Arbitrage on InTrade Markets

[HashiriyaS14]

I read a very interesting article today over on FiveThirtyEight.com, a well-respected poll tracking website with an admittedly pro-Obama bent.

This particular article however, is not partisan in nature. Rather, it points out the existence of arbitrage potential across two different predictive marketplaces, InTrade and BetFair.

Not only is the chance of Obama winning seriously different betwixt the two exchanges, but also, as I predicted, there is a significant margin between certain individual states and the outcome of the total election. I mentioned that one might be able to run a butterfly spread on Colorado and the general election and come out way ahead with zero risk (i.e. arbitrage), and this appears to be very much the case after all.

Additionally, FiveThirtyEight has reached the conclusion that, due to some similar trading activity on Hillary Clinton futures, that someone is betting big money on the idea that some disqualifying event will pull Obama from the race. They speculate that this could even be, for instance, assassination. This is pretty nefarious stuff, and if someone is indeed risking hundreds of thousands of dollars betting on such an improbability, the FBI and Secret Service need to find out the identity of this trader ASAP.

Anyway, here's a link to the article:

http://www.fivethirtyeight.com....html

What does everyone think about the potential for arbitrage? Anyone have any ideas for novel trading strategies? I don't feel like signing up for BetFair, so I likely won't play the spread betwixt the two exchanges, but I will almost certainly play the InTrade game between one or two states and the general election outcome for what appears to be a nice potential risk-free profit.

[smockers83]

I had never heard of InTrade until someone mentioned it here and I just checked out the website. People actually pay money for this and buy/sell shares for actual money? Is that right?

I'll tell you something about arbitrage. If any investor could find arbitrage, they would jump all over it as arbitrage is free money. If there is arbitrage in the market, it usually disappears as the prices converge; in a real market, like stocks, the arbitrage gap can close very quickly if someone can find it. I can give you some formulas for portfolio management if you're willing to do the math--I don't remember them being too difficult. They'll tell you what to short and what to buy in order to hedge your bets and create a portfolio.

Also, another strategy I may point out, if the site has event analysis and has a Beta measurement, I can give you some strategies based on that as well.

[HashiriyaS14]

I had never heard of InTrade until someone mentioned it here and I just checked out the website. People actually pay money for this and buy/sell shares for actual money? Is that right?

I'll tell you something about arbitrage. If any investor could find arbitrage, they would jump all over it as arbitrage is free money. If there is arbitrage in the market, it usually disappears as the prices converge; in a real market, like stocks, the arbitrage gap can close very quickly if someone can find it. I can give you some formulas for portfolio management if you're willing to do the math--I don't remember them being too difficult. They'll tell you what to short and what to buy in order to hedge your bets and create a portfolio.

Also, another strategy I may point out, if the site has event analysis and has a Beta measurement, I can give you some strategies based on that as well.

A.) Yep, they bet real money.

B.) I'm well aware of the theory of efficiency of markets. I'm just pointing out (or rather, FiveThirtyEight is) that InTrade appears at first glance to be a very inefficient market, hence the obvious arbitrage opportunity. I'm fairly familiar with hedging strategies and derivatives trading, and so this this obvious discrepancy surprises me as much as it probably surprises you. That said, I can't seem to find any reason why it isn't legitimate.

My only theory is that given the shallowness of the Intrade market and the fact that it tends to be populated by relative amateurs rather than institutions, arbitrage opportunities CAN and DO exist as the bulk of the trading population doesn't seem to know enough to spot or exploit them. There are also probably issues with trading volume.

I mean, pre-convention, McCain-Win futures were trading at like 30%. Now, this isn't arbitrage, but c'mon, 30% chance? I knew it would slide more in line with the national polls so I bought a bunch and sold post-convention when he hit like 48%. This WAS speculative, but it definitely toed the line. I did this with real money, and I made real money doing it.

[smockers83]

Hmm, interesting. I really don't know what to say about it but that is very interesting. As for the inefficient market, if you have an arbitrage opportunity, you might as well take it if you feel comfortable in the market.

As for the McCain trades, that's just a valuation just like a stock can be under- or overvalued. The best way to trade, as you probably know, is based on valuation. If you know a share is undervalued, buy that sucker up like you did.

I was so surprised by people betting money and trading on these kinds of things that I didn't even read the article, sorry.