What can we learn from Betfair and Intrade being out of line from one another?

[Simple_Linctus]

There seems to be a long running inconsistency between Intrade and Betfair on who the 2012 president is going to be. For example, at the moment on Intrade I can buy 100 shares of Barack Obama winning at $6.62.

If Obama wins, I get $1000 (including my original stake). If Obama loses, I lose $662.

However, at the same time I can go over to Betfair and lay Obama at 1.41, decimal odds. What does that mean? Well suppose I lay a stake of $1000. If Obama wins, I will lose $1000. However, if Obama loses, I will win $709. In other words I have a free bounty of $47 if Obama loses, and it costs me nothing if he wins.

(Equally, you can be even more clever and equalise outcomes, more or less. The above also doesn’t take into account fees which are significant but not enough to destroy the opportunity. I do not know whether the opportunity would still exist if you decided to hedge foreign exchange as well but I should think so)

Anyway, my question is: what can we learn from this consistent abberation?

I believe that the only major difference between Intrade and Betfair is that Americans cannot use the latter due to silly US gambling laws (I don’t see how intrade isn’t gambling just by pretending it’s “shares”, but whatever).

And thus my answer to my question is this: American republicans are putting enough money on Intrade to distort the betting markets. Eventually of course cause of arbitrageurs, this will feed through to betfair and other bookies, but they are restircted to using Intrade cause of American laws.

And if I’m correct about this - isn’t this very interesting indeed - it won’t cost them all too much, and it may generate some headlines. Notoriously Chris Hune did this when he was running to be a leader of the Liberal Democrats in the UK, which while he didn’t win most assuredly boosted his profile; and had he not been a corrupt bugger currently trying to avoid being sent to prison for perverting the course of justice, this relatively cheap in terms of political campaigning act could have been extremely effective.

Is there anything in American election law that would stop Republicans trying to distort consensus like this? And more generally, is my theory plausible?

[Chronos]

Meanwhile, of course, the fact that a guaranteed-profit arbitrage opportunity can exist unexploited for so long pretty well skewers the notion that markets are inherently efficient, which is I believe a central tenet of what purports to be Republican philosophy.

[davidm]

@Chronos

Meanwhile, of course, the fact that a guaranteed-profit arbitrage opportunity can exist unexploited for so long pretty well skewers the notion that markets are inherently efficient, which is I believe a central tenet of what purports to be Republican philosophy.

While I agree with your conclusion that markets aren’t always inherently efficient, I’m not so sure that this is proof of that.

These are essentially gambling odds (regardless of how Intrade tries to dress it up) and I don’t think they can be compared to markets in actual commodities.

[Lantern]

@Simple_Linctus

(Equally, you can be even more clever and equalise outcomes, more or less. The above also doesn’t take into account fees which are significant but not enough to destroy the opportunity. I do not know whether the opportunity would still exist if you decided to hedge foreign exchange as well but I should think so)

Do you have some numbers to back this up? $47 dollars on a $1000 dollar initial investment may not be sufficient to account for transactions costs at both Betfair and Intrade, foreign exchange risk and taxes.

If there is in fact a genuine arbitrage opportunity your explanation doesn’t really work. It doesn’t matter if some partisans are trying to manipulate the results. There is still money to be made and smart traders will exploit it until it vanishes.

[Snarky_Kong]

Intrade is a flat $5 fee per month, no transaction costs. Betfair has a 2-5% fee on winning, depending on how often you bet there. So, you’d probably (but not assuredly) cover the $47, but the fees would eat a significant portion of the money.

[Lantern]

Aren’t there also fees for withdrawing funds from your Intrade account?

[BigAppleBucky]

@Lantern

Do you have some numbers to back this up? **$47 dollars on a $1000 dollar initial investment may not be sufficient to account for transactions costs at both Betfair and Intrade, foreign exchange risk and taxes. **

If there is in fact a genuine arbitrage opportunity your explanation doesn’t really work. It doesn’t matter if some partisans are trying to manipulate the results. There is still money to be made and smart traders will exploit it until it vanishes.

