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Leeroy Jenkins's List: Prediction Markets

  • Mar 02, 14

    WHEN ACTING AS CUSTODIAN OF CUSTOMER ACCOUNTS, YOU CAN PROVE SOLVENCY BY SIGNING THE BITCOINS

  • Aug 07, 13

  • Aug 05, 13



    Nice, you should look at some of competitors for ideas to add more events also, so you can see what's popular.

    Or a Small bounty for unique ideas that generate a lot of bets...

  • Aug 03, 13

    Just because online gambling is legal in a country does not mean you can host an unlicensed site there. The UK has a very strict licensing regiment with master licenses costing around £500,000 per year. Hosting unlicensed games on a server there is a quick way to get booted by your hosting company who is required to comply with UK law.

    It is, however, legal to serve games from offshore into the UK, if they are legal in the country where they're hosted. The key here under UK law is "where the bet is struck". The bet is considered to be struck where the server is. Since the UK abides by international trade laws...

  • Jul 03, 13

    "The Defect of Intrade
    Intrade's trading system is widely described as a great invention. However, there are fundamental flaws in its system that cause its markets to be inaccurate.

    Intrade has a defect in its trading system that causes longshots to be overpriced. For example, "Ron Paul wins the Republican nomination" obviously has a value of zero, but its actual price is far greater than zero.

    The problem is that, when making a long-term prediction, you are required to post margin equal to your worst-case loss, and you don't get credited with interest. For a longshot, short selling it would involve tying up a lot of capital without earning interest. This means that people can't profitably short-sell longshots.



    I liked this post on Marginal Revolution about Intrade.

    Mr. Ravitch has made a nice profit betting against Ron Paul, the libertarian who late last year was, amazingly, given almost a 10 percent chance of becoming the Republican nominee. “If you asked anyone in politics whether there was ever, at any point, a 10 percent chance of Ron Paul being the nominee,” Mr. Ravitch said, without finishing the sentence. “That sort of makes my case for me.”

    There's a problem with Intrade's margin rules. Suppose you sold $1000 that Ron Paul would not win the nomination at 10% odds. In other words, you collected $1000 when you sold the "Ron Paul not nominated" contract. If Ron Paul would have won the nomination, you would owe another $9000. If Ron Paul is not nominated, you can keep the $1000 as profit.

    The problem is that you are required to post the $9000 as margin collateral. To sell $1000 of "Ron Paul not nominated" futures, you need $9000 in your account. In other words, your profit (if you're right) is 11%. The "Ron Paul not nominated" contract does not settle until the nomination is officially announced. At the time, it was still a year until the convention. This means your profit rate would be 11%, which isn't even comparable to a stock market investment.

    The real problem is that you don't earn interest on the $9000 collateral you were required to post as margin. If Intrade credited everyone with interest, then their market would be far more accurate.

    If you wanted to create a fair online betting market, you should credit all accounts with interest. The market would automatically correct prices for long-term contracts. Currently, Intrade pockets the interest on all accounts.

    Notice that short-term contracts aren't as distorted by the lack of interest credit. If you're betting on the Super Bowl outcome in late January, the effect of interest is negligible. If you're betting now on "Who will be elected President", then the lack of interest credits distorts the market.


    This post on Techdirt is completely wrong, regarding inefficiencies in online prediction markets. The article cites "Ron Paul is still priced at 1.2% to win the Republican nomination." At this point, it's obvious that Ron Paul's true odds of winning the Republican nomination are essentially zero.

    Can you profitably sell "Ron Paul does not win the nomination"? No. There's a defect with Intrade's margin rules. When you take into account Intrade's margin rules, this trade is not profitable.

    Suppose you sold $120 of "Ron Paul does not win Republican nomination". The worst-case loss is that Ron Paul actually does win the nomination, in which case you owe $9880. You are required to post $9880 in your account to meet the margin requirement, which is the worst case loss. This capital cannot be used for other trades until the "Ron Paul not nominated" contract settles. The contract does not settle until the nominee is officially announced at the Republican convention late this summer, approximately 6 months from now. Your return is $120/$9880 = 1.2% over 6 months. You'd be better off investing your money elsewhere.

