Massive Position On Intrade Presidential Betting Markets Causes Wild Swing, Some Suspect Manipulation

on October 23 2012 3:14 PM

The Twittersphere was set ablaze Tuesday with speculation that the betting odds in a prominent presidential election futures market were being manipulated.

The online uproar came after contracts showing the chances Gov. Mitt Romney will be elected president in November, as traded in the events futures market InTrade, suddenly and unexpectedly spiked. At 9:57 a.m. EST, speculation in that online market had Romney's chances of winning the election pegged at 41 percent. However, a huge upsurge in trading led those odds to rise over 49 percent in a matter of seconds. It took six minutes for trading to bring down the price offered on Romney odds, which settled close to earlier levels and have been trading between 41 and 42 percent since.

Justin Wolfers, an economist at the University of Pennsylvania who is very active in social media and closely follows the presidential betting markets, was one of the first to call attention to his 22,653 followers, noting, "It's not just the stock market that's gone for a wild ride this morning" on his account.

Speculation about the sudden move on Intrade spread like wildfire. Wolfers quickly tweeted that in order to cause a shift of the magnitude seen, someone must have spent $17,800, blowing $1,250 over less than 10 minutes.

So, the Twittersphere demanded to know, was it a so-called fat finger (simply a mistaken key stroke), or was someone actively trying to move the needle on a closely watched prediction market?

"We don't know what caused this. It may have been an attempt at manipulating the market. It may also have been a trader with fat fingers making a mistake," Wolfers said in an interview with the Atlantic, adding that, if indeed malicious manipulation was at play, "my guess is that a campaign would have been better off with another $1,250 spent on get-out-the-vote efforts than on the six minutes of a higher stock price that Romney got this morning."

Not everyone was completely convinced, though. Over at the Washington Post, Brad Plumer took note of the event, explaining that "this isn’t the first time weird swings on Intrade have occurred," pointing to a case in 2008 when an investor in the market tried to pump up the price in John McCain stock in order to make his chances of winning appear better than they actually were.

Others noted the event highlighted the thin and volatile nature of the markets, given it only took several thousand dollars to cause such a dramatic spike.

Details are still coming out about what was being dubbed Intrade's first "flash crash," but as various other economists and analysts chimed in later in the day, it seemed the event was more a matter of prurient interest -- and perhaps a validation of how tuned in to Intrade political junkies seemed to be -- and less of an indictment of the market.

If anything, keyboard pundits were noting Tuesday, the event clearly shows the robust nature of betting markets on presidential politics, which, like larger markets in risky assets, self-correct when someone throws a curveball in the mix.

The final word, from Wolfers' Twitter account: "Lesson from the Obama Flash Crash: Manipulating prediction markets briefly is easy. Having a lasting effect is hard, and expensive."

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