CQ TODAY ONLINE NEWS
– POLITICS & ELECTIONS
Corrected Oct. 21, 2008 – 6:56 p.m.
Trader Drove Up Price of McCain ‘Stock’ in Online Market
By Josh Rogin, CQ Staff
An internal investigation by the popular online market Intrade has revealed that an investor’s purchases prompted “unusual” price swings that boosted the prediction that Sen. John McCain will become president.
Over the past several weeks, the investor has pushed hundreds of thousands of dollars into one of Intrade’s predictive markets for the presidential election, the company said.
“The trading that caused the unusual price movements and discrepancies was principally due to a single ‘institutional’ member on Intrade,” said the company’s chief executive, John Delaney, in a statement released Thursday. “We have been in contact with the firm on a number of occasions. I have spoken to those involved personally.”
After the internal investigation into the trading patterns, Intrade found no wrongdoing or violation of its exchange rules, according to the company.
Citing privacy policies, Delaney would not disclose the investor’s identity or whether the investor was affiliated with any political campaign.
According to Delaney the investor was using “increased depth” in the Intrade market “to manage certain risks.” The action boosted the McCain prediction over its previous market value and above the levels of competing predictive-market Web sites.
Pundits and politicians have used Intrade to track the fortunes of the two presidential candidates. Through the site, begun in 1999 and incorporated in Ireland, traders buy and sell “contracts” that function as stocks, allowing investors to gamble on the outcome of political, cultural, or even geological events such as the weather.
The company asserts and experts have found that the Intrade market is generally more accurate in predicting the outcome of major events than other leading indicators, including public opinion polls. But the relatively small scale of the market and its lack of outside regulation could leave the system vulnerable to unscrupulous investors, scholars of predictive markets say.
Justin Wolfers, an associate professor at the University of Pennsylvania’s Wharton School of Business, said the trades in question do not follow any logical investment strategy.
“Who knows who’s doing it, it’s obviously someone who wants good news for McCain,” said Wolfers, who has been following the situation closely.
McCain campaign spokesman Michael Goldfarb said: “It’s always a good time to buy McCain.”
Ripple Effects
Intrade users first noticed something amiss when a series of large purchases running counter to market predictions sparked volatility in the prices of John McCain and Barack Obama contracts.
The investor under scrutiny purchased large blocks of McCain futures at once, boosting their price and increasing the prediction that McCain had a greater chance of winning the presidential election. At other times, according to Intrade’s online records, blocks of Obama futures were sold — lowering the market’s prediction about Obama’s standing in the race.
According to Intrade bulletin boards and market histories, smaller investors swept in to take advantage of what they saw as price discrepancies caused by the market shifts — quickly returning the Obama and McCain futures prices to their previous value.
This resulted in losses for the investor and profits for the small investors who followed the patterns to take maximum advantage.
The activities of the trader, dubbed the “rogue trader” on Intrade’s message boards, raised several questions.
For example, the trader purchased large contracts named specifically after McCain and Obama. There were no similar-sized investments, however, in separate instruments that predict a generic Republican or Democratic presidential win — even though both sets of contracts apply to the same event, prices show.
Some political news sites, such as realclearpolitics.org, prominently display Intrade’s McCain contract value but do not display the corresponding value for a Republican presidential win.
Similar trading patterns were not found in competing predictive market Web sites betting on John McCain , such as the Iowa Electronic Markets or Betfair. This means the trader was paying thousands of dollars more than necessary to purchase McCain contracts on Intrade, where the price of betting on McCain was much higher.
On Sept. 24, for example, Obama contracts were trading on Intrade at a price that predicts a 52 percent chance of an Obama victory. At the same time, Betfair and IEM contracts equated to about a 62 percent chance of an Obama victory, according to the political site fivethirtyeight.com.
Intrade records show the trader often purchased tens or hundreds of thousands of dollars of contracts in the middle of the night, when activity was at its lowest, and in large bursts.
