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


Barnard College, Columbia University; Santa Fe Institute

September 8, 2013


Abstract:     
We examine transaction-level data from Intrade's presidential winner market for the two weeks immediately preceding the November 2012 election. The data allow us to compute key statistics, including volume, transactions, aggression, holding duration, directional exposure, margin, and profit for each of the over 3,200 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 standard models. We present evidence suggestive of market 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: 26

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  

Suggested Citation

Rothschild, David M. and Sethi, Rajiv, Trading Strategies and Market Microstructure: Evidence from a Prediction Market (September 8, 2013). 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)
Barnard College, Columbia University ( 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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