CQ TODAY ONLINE NEWS – POLITICS & ELECTIONS Updated Oct. 17, 2008 – 3:44 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 an investor’s purchases prompted “unusual” price swings that 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.
“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 the internal investigation into the trading patterns, Intrade found no wrongdoing or violation of its exchange rules, according to the company.
Citing privacy policies, Delaney would not disclose the investor’s identity or whether the investor was affiliated with any political campaign.
According to Delaney the investor was using “increased depth” in the Intrade market “to manage certain risks.” The action boosted the McCain prediction over its previous market value and above the levels of competing predictive-market Web sites.
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 outcome of political, cultural, or even geological events such as the weather.
The company asserts and experts have found that the Intrade market is generally more accurate in predicting the outcome of major events than other leading indicators, including public opinion polls. But the relatively small scale of the market and its lack of outside regulation could leave the system vulnerable to unscrupulous investors, scholars of predictive markets say.
Justin Wolfers, an associate professor at the University of Pennsylvania’s Wharton School of Business, said the trades in question 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.
McCain campaign spokesman Michael Goldfarb said: “It’s always a good time to buy McCain.”
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, boosting their price and increasing the prediction that McCain had a greater chance of winning the presidential election. At other times, according to Intrade’s online records, blocks of Obama futures were sold — lowering the market’s prediction about Obama’s standing in the race.
According to Intrade bulletin boards and market histories, smaller investors swept in to take advantage of what they saw as price discrepancies caused by the market shifts — quickly returning the Obama and McCain futures prices to their previous value.
This resulted in losses for the investor and profits for the small investors who followed the patterns to take maximum advantage.
The activities of the trader, dubbed the “rouge investor” on Intrade’s message boards, raised several questions.
For example, the trader purchased large contracts named specifically after McCain and Obama. There were no similar-sized investments, however, in separate instruments that predict a generic Republican or Democratic presidential win — even though both sets of contracts apply to the same event, prices show.
Some political news sites, such as realclearpolitics.org, prominently display Intrade’s McCain contract value but do not display the corresponding value for a Republican presidential win.
Similar trading patterns were not found in competing predictive market Web sites betting on John McCain , such as the Iowa Electronic Markets or Betfair. This means the trader was paying thousands of dollars more than necessary to purchase McCain contracts on Intrade, where the price of betting on McCain was much higher.
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, according to the political site fivethirtyeight.com.
Intrade records show the trader often purchased 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.
In a three-day period from Sept. 30 through Oct. 2, four separate flurries of buying drove the price of the McCain contracts up by 3 to 5 points each. Those numbers eventually 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.”
Rogue Tactics
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, tracking of Internet addresses, checking physical addresses and other information.
Trader Drove Up Price of McCain ‘Stock’ in Online Market Intrade released details about its investigation in a statement on its Web site.
Some Intrade users commented on the company’s message boardthat the trader may believe in McCain’s chances for victory, despite trends in recent public opinion polls. Indeed, bucking conventional wisdom can be a profit-making strategy.
For example, David Rothschild, a researcher and Ph.D. candidate at the Wharton School, said that 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.
“That’s equivalent to buying a company’s stock just as negative earning reports come out,” Rothschild said. “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, Rothschild said. The trader’s actions help keep the probability of Obama winning the election on Intrade about 10 percent lower than Betfair and IEM for more than a month.
“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.