    The problem is that you don't earn interest on the money in your account. You should earn interest on the $9880 plus the $120 you received when you sold the contract. If Intrade credited accounts with interest at the Fed Funds Rate minus a small fee, then the Ron Paul contract would correctly trade at nearly zero.


    If Intrade credited all accounts with interest, then Intrade's betting markets would be far more accurate. Under the current system, the longshots for a long-term contract tend to be overpriced. They can't be profitably short sold, due to the margin requirements and lack of interest credits.
    Posted by FSK at 9:48 AM


    4 COMMENTS:

    JC said...
    You also missed the part where shorting Ron Paul costs 0.3% in trading fees and they take out another 1.0% on expiry. So if you short Ron Paul at 1.2 for $9800 to win $120, Intrade will charge you $30 in trading fees and $100 for your "winning" trade on expiry.

    AUGUST 18, 2008 AT 12:06 PM
    Anonymous said...
    you also missed that the fee is 3% not .3 because the contracts are .1 dollars not 1 dollar contracts and its .03 per... also the expiry fee.

    so even if you win you lose a lot in fees... this site is a total scam

    OCTOBER 3, 2008 AT 11:02 AM
    Anonymous said...
    And they fix the results so insidertraders can take your money. Daily DOW was higher at 12:00PM in NY? They just add or subtract however many seconds they need so their insidertraders win as much as possible. An insidertrader is long 100 for DOW higher at 12:00:00? But the DOW was lower in NY? Then just wait a minute or two. Or take the DOW at 11:59:00. "But it was 12:00:00 when you thought it was only 11:59:00 there". Sure it was. Whatever makes insidertraders the most money.

    And only their insidertraders can be market makers on daily dow.

    NOVEMBER 7, 2009 AT 6:46 AM
    Anonymous said...
    Two comments:

    Since this post in 2008, Intrade has revised its fee schedule. Now there is simply a monthly fee of $4.99 to maintain an active account. There are no other trading costs. This alone has made the market much more liquid.

    Next, in linked markets, there can only be one winner. For example Ron Paul *and* Mitt Romney can't EACH win the Republican nomination. Only one can win.

    So Intrade calculates the total margin requirement for each contest as the worst case if you lose ALL your bets. The margin necessary for one bet can be partially offset by the potential to win in a mutually exclusive bet.

    For example, lets say you're short Romney at $5 a share. If Paul wins the nomination then your Romney short will also be a win.


    Consequently you can *also* short Paul shares if you like, with a lower margin requirement because if you're wrong about Paul and he wins, any loss you'd have with the Paul short shares will be partially (or totally) offset by your corresponding gain in short Romney shares.

    The point is, if you're willing to take a position in one of the "major" candidates, shorting one of the "also ran" candidates like Paul doesn't require much (or any) extra margin."