In other words, what’s the vig?

[Lantern]

@Lantern

Aren’t there also fees for withdrawing funds from your Intrade account?

This pagesays:

There is a $20.00 charged by the Exchange for processing a bank wire transfer withdrawal. All fees charged for processing the wire by the sending bank, the receiving bank or any intermediary bank the transfer is routed through are payable by the receiver of the transfer (i.e. the exchange member requesting the withdrawal). These fees will not be covered or refunded by the Exchange.
The cost of issuing a withdrawal check (currently 4 euro) is payable by the receiver (i.e. the exchange member requesting the withdrawal) and will be deducted from the withdrawal amount requested. This will be done by the issuing bank (National Irish Bank) and not by the Exchange. The details of this deduction are displayed on the check itself.
For your first check withdrawal per calendar month you will incur only the cost of issuing the check. Any further check withdrawals in the same calendar month will incur a $10.00 admin fee from the Exchange, in addition to the cost of issuing the check. You may request to have your check sent by FedEx but regret that we must pass on the FedEx fee of $30.

So the cheapest option appears to be a four euro charge for the withdrawl check. Not huge but it does add up.

I am also wondering about taxes. Take the scenario in the OP where Obama loses. You would have to pay taxes on your 709 winnings at Betfair but would you be able to fully deduct your 662 loss at Intrade?

There is also settlement risk. Neither Intrade or Betfair are exactly long-established financial companies. You might wonder, for example, how the Irish financial crisis has affected Intrade.

[Simple_Linctus]

@Lantern

If there is in fact a genuine arbitrage opportunity your explanation doesn’t really work. It doesn’t matter if some partisans are trying to manipulate the results. There is still money to be made and smart traders will exploit it until it vanishes.

It won’t vanish if the Republicans keep on feeding money onto Intrade. And there would need to be some opportunity for other markets like Betfair to be moved by Intrade. It’s the very fact that the opportunity hasn’t vanished which is what I’m latching on to. I’m not giving gambling advice

Regarding taxes and so on, one will be deductable agains the other in the UK for someone doing this for a living, that I know for sure.

Yes there are risks with betting arbitrage but those are taken into account by those who do it. The major one here is definitely foreign exchange actually, but then again most of those doing betting arbitrage dabble with financial stuff as well.

[Lantern]

@Simple_Linctus

It won’t vanish if the Republicans keep on feeding money onto Intrade. And there would need to be some opportunity for other markets like Betfair to be moved by Intrade.

Let's say hypothetically that dozens of Republican billionaires put in vast amounts of money only in Intrade to raise Romney's numbers. That would obviously distort the numbers but it wouldn't automatically create an arbitrage opportunity so long as there are enough traders who can trade in both. Effectively the money that's flowing in Intrade will indirectly flow into Betfair through arbitrage. The final result will be that both markets will overestimate Romney's chances but there shouldn't be an arbitrage opportunity left net of transactions costs.

I suspect that the reason for the arbitrage opportunity that seems to exist is simply transactions costs that we don’t know much about. For example you say that UK traders can deduct their Intrade losses but perhaps the paperwork involves a lot hassles because Intrade is Irish. Possibly UK traders are just nervous about Intrade because of the Irish financial situation. Or as you mentioned foreign exchange risk which could again be high because of the Euro crisis.

[Simple_Linctus]

@Lantern

Let’s say hypothetically that dozens of Republican billionaires put in vast amounts of money only in Intrade to raise Romney’s numbers. That would obviously distort the numbers but it wouldn’t automatically create an arbitrage opportunity so long as there are enough traders who can trade in both. Effectively the money that’s flowing in Intrade will indirectly flow into Betfair through arbitrage. The final result will be that both markets will overestimate Romney’s chances but there shouldn’t be an arbitrage opportunity left net of transactions costs.

I suspect that the reason for the arbitrage opportunity that seems to exist is simply transactions costs that we don’t know much about. For example you say that UK traders can deduct their Intrade losses but perhaps the paperwork involves a lot hassles because Intrade is Irish. Possibly UK traders are just nervous about Intrade because of the Irish financial situation. Or as you mentioned foreign exchange risk which could again be high because of the Euro crisis.

