Trading Strategies and Market Microstructure: Evidence from a Prediction Market

The Journal of Prediction Markets 10 (1), 1-29, 2016

29 Pages Posted: 9 Sep 2013 Last revised: 4 Oct 2016

David M. Rothschild

Microsoft Research - NYC

Rajiv Sethi

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

Date Written: November 22, 2015

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.

Keywords: Prediction Markets, Market Microstructure, Trading Strategies, Manipulation

JEL Classification: G12, D83, D84

Suggested Citation

Rothschild, David M. and Sethi, Rajiv, Trading Strategies and Market Microstructure: Evidence from a Prediction Market (November 22, 2015). The Journal of Prediction Markets 10 (1), 1-29, 2016. Available at SSRN: https://ssrn.com/abstract=2322420 or http://dx.doi.org/10.2139/ssrn.2322420

David M. Rothschild

Microsoft Research - NYC ( email )

641 6th Ave., 7th Floor
New York, NY 10011
United States

Rajiv Sethi (Contact Author)

Santa Fe Institute

1399 Hyde Park Road
Santa Fe, NM 87501
United States

Columbia University, Barnard College - Department of Economics ( email )

3009 Broadway
New York, NY 10027
United States
212-854-5140 (Phone)
212-854-8947 (Fax)

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