Was someone manipulating the markets?

Was someone manipulating the markets?

    Was this political manoevering or simply very bad betting?

One of the best sources for anyone interested in US politics, Congressional Quarterly, is running with a story that a single, unnamed punter has been responsible for the pricing anomaly on InTrade that has seen John McCain’s stock hold a higher price than on Betfair, or the Iowa Electronic Markets.

    Apparently, the ‘institutional’ investor purchased hundreds of thousands of dollars’ worth of McCain contracts, at inferior prices than were available elsewhere, prompting the Dublin-based political betting market to make enquiries. Though there is no allegation of wrong-doing, it will seem strange to PB.com regulars (and indeed most sentient beings) that someone would accept prices that were so clearly non-preferential compared to other markets, and to offer a higher price than most other McCain backers were willing to pay.

As well as being picked up by sites like 538, the price disparity had been noticed by many regulars on this site (see here, here, and here for just a few examples), who came up with a number of explanations, which may still bear some resemblance to the truth. InTrade prices are in US dollars, indicative (I believe) of the geographical location of many of its customers in North and Central America. Conversely, Betfair has a stringent policy of not accepting bets from the United States, which it enforces technologically. Consequently, many of us believed that ‘European bias’ towards Obama was the reason that Betfair’s price seemed to indicate a 6-10% higher probability that the Illinois Senator would win the contest.

Similarly, the Iowa Electronic Markets only allow relatively modest sums (account deposits are limited to $500) so a serious gambler, as in this case, who genuinely wanted to back John McCain with six-figure sums might well have been prepared to pay a slight premium. Oddly, however, the trader did not bet on InTrade’s market on which party (rather than candidate) would win the White House, which again would have offered a better price.

We have suspected manipulation of the betting markets for political purposes before. The value to a candidate of being called ‘the favourite’ by the media is irresistable, especially at the beginning of a campaign. Early money to drive down a candidates price could well trick journalists unfamiliar with the markets to use this price as a guide, allowing that label to be applied before it is truly a reflection of the race. Our genial host had a case study in his book, “The Political Punter” about an apparent attempt to fix the Lib Dem leadership betting in February 2006 so Chris Huhne would appear to be the favourite.

    It is harder to see why this ‘institutional’ trader would do the same for John McCain. The surfeit of US and state polls, and the relatively low profile of political gambling in the US mean that it was scarcely feasible that these trades would have the desired effect. Even if the investor managed to maintain the inflated price for long enough to be noticed by the mainstream media, I find it implausible that this could have really changed the narrative. If this was the trader’s intention, I think it was rather poorly thought through.

I would be interested to hear the views of our experts on the site as to how they would diagnose this sort of betting behaviour. With political markets less liquid than those in major sports, there will always be the chance that a single trader could single-handedly shift the market for political reasons. However, with alternative markets providing arbitrage opportunities, such manipulation prices presents punters with a potential pay-day – or at least the way to limit their overall risk.

Whatever the motivation of this particular trader, this tactic now has a high-profile case study attached, and I would be astonished if we didn’t see it adopted by political operatives on this side of the pond before too long. Or maybe it already has been…


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