  • Jun 05, 13

    How Intrade Works
    What is a prediction market?
    Intrade is a prediction market. What is a prediction market? It's a market that allows you to make predictions on the outcome of hundreds of real-world events. Stock exchanges find the price of stocks, and futures markets find the price of commodities. Prediction markets find the probability of something happening - a predefined, uncertain future event.
    Will the financial markets be up today? Will a certain candidate win the next election? Who will win the Academy Awards? If you have an opinion on what will happen then you can make a prediction on Intrade. Predict correctly and you can win real money profits.
    An Intrade market - always YES or NO
    Intrade is a platform where you make predictions by buying and selling shares on the outcome of real-world events. These events are always defined on Intrade as a YES/NO proposition. For example, here are a few of the markets currently available:
    The Dow Jones to close on or above 13,000 on 30 Dec 2012
    Barack Obama to be re-elected President in 2012
    The United States or Israel to bomb Iran before the end of 2013
    There are two possible outcomes to each of these events - yes, the event will happen as described, or no, it will not happen. The Dow Jones will either close on or above 13,000 or it won't. Barack Obama will either be re-elected President in 2012 or he won't. You get the idea.
    This allows you take a clear position on each event - you can either predict the event will happen, or it won't happen. You then back up your prediction by buying or selling shares in the market.
    When do I buy? When do I sell?
    As described above, there are two possible outcomes to each event - yes, the event will happen, or no, the event won't happen. Your opinion on what the outcome will be determines whether you buy shares or sell shares:
    If you predict the market event will happen then you BUY shares
    If you predict the market event will not happen then you SELL shares.
    (Yes, you can sell shares before you own them. This is known as "short selling" and is explained further below in Short Selling - selling shares that you don't own.)
    As an example, let's say you want to make a prediction on the following market: The Dow Jones to close on or above 13,000 on 30 Dec 2011. If you predict the Dow Jones will close on or above 13,000 then you will BUY shares. If you predict the Dow Jones will not close on or above 13,000 (i.e. close lower than 13,000) then you will SELL shares.
    Who am I buying from? Who am I selling to?
    Intrade is an exchange - like the New York or London stock exchanges for example. When you buy shares you are buying them from another member of Intrade. And when you sell shares, another member of the exchange is buying them from you. You do not buy shares from Intrade, and Intrade does not buy shares from you. You are always trading shares with other members of the exchange - other people who are making predictions, just like you.
    It is important to remember that Intrade is a market. This means you may not always be able to get what you want. If you are looking to buy some shares, but nobody is selling, then you can't buy the shares that you want.
    Market Settlement - always $0.00 or $10.00
    When the outcome of an event is known, the market is settled. The market will always be settled at either $0.00 or $10.00 according to the actual real-life outcome:
    YES, the market event has happened - the market will be settled at $10.00.
    NO, the market event has not happened - the market will be settled at $0.00.
    For example, we currently have a market for Barack Obama to be re-elected President in 2012. If Obama is re-elected then the market will settle at $10.00. If he is not re-elected the market will settle at $0.00.
    Let's say you predict Obama will win re-election, so you buy shares. If Obama is re-elected the market will settle at $10.00 and you will have a profit. How much of a profit will depend on the price you paid for the shares. But if Obama loses the election the market will settle at $0.00 and you will lose.
    The opposite applies if you sold shares because you predict Obama will not be re-elected. If he is re-elected then the market will settle at $10.00 and you will lose. But if he fails to be re-elected the market will settle at $0.00 and you will have a profit.
    What is my potential profit? What is my potential loss?
    Because a market will always settle at either $0.00 or $10.00, all shares are bought or sold at prices somewhere in between. The price at which you buy or sell shares will determine how much you can win, and how much you can lose.
    When you buy shares you make a profit if the price of the market goes up. Your profit is maximised if the market is settled at $10.00. If you sell shares then you make a profit if the price of the market goes down. Your profit is maximised if the market is settled at $0.00.
    Let's look at a couple of examples...
    You buy shares at a price of $7.00. If the market settles at $10.00 then you have a profit $3.00 per share. If the market settles at $0.00 then your loss is $7.00 per share.
    Let's say you sell shares at $4.50. If the market settles at $10.00 then you lose $5.50 per share. If the market settles at $0.00 then you have a profit of $4.50 per share.
    Where do my profits come from?
    Your profits come from the losses of those on the other side of your prediction.
    There are always two sides to every prediction. If you make a prediction by buying shares, then someone is making the opposite prediction by selling you those shares - you are saying yes, the event will happen, they are saying, no it won't. If you predict correctly your profits come for the person who sold you the shares - the person who predicted wrongly.
    Let's look at an example. Trader A buys shares from Trader B at a price of $6.50.
    If the market event happens the market is settled at $10.00:
    Trader A will have a profit of $3.50 per share
    Trader B will have a loss of $3.50 per share
    If the market event does not happen the market is settled at $0.00:
    Trader A will have a loss of $6.50 per share
    Trader B will have a profit of $6.50 per share
