Abstract

http://ssrn.com/abstract=2322420
 
 

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Trading Strategies and Market Microstructure: Evidence from a Prediction Market


David M. Rothschild


Microsoft Research - NYC

Rajiv Sethi


Columbia University, Barnard College - Department of Economics; Santa Fe Institute

August 23, 2014


Abstract:     
We examine transaction-level data from Intrade's 2012 presidential winner market for the entire two-year period for which trading occurred. The data allow us to compute key statistics, including volume, transactions, aggression, directional exposure, holding duration, margin, and profit for each of 6,300 unique trader accounts. We identify a diverse set of trading strategies that constitute a rich market ecology. These range from arbitrage-based strategies with low and fleeting directional exposure to strategies involving large accumulated positions in one of the two major party candidates. Most traders who make directional bets do so consistently in a single direction, unlike the information traders in some canonical models of market microstructure. We present evidence suggestive of manipulation by a single large trader, and consider the possible motives for such behavior. Broader implications for the interpretation of prices in financial markets and the theory of market microstructure are drawn.

Number of Pages in PDF File: 25

Keywords: Prediction Markets, Asset Prices, Binary Options, Heterogeneous Beliefs

JEL Classification: G12, D83, D84

working papers series





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Date posted: September 9, 2013 ; Last revised: August 24, 2014

Suggested Citation

Rothschild, David M. and Sethi, Rajiv, Trading Strategies and Market Microstructure: Evidence from a Prediction Market (August 23, 2014). Available at SSRN: http://ssrn.com/abstract=2322420 or http://dx.doi.org/10.2139/ssrn.2322420

Contact Information

David M. Rothschild
Microsoft Research - NYC ( email )
641 6th Ave., 7th Floor
New York, NY 10011
United States
Rajiv Sethi (Contact Author)
Columbia University, Barnard College - Department of Economics ( email )
3009 Broadway
New York, NY 10027
United States
212-854-5140 (Phone)
212-854-8947 (Fax)
Santa Fe Institute
1399 Hyde Park Road
Santa Fe, NM 87501
United States
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