There won’t be an arbitrage opportunity eventually, but only because it has been arbitraged away. If you keep feeding money into one market and continually distorting it, then the arbitrage traders are going to take time keeping up (it’s not as if the money justifies sinking billions into the HFT stuff we keep reading about developed by our betters on Wall Street, although then again some of the programs you can get that trade on betfair incorporate simple auto spreaders and the like).

The foreign exchange will cost very little to hedge other than the costs of carry which are negligible presumably given the almost zero interest rates in both countries. They can use alpari (I think?) or some other fx provider that allows micro lots. And again, most people who are doing betting arbitrage will have a portfolio with considerable FX exposure anyway, this is just another position for their book.

But yeah, the InTrade stuff will move Betfair and that is why the very persistance of this is interesting - it’s suggestive of continual money coming in to intrade (and you don’t have to talk about billionaires, the over all turnover on both markets is only in the ten million kind of area, the costs of moving them like this will be under a million) with a Republican bias.

[Lantern]

@Simple_Linctus

There won’t be an arbitrage opportunity eventually, but only because it has been arbitraged away. If you keep feeding money into one market and continually distorting it, then the arbitrage traders are going to take time keeping up (it’s not as if the money justifies sinking billions into the HFT stuff we keep reading about developed by our betters on Wall Street, although then again some of the programs you can get that trade on betfair incorporate simple auto spreaders and the like).

If there are traders who are active in both markets arbitrage shouldn’t take very long though ; I would think it could happen easily within a single trading day. And the existence of a big arbitrage opportunity would itself attract more traders which would speed up arbitrage. Like you say, it wouldn’t justify HFT technology but all you really need is smart traders who buy low and sell high.

If I had to guess, I think what is slowing the arbitrage is the perceived foreign exchange/settlement risk because of the Irish/Euro financial situation. I would bet the discrepancy would be a lot lower if Intrade was also British.

[Simple_Linctus]

It can’t happen within a single trading day if InTrade keeps getting distorted orders!

It’s not as if the prices are set in stone once, and then adjust, and then that’s it. There are continual trades going on. If someone keeps backing Romney every day (or every hour, or whatever) at InTrade in size (which again, doesn’t mean a huge amount of money in these markets) then the markets are going to stay out of whack.

Arbitrage once does not mean the exchanges will stay in line. It’s the continual bias that’s itneresting.

[Measure_for_Measure]

I’m a little surprise the difference hasn’t been arbitraged away. The transaction cost explanation has been covered above. I’ll point out here that we’re are dealing with a thin market.

Over the past week, daily trading volume for Romney has high on an historical basis, but the average has been about 34,000. This market is small enough to tilt, but isn’t large enough to get Goldman Sachs interested. But consider that volume averaged 21,000 shares a week earlier and that was more typical. I’m wondering whether amateur evening arbitragers are rushing in. They should be: it’s easy money if you have an account at both venues. Buy Romney for $3 and sell him for the equivalent of $4 and you win whatever the election outcome. As Lantern points out though, you would also have to hedge for currency risk as well. These are futures markets after all. (Geeky: there’s also the time value of money to consider, but at today’s interest rates, that can be ignored.)

Along the same lines, I suspect that betfair would be straightforward for interested Romney supporters to game as well.

---

Does anybody have a good idea of the legalities?. IIRC, Intrade has asked for an official opinion from the SEC, which has… sat on its hands. All well and good. Are Betfair’s political markets considered illegal gambling according to the Unlawful Internet Gambling Enforcement Act?

[Chronos]

Quoth davidm:

While I agree with your conclusion that markets aren’t always inherently efficient, I’m not so sure that this is proof of that.

These are essentially gambling odds (regardless of how Intrade tries to dress it up) and I don’t think they can be compared to markets in actual commodities.

Markets in actual commodities are gambling odds in exactly the same sense as Intrade is.

[Simple_Linctus]

@Chronos

Markets in actual commodities are gambling odds in exactly the same sense as Intrade is.

