Dynamic Learning and Market Making in Spread Betting Markets With Informed Bettors

81 Pages Posted: 7 Dec 2018 Last revised: 20 Apr 2020

See all articles by John R. Birge

John R. Birge

University of Chicago - Booth School of Business

Yifan Feng

University of Chicago - Booth School of Business

N. Bora Keskin

Duke University - Fuqua School of Business

Adam Schultz

Wealthfront, Inc.

Date Written: April 14, 2020

Abstract

We study the profit maximization problem of a market maker in a spread betting market. In this market, the market maker quotes cutoff lines for the outcome of a certain future event as “prices,” and bettors bet on whether the event outcome exceeds the cutoff lines. Anonymous bettors with heterogeneous strategic behavior and information levels participate in the market. The market maker has limited information on the event outcome distribution, aiming to extract information from the market (i.e., “learning”) while guarding against an informed bettor’s strategic manipulation (i.e., “bluff-proofing”). We show that Bayesian policies that ignore bluffing are typically vulnerable to the informed bettor’s strategic manipulation, resulting in exceedingly large profit losses for the market maker as well as market inefficiency. We develop and analyze a novel family of policies, called inertial policies, that balance the tradeoff between learning and bluff-proofing. We construct a simple instance of this family which (i) enables the market maker to achieve a near-optimal profit loss and (ii) eventually yields market efficiency.

Keywords: sequential learning, dynamic pricing, strategic agent, market manipulation, spread betting market, prediction market, market making, sports analytics

Suggested Citation

Birge, John R. and Feng, Yifan and Keskin, N. Bora and Schultz, Adam, Dynamic Learning and Market Making in Spread Betting Markets With Informed Bettors (April 14, 2020). Available at SSRN: https://ssrn.com/abstract=3283392 or http://dx.doi.org/10.2139/ssrn.3283392

John R. Birge

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Yifan Feng

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

HOME PAGE: http://sites.google.com/view/yifanfeng/

N. Bora Keskin (Contact Author)

Duke University - Fuqua School of Business ( email )

100 Fuqua Drive
Durham, NC 27708-0120
United States

HOME PAGE: http://faculty.fuqua.duke.edu/~nk145/

Adam Schultz

Wealthfront, Inc. ( email )

900 Middlefield Rd
Redwood City, CA 94063
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
252
Abstract Views
1,759
rank
134,928
PlumX Metrics