    As you can see, the profits of those who predicted correctly always match the losses of those that predict incorrectly. Those losses are simply transferred to the winners as profit.
    If the market settles at $10.00 then the profits for the buyers comes from the losses of the sellers. If the market settles at $0.00 then the profits of the sellers come from the losses of the buyers.
    Because a prediction always requires a buyer and a seller there is always the exact same number of shares sold as there are bought. Therefore there is always a perfect balance between profits and losses.
    How do I cover my losses?
    Whenever you buy or sell shares you have to cover your potential loss. Intrade does this by freezing the maximum amount you can lose whenever you make a prediction. If you don't have enough available cash in your account to cover this potential loss, then you cannot make the prediction.
    For example, let's say you buy 10 shares at a price of $6.00. The maximum amount you can lose per share is $6.00 (if the market settles at $0.00), so your total potential loss is $60.00 (10 shares x $6.00). When you buy these shares $60.00 is frozen in your account to prevent you using the same funds to cover other predictions. If you don't have $60.00 in your account, you can't buy those shares.
    By doing this your potential losses are always covered, which means the profits of those who you have predicted against are always assured. There is no way you can default on your losses because if you can't cover the loss, you can't make the prediction in the first place.
    If you win then the funds frozen to cover your potential loss are unfrozen and any profit credited to your account. If you lose, the frozen funds are debited from your account balance as a loss.
    Short Selling - selling shares that you don't own
    It is possible to sell shares that you don't yet own. This is known as short selling. You are essentially "borrowing" the shares and selling them with the intention of buying them back again later. If you predict the market event will not happen then you will (short) sell shares. You can then cover this sale at a later time by buying back the shares, or hold until the market is settled.
    So don't be put off selling shares because you don't own any - you can sell shares without owning them first.
    Can I sell my shares early for a profit (or to minimise a loss)?
    Yes. If you buy shares and the price increases, you can sell these shares for a profit. For example:
    You buy shares at a price of $6.00. The next day the price has increased to $7.50. You can sell these shares and take a profit of $1.50 per share.
    If however you sell your shares for a lower price you will make a loss. For example:
    You buy shares at a price of $6.00. The next day the price has dropped to $4.90. If you sell these shares you will suffer a loss of $1.10 per share.
    (Why would you sell for a loss? You may want to sell your shares if you think the market will drop further, to help minimise your potential loss.)
    Because you also have the option of short selling shares you can sell the shares first and then buy them back later at a lower price to make a profit. You have still bought low and sold high, only you did the selling part of the equation first. For example:
    You short sell shares at a price of $8.00. The price of the shares slips to $5.30 later in the day. You can now buy back these shares for a profit of $2.70 per share (i.e. you bought at $5.30 and sold for $8.00).
    But if you buy back your shares for a higher price then you make a loss. For example:
    You short sell shares at a price of $8.00. The price of the shares increases to $9.25 later in the day. If you buy back these shares you will suffer a loss of $1.25 per share (i.e. you bought at $9.25 and sold for $8.00).
    (You may want to do this in order to minimise a potential loss if you think the price of the market will continue to rise.)
    What is the "chance" of an event happening?
    The market prices of shares also indicate the probability of the event happening. For example, a market price of $3.63 indicates a 36.3% probability the event will actually happen, according to the market. In other words, the market is predicting a 36.3% probability.
    At various places on Intrade you will see the "chance" of something happening. This figure is the current percentage probability of the event happening, as predicted by the market, and is calculated using the last price at which shares were bought or sold.
    The golden rules - a summary
    In summary, here are a few of the golden rules when it comes to understanding Intrade:
    Each market is a YES/NO proposition - yes, the event will happen, or no, the event will not happen.
    If the event does happen, the market will settle at $10.00.
    If the event does not happen, the market will settle at $0.00.
    If you predict the event will happen then you BUY shares.
    If you predict the event will not happen then you SELL shares.
    If you buy shares you profit if the market value of the shares goes up. Your profit is maximised if the market settled at $10.00.
    If you sell shares you profit if the market value of the shares goes down. Your profit is maximised if the market settled at $0.00."

  • Jun 05, 13

    Fees
    Intrade charges a $4.99 monthly fee. If you do not have any funds in your account the fee is not charged.
    The fee is debited from your account balance on the first day of each month. If, for example, you have opened your account on January 10th, you will not be charged your first monthly fee until February 1st.
    This fee encourages and provides for an unlimited number of predictions. There are no transaction fees or commission charges other than the monthly fee of US$4.99.
    If your account is unused for eighteen-months then a dormant account fee of $5.00 will be debited from your account balance on a monthly basis. If you do not have any funds in your account this fee will not be charged. To avoid the dormant account fee you need to login and either buy/sell shares or make a deposit/withdrawal.
    If you have any questions or concerns regarding this fee or any other related issue please contact our Customer Support."

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