Manipulated Markets?

I’m becoming less confident about the accuracy of the online futures markets in predicting the outcome of the presidential race. Intrade’s Bush re-election market sold off into the debate, rallied during and sold off after. This behavior seems odd, and is similar to what the same market did during the previous presidential debate and the vice-presidential debate. (I didn’t follow the first presidential debate.)

It’s occurred to me that partisans might be trying to manipulate the markets (Glenn Reynolds and Tom Smith have similar ideas, as I suspect do other observers). While I have no evidence for this possibility, consider it on a cost/benefit basis. Political futures markets aren’t so deep that a trader, or consortium of traders, willing to spend a few hundred grand couldn’t bias them against Bush for days or weeks at a time. Given the increasing credibility of these markets, and given the high cost of conventional advertising, selling a big lot of Bush re-election futures might be a relatively inexpensive way to help Kerry. (Of course the bill would come due eventually, if Bush won, but in that case the inevitable market pop might not occur until shortly before the election, in which case money invested in holding down Bush’s numbers would have been well spent.)

I think that these markets are a great tool, and that they will eventually equal or surpass conventional opinion-polling in the degree to which they become accepted by the media and public for political prediction. But markets aren’t perfect. Someone told me that James Cramer on CNBC suggested that Democratic hedge-fund managers are buying oil futures in an attempt to boost oil prices and hurt Bush politically. I am skeptical about Cramer’s idea: oil has been rallying for a variety of reasons, it’s a huge market and manipulation of huge markets tends to be prohibitively costly for prospective manipulators. But if Cramer is saying it, it means other traders are thinking it. And if they think it about oil, what about the relatively illiquid elections markets? It seems likely that politically engaged traders have considered, if not actually attempted, trying to push those markets their way. I don’t know whether they have succeeded. Perhaps this would be a fruitful area for systematic research.

OTOH, it could be that the election really will be as close as the online markets suggest it will be. We’ll know soon enough.

(Previous related posts: here and here)

UPDATE: Lex reminds me that the election odds shown by online bookmakers have roughly paralleled the odds shown by Intrade and the Iowa Markets. His observation supports the close-election hypothesis.

UPDATE2: Don Luskin suspects manipulation.

20 thoughts on “Manipulated Markets?”

  1. Intrade provides daily and total volume. However, I don’t think Intrade provides open-interest information, or makes it easy to examine volume vs. time.

  2. Remember also Soros’ theory is more or less herd mentality making something into reality. So if a bunch of traders are ganging up on oil, other traders see it and pile on.

  3. Note the spike in the iowa electronic markets presidential vote share market a while back which was obviously an over enthusiastic bit of manipulation to bring Kerry’s closing price up.

  4. Iowa doesn’t display transaction prices, or bids/offers away from the market, in real time. The daily-price charts that most people look at are based on settlement prices derived from the last daily trade — relatively easy to manipulate.

    Intrade has a much better system, roughly comparable to online stock-trading systems. The issue with Intrade is that most of its markets are thin enough that someone who wanted to push them around might be able to do so for a while, if he were willing to spend some money. Bush at 55 looks a lot weaker than Bush at 60, for example. Some Democratic partisans might find lowering Bush’s apparent odds in this way to be worth the cost. I’m not saying there’s a problem: Intrade’s prices may accurately reflect the odds. But the questions of whether some players are trying to manipulate prices, and whether they are succeeding, are empirical ones and might be worth investigating. These questions are likely to become moot to the extent these markets become big and liquid.

  5. I think the polls have less predictive value than usual this time. And that includes the future markets. This stuff works very well when most things are equal. In this election, they’re just not.

  6. I have trouble with this Krugmanite (“Enron-manipulated-California-energy-market”) type of argument.

    What benefit would a Soros-type of trader derive by manipulating a market that majority of voters do not understand, and, therefore has no marketing value for political partisans? I find it hard to believe that both Iowa Electronic Markets and Intrade can be calibrated to around 54-55% in favor of Bush. Given that futures price approaches spot price as we get close to maturity of a contract, why not then manipulate to something like 90% in Kerry’s favor?

  7. I think it would be difficult to keep the mkt that far against Bush artificially. Bush under 40% would probably bring a lot of buying in. OTOH making a race seem tighter than it is could be beneficial at lower cost.

    The more I think about this, and see competing mkts that are more or less in line with each other, the more I think there’s no manipulation here.

  8. Intrade and the bookies have closely tracked each other. They have been less volatile than the polls. I agree with Sylvain that the polls are not much good this year. The whole race is occurring within the margin of error. I disagree that the people betting money are not decent predictors. They have all along been predicting a close race, though for a while Kerry was way behind. Now it has closed up, with Bush a little ahead. A simple story, not noisy, and plausible. I think it is as accurate a picture of what is happeniung as we are going to get.

  9. I don’t agree that the race is occurring within the margin of error. Rather, it appears that some of the old-style polls are more incaccurate than previously, either because they’re being spun or because changed personal behavior (people lie to pollsters or don’t answer the phone), or Internet-driven information cycles, have increased the sampling error. The online betting/futures sites are likely to be more accurate in this new environment, IMO.

    Note that Intrade & similar sytems aren’t necessarily predicting a close race. They are predicting a bigger likelihood of victory when Bush is at 70% than when he is at 55%, but his margin of victory or defeat is a separate issue.