In a three-day period from Sept. 30 through Oct. 2, four separate flurries of buying drove the price of the McCain contracts up by 3 to 5 points each. Those numbers eventually settled when the market compensated.
“These movements over McCain largely occurred at time when there was no way that any useful information came out that was pro-McCain,” Wolfers said. “A profit-motivated guy wants to buy his stock in a way that would minimize his impact on the price, a manipulator wants to maximize it.”
Rogue Tactics
According to Intrade, the company contacted the investor and used public and private data held by the company as part of its investigation. That included an analysis of the trades made by the investor, tracking of Internet addresses, checking physical addresses and other information.
Intrade released details about its investigation in a statement on its Web site.
Some Intrade users commented on the company’s message board that the trader may believe in McCain’s chances for victory, despite trends in recent public opinion polls. Indeed, bucking conventional wisdom can be a profit-making strategy.
For example, David Rothschild, a researcher and Ph.D. candidate at the Wharton School, said that during the first two presidential debates, the trader bet thousands of dollars on a McCain electoral victory at the same moment that instant polls were suggesting that Obama would win.
“That’s equivalent to buying a company’s stock just as negative earning reports come out,” Rothschild said. “It is a bad investment, but may make some observers think that Mr. McCain won the debate, which, again would be the goal of market manipulation.”
Also, the trader paid a premium of 10 percent to 20 percent on every dollar traded by not placing similar bets on other Web sites, according to Rothschild’s calculations.
Overall, if the trader’s motive was to influence the Intrade market, he was remarkably successful, Rothschild said. The trader’s actions help keep the probability of Obama winning the election on Intrade about 10 percent lower than Betfair and IEM for more than a month.
“If the investor did this as investment, not to manipulate Intrade, he is one of the most foolish investors in the world,” Rothschild said.
Drew Armstrong contributed to this story.
First posted Oct. 17, 2008 11:44 a.m.
Correction
Earlier versions of this story were revised to clarify information, improve attribution and remove unsupported conclusions.
Comments
Fantastic write-up. Thanks. Watching Intrade over the past month has been one of the most bizarre market anomalies I've ever seen with it consistently 10% out from Betfair and IEM. What surprised me was that there wasn't more arb'ing between Betfair and Intrade over the period. (Unfortunately my bank balance didn't let me participate and I don't think my bank manager would have given me a loan for a 'sure thing'!)
Nate Silver wrote about this a MONTH ago. "Intrade Betting is Suspicious" http://www.fivethirtyeight.com/2008/09/intrade-betting-is-suspcious.html
So, is this guy still allowed to trade on Intrade or has he been blocked from doing so?
So now that we know that Intrade is useless for predicting the outcomes of political races, given that it's so easily gamed and that Intrade has now demonstrated it won't do anything about that gaming, what service do you guys use for your crystal ball?
It's stunning that any logical, rational person would lose thousands of dollars, solely for the purpose of generating short-lived improved news for the McCain campaign. The Iowa Election markets and Betfair have been consistently 5-10 points higher for Obama throughout the election season. So much for the Efficient Market Hypothesis.
It's absolutely amazing that someone could view playing the line between gambling sites as "Arbing" But then again, I used to sell derivatives
What'll be really interesting is if "futures losses" show up in somebody's campaign expense report.
Why complain. If some Republican wants to shower money our way let us just accept it. I put a small bet in when Obama dropped to 50 and sold it at 70. 40% in a few weeks. Best investment in years.
This article says more or less the exact opposite of what Intrade's CEO posted on his blog last night.
>>So, is this guy still allowed to trade on Intrade or has he been blocked from doing so?<< Why would he be blocked? This person did nothing wrong - could you point to any specific rule or law that was broken? >>So now that we know that Intrade is useless for predicting the outcomes of political races, given that it's so easily gamed<< Yup, this reflects extremely poorly on Intrade - how can anyone trust anything on their site now? >>It's stunning that any logical, rational person would lose thousands of dollars, solely for the purpose of generating short-lived improved news for the McCain campaign.<< Actually, if I read the article correctly, the person was using the 'loss' to cover some of his other financial gains (i.e. for tax purposes). He was just doing it in such a way that it supported Fibber McCain at the same time.
