25/09/2013
In response to recent headlines related to the academic study titled Trading Strategies and Market Microstructure: Evidence from a Prediction Market by Rajiv Sethi and David Rothschild, please note the following information:
Intrade has a longstanding tradition of providing trading data and other information to academia to advance studies about the social utility and value of Prediction Markets. Data and information is provided (subject to our consent and solely at our discretion) to academia in an “anonymized” format, and usually free of charge. At no time are the names or personal details of any members provided.
Intrade provided the data to Sethi and Rothschild for this research, and we are in the process of supplying additional data for further analysis.
Intrade monitors trading activity routinely, as well as in response to unusual activity, with regard to the permitted use of the website. When queries are raised, they are typically investigated, and appropriate actions taken to correct (and prevent) violations if they occur. The 2012 US Presidential Election Results markets were reviewed with extra focus on the last weeks and the last hours of the contract. This was done shortly after the elections concluded, as well as prior to providing the data for the research study. No violations of our Terms and Conditions were found, all trading accounts were properly funded, and all trading accounts were properly registered with Intrade; including the conformity by members of strict anti-money laundering provisions.
Many of the articles about the study (as well as the study itself) focus on the following two themes: a) the persistence of a profitable arbitrage between Intrade prices and other real money betting sites for the key contract, and b) the motivation of the “large trader”.
There are a number of factors that may have contributed to the persistent arbitrage. Primarily, there is a difference between Intrade’s fee structure (a single monthly fee) compared to the typical commission charge on trading profits charged by others. Secondly, there are “regulatory” hurdles that create arbitrage opportunity; i.e. It was (and still is) difficult for US citizens to trade on markets related to political outcomes. Political markets were not offered by “traditional” US exchanges, and attempts to introduce this product set by a regulated US exchange have been rebuffed by regulatory authorities.
US residents (were) are not easily able to open accounts with most off-shore betting companies (such as Betfair), and therefore essentially limited to the markets provided by Intrade. That resulted in the arbitrage opportunity for those able to participate on both Intrade and Betfair (or other sites providing political markets) calculated after factoring in the “costs of doing business” with their own risk tolerances. Intrade was not able to accept funding deposits from US customers using credit cards or Paypal for example, which further limited US based liquidity (participation) on the site.
As liquidity on Intrade improves; the data will correspondingly improve (and arbitrage opportunities will narrow), providing a better exposition of “true market value”.
It would not be appropriate for Intrade to speculate about the motivation for any individual members’ trading activity.
The Intrade platform is specifically designed as a “real trading exchange”, where orders are strictly accepted and executed in “price-time” priority. Our guiding assumption is that the use of Intrade; just like any real trading exchange, is in pursuit of an ultimate financial profit objective, directly or indirectly.
