Excellent post, Kid. To see an example of a market that works like KidCharlemagne describes, see www.tradesports.com.
That makes perfect sense; but do you think such a market could be designed in a way that would work? Or is such a market unlikely to work no matter how designed, for one reason or another?
I believe that small groups of very rich people can collude to manipuate any financial market that can be devised to their own benefit and profit. And that there are such groups doing just that. And that they can hide the paper trail through multiple off-shore holding companies, or something (I am NOT sophisticated in market terminology or, obviously, SEC regulations).
Am I cynic or a conspiracy theorist?
oh no. Do you realize the can of worms you just opened for me? Damn. And the spreads are really tight on some of those markets. Damn. I hope these people are as irrational as they were about David Blaine - London bookies gave me 5/2 on him successfully completing that “starve in a hanging box” stunt. The mind boggles.
Both. The degree to which a market can be manipulated is inversely proportional to the amount of money that can be extracted from it. In order to mark up the price of a given instrument you have to have the buying power to soak up all the sell orders between the market price and the price you want. When liquidity is low, it’s easy to mark up the price, but it’s hard to get a decent position on because so few contracts are offered between the current and target prices. That same low liquidity also works against you on the exit. if I buy 100 lots each at prices of $50, 55, 60, 65, 70 then I have 500 lots at an average price of $60 with a market price of $70. You may think “chi-ching,” I’ve made $10 on 500 lots, but you haven’t. When you sell those lots, the same liquidity that allowed you to mark up the price with 100 lot buy orders will now make it difficult to unload that 500 lots at anything resembling a profit.
Traders will often attempt to “run stops,” which is taking a position with the hope of moving the price through a point that will likely set off stop-loss orders and propagate further movement. It’s pretty small time though; you can make a living at it if your smart, but it’s not worth the time of a cabal hellbent on world domination.
Large traders can intimidate illiquid markets but again, there isn’t much to gain on a relative basis. For instance, after trading Hang Seng Futures (Hong
Kong stock market) I decided my broker was giving up my trading size to the locals( (floor traders) so they could frontrun me. Frontrunning is placing an order just ahead of another in price or time to take advantage of the forthcoming large order. To teach them a lesson, I offered to sell a huge amount well below the current market price and placed a bid just below that price for a tiny amount with a different broker. The locals hit my bid thinking if the price didn’t go down any further they could just buy back from me a tick higher. Well, I canceled that huge offer and then bid above it through the same broker, leaving the locals short with no big offer anywhere in sight and the market bid well above
the point of a short local’s comfort. They shat themselves. Having said that, If I had been lifted on that amount at a price lower than the last bid I would have been fucked when I tried to cover. But 200 lots on the Hang Seng doesn’t mean that much to me financially, but 10 lots means a lot to a local.
ok, I get that; I like it when economic theories take in the little details of reality, like finding sellers and buyer.
If I understand you correctly, my Terrorist Masterminds could not use an illiquid market.
But, assuming a liquid market (and my TMs would be too easy to trace in a slow market, anyhow, right?)
AND that the paper trail could be adequately obfuscated (I know it can be, the Aliens told me it could be the last time they helped the Satanists make crop-circles)
AND that my TMs are very rich
THEN
could the TM manipulate the terrorist future board to 1.) screw with the predictive powers, 2.) make the non-literal killing, or 3.) both?
- Both.
Thanks, Kid.