Just yesterday, I was speculating with a friend about why - in a tight presidential race - the campaigns, and/or their deep-pocketed supporters, didn't spend any funds 'working' the prediction markets to make their prospects look better. In this post, Alex Tabarrok, over at Marginal Revolution analyzes another post by Donald Luskin:
"There is now no question whatsoever that the Bush re-election futures contract at Tradesports.com is being manipulated. Yesterday the price of the futures were sold down from about 55 (indicating the market's estimate of a 55% probability of Bush's re-election) to 10 (indicating on a 10% probability) with a single 10,000-lot order entered by a single trader. An order that size represents twice the normal volume of an entire typical day's trading."
The ominous news:
"...this kind of behavior is called a 'speculative attack'... to use one's selling to deliberately cause prices to fall... the motive is... to cause people in the real world - not just other traders - to panic."
In other words, to sway the election. Luskin goes on, with an even more ominous conjecture:
"The classic example of a speculative attack is when George Soros massively shorted the British pound in September, 1992. The Bank of England was obliged to support the pound's exchange rate under the European Exchange Rate Mechanism... could Soros be behind the manipulation of the Tradesports Bush futures? The amounts of money involved are pocket change to Soros. And it would fit his avowed intention to unseat the President. It would be a cheap way for Soros to damage Bush's credibility and panic his troops. I have no idea whether Soros is behind this or not. But it would fit."
Ironies abound, it seems. In any case, the 'price' of a Bush future quickly rebounded to the mid 50's, where it's been for some time already. The (very) good news, as pointed out by Mr. Tabarrok:
"...manipulators subsidize information traders... by definition manipulators aren't trying to predict the true outcome so they are likely to take losses and the more they try to manipulate, the bigger the losses. Now if the manipulators are taking losses who is making money? The information traders! Manipulators, therefore, encourage and support the information traders. Manipulation isn't impossible but it's surprising how little information other trader's need to not only avoid the manipulation but to profit from it."
This raises a host of issues which I'll deal with in another post. But the bottom line it seems, is that prediction markets are proving as resilient to deliberate influence as theorists have long said they would be. My prediction: this will only accelerate their journey to mainstream awareness and adoption - in much the same manner as did the Policy Analysis Market debacle in the summer of 2003.