Just let the right wing wacko keep losing his money...
Not sure it's all that dumb. How much does air time on one of the major networks run? And what's the response level on a good day? Sounds like this guy may have gotten a larger ROI if you ask me. In fact, this probably achieved a more effective psychological impact than most attack ads. Forgetting the clear moral/ethical implications, of course. Not sure that matters too much in a Presidential campaign in this country though. Implying one's opponent is a terrorist isn't much better.
This is an excellent article on a subject that needed full discussion. I would only add that I think Nate Silver of FiveThirtyEight.com should be credited with having said a lot of this a month ago.
He's just "spreading the wealth around"...
J, i wouldn't say that intrade is 'easily gamed'... as the article points out this trader spent tens of thousands (or even hundreds of thousands) of dollars to manipulate only the obama/mccain market while the democrat/republican presidential market remained in line with markets at other sites. that's a vulnerability to be sure but that kind of cash is serious money.
Push 100 units onto McCain to inflate that future's value, decreasing the Obama future's value. Then drop 200 units in small increments buying low on Obama future. Watch Obama future prices rise. This kind of thing happens all the time in sportsbooks. Easy money.
Someone help me out here. If this is a private individual, losing his own money, that's his business. As Rothschild said in the article, he's just " one of the most foolish investors in the world" But this is an "institutional" investor (a company or foundation). I understand the importance of protecting the privacy of individual investors (even stupid partisan ones), but if this is some rogue individual or clique within that institution who is throwing other people's money away for partisan purposes, I would assume the stockholders or foundation funders would want to know about that, and the only way they could is if the name of the institution is made public. Of course the institution itself may be partisan (ie, a political think tank like AEI), and the institution itself may see this type of behavior as part of its mission, and thus an apppropriate expense. Still, since there is little regulation, this is worrisome. Perhaps this is worthy of some attention by relevant congressional committees?
You gotta admit: it IS easier (and probably cheaper) than starting a 527 or figuring out another way to work around the campaign financing requirements. And it has to have had at least as much impact for the money spent - keeping the Intrade price artificially low was a way of buying the "horserace" narrative when polling wouldn't produce the desired results. Props to Nate Silver for bringing broader recognition to this manipulation scheme - and for thus pointing out the inherent problems with using Intrade as a substitute for scientific polling.
Obviously, what is needed is more regulation of Intrade from the federal government.
If you watched the spending graph on Intrade, every 8 hours or so you'd see a sharp spike of McCain buys and simultaneously a corresponding sharp sell-off of Obama shares. Obviously soemone or some party has been trying to influence perceptions regarding McCain's standing.
Of course, all of this ASSUMES one believes the polls. Case in point, I saw an AP/Yahoo poll today that had the race Obama 46, McCain 44. The sample was 57% Democrat and 43% Republican. Perhaps you need to read some articles BY pollsters talking about what a WAG (not SWAG) the polls are this year. All the pollsters are applying methods that they simply cannot defent. I have watched a couple in particular that keep increasing the mix to favor one side, yet their numbers for that favored side don't increase... Maybe, just maybe someone with money to spend recognizes reality. CC
SELL SELL SELL!!! The McCain bubble is about to pop...!
Far out! A Republican George Soros trying to buy In-Trade. Gotta hand it to the man.