No informed person thinks commodity markets are efficient (that doesn’t rule out republicans though, lol). Unlike stock markets where there is a pay off for making the market efficient, commodity markets can only have the traders who would make the market efficient if they’re inefficient, curiously enough. This is why trend following strategies so simple they can even be made into indecies show results.

@Measure_for_Measure

I’m a little surprise the difference hasn’t been arbitraged away. The transaction cost explanation has been covered above. I’ll point out here that we’re are dealing with a thin market.

Over the past week, daily trading volume for Romney has high on an historical basis, but the average has been about 34,000. This market is small enough to tilt, but isn’t large enough to get Goldman Sachs interested. But consider that volume averaged 21,000 shares a week earlier and that was more typical. I’m wondering whether amateur evening arbitragers are rushing in. They should be: it’s easy money if you have an account at both venues. Buy Romney for $3 and sell him for the equivalent of $4 and you win whatever the election outcome. As Lantern points out though, you would also have to hedge for currency risk as well. These are futures markets after all. (Geeky: there’s also the time value of money to consider, but at today’s interest rates, that can be ignored.)

Along the same lines, I suspect that betfair would be straightforward for interested Romney supporters to game as well.

---

Does anybody have a good idea of the legalities?. IIRC, Intrade has asked for an official opinion from the SEC, which has… sat on its hands. All well and good. Are Betfair’s political markets considered illegal gambling according to the Unlawful Internet Gambling Enforcement Act?

Betfair may be simple for Romney supporters but I doubt they are gonna touch anything totally illegal.

Absolutely the market is too small to attract anyone like Goldman. But I promise you that betting arbitrageurs work at very small scales. For example, there is/was a huge movement in the UK of people who basically worked to take the bonuses off of bookies by hedging their bets - see the Matched Betting forums at MoneySavingExpert. This is how I know about betting arbitrage and suchlike, I do not know anything at all about real markets other than what my friends tell me, and am definitely not a financial trader or anything. You can find plenty of info on that previously mentioned forum but let me assure you there are people out to make less than a dollar per trade! There is no way this market will have stayed like it is for long, without a systematic distortion.

P.S. Credit where credit’s due, I pointed out the FX risk not Lantern. You can save your fawning of me for a later time ;

[Measure_for_Measure]

@Simple_Linctus

There is no way this market will have stayed like it is for long, without a systematic distortion.

If Romney supporters are gaming intrade, what should happen is that British arbitragers should take care of the betfair/intrade spread: it doesn’t matter how big the distortion is. In practice that means that Romney’s minions will have to distort 2 markets at the same time - intrade and, via the arbitragers, betfair. That is entirely possibly as both markets are pretty thin. But a spread between the two markets shouldn’t stay wide for long, though it could easily maintain the width of the underlying transactions costs.

There are $20 and 100 quid notes laying on the sidewalk. They shouldn’t stay there for long.

I understand that you can’t fund either via Mastercard or Visa. So moving money into these sorts of accounts isn’t necessarily quick.

[Simple_Linctus]

@Measure_for_Measure

If Romney supporters are gaming intrade, what should happen is that British arbitragers should take care of the betfair/intrade spread: it doesn’t matter how big the distortion is. In practice that means that Romney’s minions will have to distort 2 markets at the same time - intrade and, via the arbitragers, betfair. That is entirely possibly as both markets are pretty thin. But a spread between the two markets shouldn’t stay wide for long, though it could easily maintain the width of the underlying transactions costs.

There are $20 and 100 quid notes laying on the sidewalk. They shouldn’t stay there for long.

I understand that you can’t fund either via Mastercard or Visa. So moving money into these sorts of accounts isn’t necessarily quick.

You’re not getting it.

Let’s make this really simplistic. Say there’s two markets for something, let’s call it X. And the markets can by Y and Z.