    I was nervous about Bush’s chances until a day or so ago, when I realized that Hugh Hewitt and the Power Line guys are right: the candidates have the most at stake here, their respective internal polling is therefore likely to be of high quality, and their behavior should tell us what we want to know. Kerry is campaigning in states which he must win in order to win the election; Bush is campaigning in states where Kerry should be a lock. It looks as though Bush may still be doing well and may still have a good chance of winning big.

  10. These results are still unreliable but in averaging the five, some of the variables Jonthan notes might be muted. And, while the margin for Bush isn’t large in the last set, none is for Kerry.

  11. Steven den Beste helpfully performs his wizardry on poll numbers. And Donald Luskin notes the manipulation of trades.

    Both of them teach a liberal arts person humility – there is so much fun to handling these figures as they do.

    However, I do believe one of my first comments on Chicagoboyz is true: if George Soros had made his money by actually performing a service or producing a product, he might see capitalism in more positive terms. Most of us that have run businesses found real joy in seeing our products in other’s hands or in another’s gratitude for a service well-done. What kind of pleasures (except it would seem to me somewhat subterranean and guilty ones) arise from manipulating markets?

  12. Ginny, I disagree with Soros’s politics but I find no fault with, and indeed admire, his business career. As a speculator he provided a valuable service by helping to check the incompetence of central banks and finance ministries. Speculators are messengers whose presence indicates that something is amiss. They don’t cause the financial abnormalities from which they profit. Indeed, by taking the other side of extreme price movements, they are generally part of the solution.

  13. Of course, I know nothing about the markets. And I am willing to accept your assessment of something about which I know nothing. I admire your toughness. You are arguing, I take it, that many would have suffered a great deal more from market fluctuations without Soros?

    Still, I can’t imagine that service (and I’m sure he has the imagination and understanding for the long-range vision you apply and even with the positive results you describe) is as likely to be fulfilling in a personal way as would be more humdrum work. Thrilling, maybe; on the edge, maybe.

  14. Markets are meant to bring buyers and sellers together and to send true and accurate signals about demand for whatever is for sale. Soros’ biggest killing was when he hammered the British pound. What was going on? The European governments were manipulating the currency. The worst manipulators are governments trying to impose concealed taxes, inflation being the most common example, and it is governments who howl the loudest when traders take advantage of that to, in effect, tell the world the truth about what they are doing and make them deal with the consequences of their policies in the full light of day. Would it be satisfying to be George Soros and be able to turn the lights on and make the rats scurry for their holes, expose a bunch of pompous blowhard politicians for the phonies and frauds and shysters they are, and make a billion dollars while you are at it? Yeah, probably, I can see how that would be satisfying work.

    Soros did the world a better service when he focused on making money. When he did that he was dealing with objective facts in an objective way. Now that he wants to “ascend” to political do-goodery, his judgment is not much better than the average center-left man on the street. People do themselves and the world their best service when they stick to what they know and act with humility about what they don’t know. But Soros isn’t the first guy who made a heap of money and suddenly felt qualified to run the whole planet. When these guys start talking, their limitations are often obvious and laughable. (Remember Ross Perot?) It seems to be a common affliction of billionaires.

  15. Another bit of evidence.Clinton Expected to Be At Fewer Kerry Events: Recuperation From Surgery Is Taking Time (John F. Harris and Al Kamen, October 17, 2004, Washington Post)

    Former president Bill Clinton, whose recuperation from
    heart surgery last month has been slower than he anticipated, will not
    make more than a few cameo appearances on behalf of Democratic nominee
    John F. Kerry, and even an abbreviated schedule is far from certain,
    friends and Democratic officials said.

    Clinton has been recuperating from his Sept. 6 quadruple bypass
    surgery at his home in Chappaqua, N.Y., with a recovery regimen that
    has included mile-long walks. He has completed the walks but finds
    himself exhausted after each jaunt, friends said, and he remains in
    considerable pain from the chest incision.

    His continued fatigue, combined with recommendations of caution from
    his physicians, means that a frenetic sprint of last-minute campaigning
    — the kind of barnstorming that was the 58-year-old Clinton’s
    signature during his own campaigns — is out of the question, friends
    said. Kerry officials had hoped that Clinton might spend some of the
    closing weeks of the campaign on the Democratic nominee’s plane,
    appearing arm in arm at rallies in swing states.

    Bill is obviously being fed internal poll results, and knows that Kerry is in dire trouble. He is going to let Kerry go down in flames, while he — Bill goes down home to Arkansas to enjoy the fall weather. When the dust settles. He will be able to control the remnants of the party for what it is worth, which will be a few bucks at least.

  16. This comment about Clintor reminds of Metternich’s comment when the Russian foreign minister died — “yes, but what is his purpose in doing so now?” Sometimes everything isn’t political calculation. Maybe Clinton, a man who has abused his body all his life and relied on his amazing animal vitality, is really sick and really unable to do it? That seems more plausible. He loves campaigning and he’d be out doing it if he were up to it, or so I assess it.

  17. I read part way through “Soros on Soros”, his autobiography. It’s a readable book if
    you’re looking for a readable economics themed book – which are few and far
    between. I use to have a high opinion of the guy. But since he started dabbling in
    politics, my opinion has plummeted.

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