Two comments. First, this doesn't show an inherent problem with using markets to predict future outcomes. We don't know that Intrade is the market that's out of whack. It's just assumed so. But even if it is, we're only talkng somewhere around 10 per cent points of difference despite someone dumping a lot of money into these contracts. That's not much of a deviation. Second, why would anyone think that market manipulation is bad? Sure it mildly weakens the market as a tool of prediction. But it rewards those who bet against the manipulation. As I see it, this sort of manipulation will grow Intrade and improve its predictive capabilities. I welcome all future attempts to screw with betting odds. As you might guess, I heavily favor Intrade as a market. Interface is more professional and, as you can see, the market manipulators go to Intrade. Props to Nate Silver for bringing broader recognition to this manipulation scheme - and for thus pointing out the inherent problems with using Intrade as a substitute for scientific polling. I don't know of any Intrade contracts that overlap with "scientific polling". They yield answers to different questions.
CapedConservative says: "Of course, all of this ASSUMES one believes the polls. Case in point, I saw an AP/Yahoo poll today that had the race Obama 46, McCain 44...Maybe, just maybe someone with money to spend recognizes reality. " This poll is just more spin and disinformation, similar to the Intrade gaming. The ever-alert Nate Silver points out that this poll started *two weeks ago* and was an Internet-based poll. See http://www.fivethirtyeight.com/2008/10/bad-spin-watch-drudge-touts-weeks-old.html All of this has as much credibility as the fake "African" Press International "interview" with Michelle Obama, that was more bogus than a Nigerian scam letter, yet the wishful-thinking right-wing bloggers bought it hook, line and sinker. Looks the like McCain campaign continues to hire interns that dropped out of Disinformation School.
CapedConservative says: "Of course, all of this ASSUMES one believes the polls. Case in point, I saw an AP/Yahoo poll today that had the race Obama 46, McCain 44...Maybe, just maybe someone with money to spend recognizes reality. " This poll is just more spin and disinformation, similar to the Intrade gaming. The ever-alert Nate Silver points out that this poll started *two weeks ago* and was an Internet-based poll. See http://www.fivethirtyeight.com/2008/10/bad-spin-watch-drudge-touts-weeks-old.html All of this has as much credibility as the fake "African" Press International "interview" with Michelle Obama, that was more bogus than a Nigerian scam letter, yet the wishful-thinking right-wing bloggers bought it hook, line and sinker. Looks the like McCain campaign continues to hire interns that dropped out of Disinformation School.
First time I've heard of Intrade. Is it actually wagering real money? If so is it open to US citizens, since the law about Internet gambling and the more recent law requiring transactions be reported to the government by their banks?
NUCLEAR "GLORK" SOULJAH JIHAD -- CAMPAIGN CRISIS "Obama Exposed" External Resource: http://video.google.com/videoplay?docid=3369102968312745410&q=Fitna&total=1413&start=0&num=10&so=0&type=search&plindex=5 WASHINGTON -- Obama's support among Democrats nationally has softened.
CapedConservative. That poll was an internet based poll with little credibility. Furthermore it was conducted over about the last 2 weeks meaning it isn't going to have a lot of relevance. If you really want to know more about polling head over to fivethirtyeight.com Anyone who can see past their own personal perceptions can see Nate Silver (The author of 538) is an honest and intelligent person with a distinct partisan bias but equally distinct passion for unbiased reporting of polling.
If I were trying to raise money for McCain or other Repub candidates, I am sure it would be easier to open donor cheque books if there was still a reasonable prospect of McCain pulling out a win. If it was obvious that he was going down, perhaps supporters would keep their money for 2012. This is the only way I can see some one having a reason to manage a financial exposure to McCain's chances of winning.
He is going to loose, no matter what the motives of that ONE trader were. A must read article about McCain from Rolling Stone: http://www.rollingstone.com/news/coverstory/make_believe_maverick_the_real_john_mccain?action=rate#rate Hope it gets more coverage, because it's shocking in many ways.
The McCain spokesman was right about it being the right time to buy McCain especially if it you were Buying him to lose.
Maybe we should start doing this like Vegas Lines. Obama -14EV to win the Prez.
What would have given this article some more depth is how big of a bet did this idiot have to place to move the market? And of course how much money was there to be made arbitraging between Intrade's McCain-Obama position and the others? People like this don't have to be excluded from trading. They make the market more lucrative for other traders.
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