Trading Strategies and Market Microstructure: Evidence from a Prediction Market
David M. Rothschild
Microsoft Research - NYC
Barnard College, Columbia University; Santa Fe Institute
September 8, 2013
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, D84working papers series
Date posted: September 9, 2013
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