Political junkies and campaign reporters often pay close attention to Intrade, a prediction market where investors bet on things like the outcome of the 2012 presidential election. The idea is that the collective wisdom of traders can offer a more accurate take on events than the occasional poll. (It doesn't hurt that Intrade correctly predicted the outcome of the 2008 election.)
But there's an interesting twist here. The betting markets can sometimes be swung sharply — at least temporarily — by a small handful of traders who post extraordinarily large trades. That might well have happened Tuesday morning, when either a single investor or a couple of investors spent about $17,800 on Intrade and boosted Mitt Romney's fortunes considerably. For about six minutes. [Update: See below.]
Here's the backstory: On Monday night, after the debate, Barack Obama was leading Romney on Intrade by around 60 percent to 40 percent. But at around 10:00 a.m. on Tuesday morning, Romney had surged to nearly 49 percent. Was this evidence that the conventional wisdom was wrong? Had Romney actually won the debate handily? Or, alternatively, was the nosedive in the stock markets putting a dent in Obama's re-election chances?
Or maybe it was something else. As economist Justin Wolfers pointed out on Twitter, the huge swing toward Romney appears to have been driven by a brief burst of trading, with someone spending about $17,800 to push Romney's chances on Intrade up to 48 percent. But the surge only lasted about six minutes before other traders whittled the price back down to what they saw as a more accurate valuation. Romney's odds of winning are, as of Tuesday morning, back at around 41 percent:
As Wolfers pointed out, this mysterious trader ended up overpaying by about $1,250 for shares that subsequently collapsed in value. Was this just someone who made an expensive trade? Or was somebody trying to influence Intrade odds in order to sway perceptions of the race? And, if so, was it worth $1,250 to jolt the markets for less than 10 minutes?
The whole idea of manipulation may seem like a bizarre conspiracy theory, but this isn't the first time weird swings on Intrade have occurred. In October of 2008, Intrade revealed that a single investor had been engaging in massive purchases of John McCain shares, seemingly in order to bolster the candidate's standing in the prediction markets:
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.
Here's the twist, though. That manipulation didn't work either. Other traders on Intrade quickly realized that McCain's surge was being driven by a lone investor — rather than by facts about the campaign — and rushed in to take advantage of what they saw as price discrepancies. Obama and McCain's Intrade values quickly returned to their previous levels.
Alex Tabarrok, a major proponent of prediction markets, offered this take at the time: "This supports Robin Hanson’s and Ryan Oprea’s finding that manipulation can improve prediction markets — the reason is that manipulation offers informed investors a free lunch ... The more manipulation, therefore, the greater the expected profit from betting according to rational expectations."
Of course, that leads to a broader question. Are betting markets really so important that they're actually worth manipulating? Sure, Intrade did remarkably well in predicting the final electoral vote count of the 2008 election. But as Alex Klein argued last year in The New Republic, prediction markets are far from omniscient. Investors are largely compiling information that's already out there, such as polling data. The site does less well for more inscrutable events. (Intrade, for instance, suggested there was an 80 percent chance that the Supreme Court would overturn Obama's health care reform.)
So Intrade isn't perfect. Still, the betting market on the presidential race has been highly active this year. And the fact that prediction markets are seen as worth swaying suggests that more and more people now see them as highly influential.
Update: Over at the Atlantic, Carl Wolfenden, the exchange operations manager for Intrade, says, "We checked this out for potential manipulation—it certainly fit the pattern at first glance." But, he says, that doesn't seem to be the case this time around. The Romney blip was apparently driven by a number of traders during an early-morning period when the market was very thin, rather than just one person.