Saturday, November 8, 2008

Election morning roundup

Hi all,

Some interesting trading late last night the effects of which haven't yet entirely unwound. See the prior post for details. The upshot of these trades is that PM.National is lower than it was yesterday, PM.Labour is higher, and MP.Peters is higher. I rather suspect that a strong partisan came in, buying as much PM.Labour as possible against the order book.

Now, if we run the underlying prices through the spreadsheet, PM.National should still be up around 90%. One thing to keep in mind if you're using the spreadsheet is that it assumes independence between the Act-National-UF seat share and the probability of the Maori Party supporting that coalition. Obviously, if the former coalition looks very likely to get a majority on its own, then the likelihood of no agreement with the Maori Party goes up as the coalition doesn't need it. So, the spreadsheet understates the true value of PM.National. If you want to correct for that, replace the prices in Maori.Nat.Supp and .Abst with the prices that were dominant when the probability of a National win was more like 0.7: they then summed up to about 60%.

Many of you may now be facing the liquidity-constrained trader's dilemma: whether to freeze more margin and take more exposure in stocks to which you're already heavily exposed, figuring that the prices are out by about 10%, or whether to seed the order book with bids and asks far away from current prices in case another strong partisan comes into the market and wants to throw money away. Spend too much now, and you've no margin left to cover seeded orders later. Dilemmas!

As for me, I'd invested nowhere near $1000 in the market to start with, so I had room to deposit a couple hundred in cash balances (that's why I've been rising in the rankings lately, not due to any recent brilliant profit-taking) and have room to throw a fair bit more in should really tasty profit opportunities arise. I just really don't like my current exposure in PM.National, PM.Labour and MP.Peters.

30 comments:

Sam said...

I'm not sure if liquidity will be much of an issue as now peters.resign has closed I imagine many traders got a huge amount of cash back from the deposits on short positions.

Still should be an interesting day

Greg said...

Something significant certainly seems to be happening to PM.Nat (as at 10:53am)!

Sam said...

Agreed!

Crampton said...

Not seeing much going on in PM.Nat -- it's down a couple cents on lots of small-looking trades (checking the graph).

Note that if you use Farrar's polling numbers, 80 cents isn't far off a fair price for PM.National.

Crampton said...

PM.Nat is just responding to the spike up on PM.Labour at 11:12 that took it up to 0.25.

Greg said...

Rather than a blatant manipulation attempt, I think it could be a genuine trader who thinks PM.Nat is overpriced.

A trader with a modest amount of cash (e.g. me) who thinks National will not be elected (not necessarily me) might be more likely to spend a few dollars gambling on shorting PM.Nat than adjusting VOTE.Nat.

Shorting PM.Nat would provide for a higher payout than a few cents per share on VOTE.Nat.

Maori.Nat.Other is also climbing by a corresponding amount, which suggests to be that it's a few small-time traders who don't want to tie up funds in VOTE.Nat for little return.

Disclosure: Still have plenty short on MAJ.Nat. Nothing else in the party vote market - yet.

(Typed up before I saw Crampton's comments - in other words, I agree!)

Crampton said...

How this works:

Somebody comes in, spends a lot of money buying PM.Labour. Sum of high bids across PM.Nat + PM.Lab >1. Folks short both, buy bundles. That pushes down both PM.Lab and PM.Nat after an abnormal jump in PM.Lab.

Greg said...

Ach so. Makes sense.

Crampton said...

I have a really hard time seeing what the point of manipulation would be at this point. I could buy it if there were lots of press coverage of the prices over the course of the day, but we're not in that world.

Current trading will be a mix of partisans entering the market and adding volatility, folks gaining liquidity from the closing of PETERS.RESIGN and taking positions, and folks updating their expectations of correct prices based on last night's polls.

I still think 80/20 is a pretty fair price ratio. We get too far from that, and I'll build more position. I'm far too exposed in this market though.

PhiRatE said...

The most hilarious section on http://phirate.com/PM.LABOUR_24.png is the minute immediately after the big labour buy.

