush futures from a price of 54 (indicating the market’s estimate of a 54 percent probability of a Bush reelection) all the way down to 10 (indicating a 10 percent probability of reelection) in just eight minutes. Six minutes after the attack the Bush futures were back to 54. That’s the equivalent of an 8,000-point crash in the Dow Jones Industrial Average followed by an 8,000-point recovery. All within 14 minutes.”

I recall at the time thinking that I wished that I had opened a Tradesports account and put in a “limit” order to buy Bush at 10 :-). More seriously, what impressed me about the incident is how quickly the prediction market price recovered. I highly recommend Alex Tabarrok’s posting from earlier today entitled “Manipulation of Prediction Markets” for more information about this topic.

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