Investing

Manipulating futures markets

Posted by Peter on October 29, 2004
Posted in: Idea Futures, Investing, U.S. Politics. Tagged: .

Alex Tabarrok writes about the apparent attempts to manipulate the Bush re-elected contract at Tradesports.com (which just dropped to exactly 50!), and CNBC has mentioned the same report today (with a denial from George Soros that he is responsible).

I want to warn people not to treat the failure of this manipulation as strong evidence that manipulation won’t have much effect on the reliability of the prices. If an experienced trader such as Soros tried to engage in this kind of manipulation, he would use a much more patient and cost-effective strategy than quickly driving the price down from 55 to 10.

To estimate the harm done by manipulation, we need to look at careful studies of how accurate markets have been, plus experiments such as the one Robin Hanson arranged. Note also that Robin’s attempt at a theoretical argument on this subject is unconvincing because it unrealistically assumes that traders aren’t risk-averse.

Greenspan and bubbles

Posted by Peter on October 21, 2004
Posted in: Investing. Tagged: .

According to an October 19 Bloomberg article, Greenspan said:

"Housing price bubbles presuppose an ability of market participants
to trade properties as they speculate about the future," and the
expense and difficulty of moving "are significant impediments to
speculative trading and an important restraint on the development of
housing price bubbles,"

I wonder how he would describe the Japanese real estate prices of the late 1980s.
It might not be a coincidence that the dollar has dropped against gold and other currencies the past couple of days.

I’m not yet willing to bet money that a significant housing bubble is developing in the U.S., but it wouldn’t take too much for me to decide it’s time for such a bet.

Efficiency of presidential election futures markets

Posted by Peter on October 17, 2004
Posted in: Idea Futures, Investing.

Tyler Cowen and Mike Linksvayer discuss the somewhat confusing reaction of Bush wins futures to the first debate.

I have some different theories about what might have happened. The size of a typical trade seems to be a few hundred dollars or less, so the typical reward for being quick to exploit inefficient prices is probably in the $10 to $30 range. It’s fairly easy for me to imagine that the most sophisticated traders value their time enough that such rewards don’t cause them to react quickly. I’ve been making a small but steady return from fairly regular trades on Tradesports the past few months, but I only log in about once every two days.

Another possibility is that the best informed traders get their information by talking to undecided voters over several days after the debate.

Either way, as an experienced investor it doesn’t surprise me that markets are slow to react to information that isn’t very clear. Markets often show more frequent patterns of prices following a trend than I would expect from random behavior. I interpret this as evidence that some information gets reflected slowly in those prices. That doesn’t mean it’s possible to get rich by any simple trend following rule – enough of those trends are false signals created by traders trying to exploit the naive trend follower that it’s hard to get useful information out of the trends unless you combine it with good information about what the efficient price should be.