Trader Drove Up Price of McCain ‘Stock’ in Online Market

CQ TODAY ONLINE NEWS – POLITICS & ELECTIONS
Updated Oct. 17, 2008 – 12:20 p.m.
Trader Drove Up Price of McCain ‘Stock’ in Online Market
By Josh Rogin, CQ Staff

An internal investigation by the popular online market Intrade has revealed that a single investor’s purchases prompted “unusual” price swings that significantly boosted the prediction that Sen. John McCain will become president.

Over the past several weeks, the investor has pushed hundreds of thousands of dollars into one of Intrade’s predictive markets for the presidential election, the company said, resulting in repeated monetary losses through a strategy that belies any financial motive.

“The trading that caused the unusual price movements and discrepancies was principally due to a single ‘institutional’ member on Intrade,” said the company’s chief executive, John Delaney, in a statement released Thursday. “We have been in contact with the firm on a number of occasions. I have spoken to those involved personally.”

After an extensive investigation into the suspicious trading patterns, Intrade found no wrongdoing or violation of its exchange rules, the company said.

Citing privacy policies, Delaney would not elaborate on who the investor was or whether or not that investor was affiliated in any way with a political campaign.

According to Delaney, this investor, who boosted the McCain prediction significantly over the market value and above the levels of competing predictive-market Web sites, was using the Intrade market to protect other positions and hedge other investments.

Pundits and politicians have used Intrade to track the fortunes of the two presidential candidates. Through the site, begun in 1999 and incorporated in Ireland, traders buy and sell “contracts” that function as stocks, allowing investors to gamble on the outcomes of political, cultural, or even geological events such as the weather.

The company claims and experts confirm that the Intrade market is generally more accurate in predicting outcomes of major events than other leading indicators, such as polls.

But the relatively small scale of the market and its lack of outside regulation leave the system vulnerable to activity from well-monied investors who either have inside information or seek to manipulate the market for political purposes.

Justin Wolfers, an associate professor at the University of Pennsylvania’s Wharton School of Business, said the trades in Intrade’s McCain-Obama market do not follow any logical investment strategy.

“Who knows who’s doing it, it’s obviously someone who wants good news for McCain,” said Wolfers, who has been following the situation closely.
Ripple Effects

Intrade users first noticed something amiss when a series of large purchases running counter to market predictions sparked volatility in the prices of John McCain and Barack Obama contracts.
Trader Drove Up Price of McCain ‘Stock’ in Online Market

The investor under scrutiny purchased large blocks of McCain futures at once, artificially boosting their price and making the market seem to indicate that McCain had a greater chance of winning the presidential election. At other times, according to Intrade, the investor sold blocks of Obama futures — artificially lowering the market’s prediction about Obama’s success.

According to Intrade bulletin boards and market histories, soon after the mystery investor would act, smaller investors would sweep in to take advantage of what they saw as a price discrepancy — quickly returning the Obama and McCain futures prices back to their regular market value.

This resulted in huge losses for the investor, which users dubbed the “rogue trader,” and what amounted to effortless profits for the small investors who followed the patterns to take maximum advantage.

There were several signs that the “rogue trader” was not an honest investor simply seeking profit or a McCain enthusiast who just believed that McCain was destined to win the election.

For example, he only bought and sold contracts named specifically after McCain and Obama, while ignoring contracts that predicted a Republican or Democratic presidential win, even thought both sets of contracts are predicting the exact same event outcomes.

Some political news sites, such as realclearpolitics.org, prominently display Intrade’s McCain contract value but not the corresponding value for a Republican presidential win, suggesting again that the rogue trader was trying to influence perceptions.

Also, the rogue trader did not invest similar amounts of money in competing predictive market Web sites betting on John McCain , such as the Iowa Electronic Markets or Betfair. Therefore, he was paying thousands of dollars more than necessary to purchase McCain contracts on Intrade, where the price of betting on McCain was much higher, due largely to his efforts.

On Sept. 24, for example, Obama contracts were trading on Intrade at a price that predicts a 52 percent chance of an Obama victory. At the same time, Betfair and IEM contracts equated to about a 62 percent chance of an Obama victory, the political site fivethirtyeight.com reported.

Lastly, the rogue trader would often buy up tens or hundreds of thousands of dollars of contracts in the middle of the night, when activity was at its lowest, and in large bursts, Intrade records show.

In a three-day period from Sept. 30 through Oct. 2, four separate flurries of buying drove up the price of the McCain contracts from 3 to 5 points each, although the numbers settled when the market compensated.

“These movements over McCain largely occurred at time when there was no way that any useful information came out that was pro-McCain,” Wolfers said. “A profit-motivated guy wants to buy his stock in a way that would minimize his impact on the price, a manipulator wants to maximize it.”

There is a long history of candidates trying to manipulate predictive markets over the last century, Wolfers said. New York’s one-time Democratic political machine Tammany Hall, for example, used to have a war chest for that very purpose.
Rogue Tactics
Trader Drove Up Price of McCain ‘Stock’ in Online Market

According to Intrade, the company contacted the investor and used public and private data held by the company as part of its investigation. That included an analysis of the trades made by the investor, and also tracking back Internet addresses, physical addresses and other information to make sure the investor was not a bad actor.

Intrade released details about thee investigation in response to questions submitted by Congressional Quarterly.

Some Intrade users speculated that the rogue trader may just be a true believer in McCain’s chances for victory, no matter what the market, polls or pundits are saying. Indeed, bucking the conventional wisdom is often a profit-making strategy on the site.

For example, during the first two presidential debates, the trader bet thousands of dollars on a McCain electoral victory at the same moment that instant polls were suggesting that Obama would win.

But again, from an investment standpoint, the tactics used by the trader suggest a different motive.

“That’s equivalent to buy a company’s stock just as negative earning reports come out, said David Rothschild, a researcher and Ph.D. candidate at the Wharton School, “It is a bad investment, but may make some observers think that Mr. McCain won the debate, which, again would be the goal of market manipulation.”

Also, the trader paid a premium of 10 percent to 20 percent on every dollar traded by not placing similar bets on other Web sites, according to Rothschild’s calculations.

Overall, if the trader’s motive was to influence the Intrade market, he was remarkably successful. He singlehandedly kept the probability of Obama winning the election on Intrade about 10 percent lower than Betfair and IEM for more than a month.

It’s unknown how many tens or hundreds of thousands of dollars the trader lost in process.

“If the investor did this as investment, not to manipulate Intrade, he is one of the most foolish investors in the world,” Rothschild said.

Drew Armstrong contributed to this story.

First posted Oct. 17, 2008 11:44 a.m.

 

So, to sum up:

1 Intrade found no rules violations

2 the institutional investor was using the contract to hedge other investments.

(these two points were stipulated by intrade)

3 there has been manipulative activity of the sort that is being alleged in the past by democrats (Tamany Hall)

4 democrats are coming up with all kinds of conspiracy theories to smear republicans about this.

 

Come on, Pa(b)st, come clean. We know it was you.