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

See all articles by David M. Rothschild

David M. Rothschild

Microsoft Research

Rajiv Sethi

Barnard College, Columbia University; 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 ( email )

New York City, NY 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)

HOME PAGE: http://www.columbia.edu/~rs328/

Santa Fe Institute

1399 Hyde Park Road
Santa Fe, NM 87501
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
3,729
Abstract Views
23,052
Rank
6,271
PlumX Metrics