With two weeks before the election, most political followers are glued to national and swing-state polls. But some junkies and journalists swear by Intrade, an online betting market where investors place money on the next president (among other things).
But this morning, something very weird happened on Intrade. Mitt Romney began the day trailing the president 60 to 40 (i.e.: his chance of winning was priced at 40%). Suddenly, Romney surged to 49%, and the president's stock collapsed, despite no game-changing news in the press. The consensus on Twitter seemed to be that somebody tried to manipulate the market.
But the more interesting question might be: Could a campaign re-direct their tens of millions of marketing dollars to bid up the candidate's stock price for a final month to bolster his Comeback Narrative in the press? We hashed it out with Justin Wolfers, an economics professor at the University of Michigan.
DT: What just happened?
JW: At around 9:57am this morning, I noticed something funny happening on InTrade: Obama's stock was tanking, and this was happening in the absence of any concrete political news. Barnard College's Rajiv Sethi alerted me over Twitter that this was really due to some unusual trades in the Romney stock (which then ultimately affect Obama).
In the chart below, you can see this very clearly: Romney's stock shot up from 41 to 48 in a matter of minutes (suggesting that his chances of winning the election had risen from 41% to 48%).
To be clear: We don't know what caused this. It may have been an attempt at manipulating the market. It may also have been a trader with fat fingers making a mistake. But the fact that the uptick took several minutes, rather than occurring instantly, suggests that perhaps it wasn't fat fingers. It still may have been some other form of naive trading. Remember: When you're buying a stock, you want to minimize the extent to which you bid the price up, because that only makes it more expensive for you. These trade did the opposite. It's hard to think of a way of having a more immediate impact on the price.
How much might this sort of manipulation have cost?
The total quantity of Romney stock traded between 9:57 and 10:03 was around $17,800. But that's not the "cost" of this manipulation (if that's what it was), because the buyer got stock in return. If we value that stock at 41 (rather than the higher price he paid), the net cost of this manipulation/error was about $1,250.
What did the trader get in return?
About six minutes where Romney's stock rose sharply. Notice though that the effect disappeared very quickly. The Obama Flash Crash disappeared nearly as quickly as it appeared.
Two conclusions follow. First, you can manipulate prediction markets fairly easily. But second, you won't get much bang for your buck.
Considering the attention Intrade prices get in media, is is possible that sustained Intrade manipulation would be a relatively smart use of campaign money?
My guess is that a campaign would have been better off with another $1250 spent on get-out-the-vote efforts than on the six minutes of a higher stock price that Romney got this morning.
But that doesn't say much. There are surely more subtle, and hence less expensive ways of manipulating political prediction markets. And there are times when it will likely also yield some useful publicity -- something that a short-term blip at 10am on a Tuesday won't do.