Day 1:

Bid/Offer at Y for X = 30/31
Bid/Offer at Z for X = 40/41

Shit, loads of arbitrageurs notice this, pile in. They smash bid in Z and lift the fuck out of Y

Day 2:
Bid Offer at Y for X = 37/38
Bid Offer at Z for X = 38/39

Arbitrageurs have done their work. Markets are in line to the extent that there is no easy arb.

Day 2:
Bid Offer at Y for X = 36/37
Bid Offer at Z for X = 38/39

Republicans (for it is they), unable to sell X at exchange Z, go to exchange Y to sell X.

Day 3:
Bid Offer at Y for X = 36.5/37.5
Bid Offer at Z for X = 37.5/38

The arbirtargeurs came back! Republicans distorted the market at Y enough that the arbitrage was there agin. And look, X is getting cheaper! But now once again prices are equal…
Day 3:
Bid Offer at Y for X = 36/37
Bid Offer at Z for X = 37.5/38

…But not for long. The republicans came back to Exchange Y and carried on selling Z.

Day 4:
Bid Offer at Y for X = 36.25/37.25
Bid Offer at Z for X = 37.25/37.75

Arbitargeurs back. Y and Z back in touch again…

**And so on and so on. While a particular arbitrage opportunity naturally will disappear, that does not mean that there will be no opportunities.

What matters is that the opportunities are all the same around. It’s always InTrade overestimating a Republican win compared to Betfair.**

You do not have to interpret it like I am doing. You could interpret it as Betfair users being out of touch with the reality on InTrade, if you like. But there is something there to explain, and I feel my theory of Republican money going onto InTrade is the best option so far. About the only thing you can be sure of is that it’s not professional gamblers distorting one market or the other - they would definitely be putting money where the value was greatest. The distorting cashflow is therefore coming from money that is (for want of a better way of putting it) not optimally invested towards a maximum return. The most obvious reason to do that is to distort the market

[Measure_for_Measure]

So… you would expect an arbitrage opportunity to open and close? Why would it stay “Open” for any length of time if arbitragers have a computerized algorithm? We would expect the spread to equal the transaction costs and spreads plus a de minimus profit to cover nuisance and possibly risk.

Then again, there are time zone differences and we’re positing that these abnormalities wouldn’t attract the pros. So a fluctuating arbitrage opportunity might very well exist, if there is limited or no automated trading at work.

“What matters is that the opportunities are all the same around. It’s always InTrade overestimating a Republican win compared to Betfair.”

Yes, it’s interesting that the arb opportunity is always in the same direction. Which suggests something systematic. Admittedly, that could be an intrade audience that skews Republican. But as I’ve noted in another thread, the unmatched predictions page suggested the existence of a 5000 share gorilla.

Then again, the gorilla appears to have disappeared this weekend: the books appear more balanced. Huh. Was he annihilated? Romney’s odds have certainly tanked. On 9/9 538 predicted .202 for Romney, while intrade gave him .418. Right now, 538 says .238 while intrade says .343 - a difference of .105 as opposed to .216. That 10 percentage point difference is in line with what it was earlier this summer. Interesting.

[Simple_Linctus]

@Measure_for_Measure

So… you would expect an arbitrage opportunity to open and close? Why would it stay “Open” for any length of time if arbitragers have a computerized algorithm? We would expect the spread to equal the transaction costs and spreads plus a de minimus profit to cover nuisance and possibly risk.

Clearly if someone sat there in unlimited size with an arbitraging algo on 24/7 then it wouldn’t remain open, except for the tiny period in between evil republican plutocrat ™ submitting their limit order and the algo submitting the legs to both exchanges.

However, while arbitrageurs having a computer doing some of this stuff is fairly likely, it being left there unattended to do unlimited size doesn’t sound too likely to me. Especially if this stuff is going on every day - you’d think they would want to see how distorted the market can get after all as there’s no point in going for 5% when they can get 10%. That can only be done by taking breaks (and breaks long enough for your fellow arbitrageurs to notice and take breaks of their own)

Not to mention trading concerns - if they identify this going on constantly then they won’t be able to trade out of their position which most betting arbitrageurs would want to do, so they can get into it again and again. Having to put on a position with no unwind in sight will make them more reluctant too.