Prediction Markets Seeing Eye-to-Eye

In early September I wondered why Intrade traders were betting that McCain would win the presidency while other markets had Obama on top.

But over the past month, that discrepancy has disappeared, a development which I chalk up to three factors. First, volume on all of the major exchanges -- Intrade, BetFair, and the Iowa Electronic Markets -- has picked up.  Second, market dynamics, and everything else, have changed dramatically since early September. Back then, the presidential race could be called a toss-up, but with Lehman's collapse polls have moved strongly in favor of Obama. That may have driven some McCain supporters out of Intrade's market. But the third factor -- Nate Silver's  identification of suspicious trading on Intrade -- is the one I think is most important. Explanation in a little bit.

The following chart shows how the Obama-related contracts on the three markets have evolved since Hillary Clinton dropped out in early June:

The biggest discrepancies were between BetFair and Intrade, which the following chart plots. The largest gap occurred on Sep. 22 with BetFair giving Obama a 62 percent chance of winning while Intrade had Obama at 51 percent:

As you can see from the chart, the BetFair-Intrade difference started to fall rapidly right around the time of Silver's post. This isn't to say the activity on Intrade was nefarious, but that Silver's wide audience likely helped focus attention on the possible arbitrage opportunity, which has since evaporated.