Note the kind of stunned-mullet flat-line before everyone shorts :) Perhaps the time it took for everyone to move more cash in?

Crampton said...

That graph's awesome.

I'm amazed that enough people were watching the market at 11 on a Friday night for the price to jump back within about 10 minutes.

I'm always too slow on the reaction to those things, always wanting to check the news-sites first that nobody found a candidate in bed with a goat or some such. :>

PhiRatE said...

Can anyone explain why VOTE.GREEN is so high?

Crampton said...

Vote.Green is about in line with polling. If I went into that market, I'd be buying rather than shorting.

PhiRatE said...

ah ignore me, it's a 10c not 1c stock, I was busy scratching my head for a bit there. You guys might wanna look at some way to make that clearer when you have other stocks of an equivalent setup with different c/% on them.

PhiRatE said...

Interesting to watch the waves of correction as one or the other of the PM stocks move

http://phirate.com/ipdash/

smartypants said...

Not sure how much can be gleaned from the values of the VOTE stocks, I for one tradedo ut of these long ago when I ran out of trading funds to deal in more lucrative (higher potential payoff per dollar tied up) contracts, given individual trader liquidity limits imposed by the $1000 limit I suspect many others have struck similar, hence the price of the PM contracts themselves is a better indicator of outcomes?

PhiRatE said...

I tried to generate those candlestick charts for the vote stocks, but there wasn't enough movement in them to make anything worth looking at, so I suspect you're right smarty, the PM stocks are where most of the effort is happening.

Crampton said...

I agree on VS vs PM markets. If we had a set of 0/1 contracts on VS intervals, that would be more useful. That would be pricey though given that iPredict loses money on every market because of the subsidized market maker.

smartypants said...

I think we also saw similar effects with the Pm.other and US.president other, in tersm of the excessive margin required to short these, which allowed them to persist well above the fair value (of zero) until almost the end of the contract. While I can understnad the use of simple margining as opposed to varying margin calls for simplicity, it does undermine the accuracy of these contracts slightly.

smartypants said...

I wondered how the automated market maker was working, I assumed it would be largely self funding as it sits on both sides. Wouldn't be too hard to add an algorithm to self adjust for incurred losses (or would it?). A normal market amker makes money, albeit with some human intervention. At the same time the quantities bid/offered by it could do with self-tweaking to reflect activity in that contract, some contracts have definitely suffered from quantities that are too high or spread too far apart.

Crampton said...

The market maker is set with an initial budget and loses money to the extent that the seeded initial price differs from the final price. We're trying to subsidize trade to bring informed people into the market to provide better prices.

jak said...

I think it should be explicit how this marketmarker works.

What determines whether it's set to trade in quantity of 25 or 50 and what determines the price between bids - they seem to vary kinda randomly.

Crampton said...

They're settings that Matt can adjust depending on the amount of money he's willing for the market to lose. The more he's willing to lose, the tighter the steps between orders and the larger the bundles. A given amount of liquidity can be stretched further with smaller bundles.

PhiRatE said...

Holy crap look at the whole thing go nuts as the results come in. pm.labour has jammed up completely and all the numbers have gone out of the bounds of some of my charts :)

JC said...

the fluctuations for wellington central were quite interesting as robertson underwent major correction as the results came in alot closer than the stocks had suggested pre-election night.

the trading would have been alot more interesting if nz first had breached 5%.

Crampton said...

It's been fun! Stick around; more interesting contracts to come....

PhiRatE said...

heh true, I wasn't even watching that. Chart is fascinating,

http://phirate.com/ipdash/WC.ROBERTSON_24.png

a few people did well picking the bottom on that one.

PhiRatE said...

haha. Erm, you guys might need to pull LAB.LEAD.CLARK asap ;)

Anonymous said...

Hey Crampton...so you are getting the heads up on newly launched contracts! Pretty useful info when they are mispriced on startup....

Crampton said...

I actually had no clue those ones were coming and haven't traded in them. I've suggested a couple of other ones though!