Evening roundup

The thing I like best about Matt's shiny new graphs is that the price spikes from heavily partisan trading become very apparent. Have a look at PM.Labour. At 10:46 tonight, somebody spent several hundred dollars (at a first guess) running the price up from $0.14 to about $0.30. It's since dropped back to $0.1978 but has a ways to go yet before getting back to its ex ante price. Market response to the spike was near instantaneous, with traders making the obvious arbitrage play shorting both National and Labour, and then buying back the bundle. Prices in PM.National dropped as consequence, but not as far as PM.Labour dropped.

About the same time as the PM.Labour price run-up, somebody had a similar go at MP.Peters: it ran up from $0.16 to $0.21 and now is down to $0.20.

I had a few asks sitting in the MP.Peters order book, knowing this had happened a few times with MP.Peters. I didn't expect it to happen in PM.Labour though.

Again, there were no price moves in the complementary markets that would have signaled anything other than a partisan trade.

Recommendation: seed the order book with bids and asks well outside of the current trading range to take advantage of folks who come in and want to spend several hundred dollars buying the stock of their preferred party and who want to do it in a hurry. There's some risk in doing this: if new information comes into the market suggesting that there really ought to be a shift in price level, you'll take a hammering. But if you're watching the market reasonably closely, you can guard somewhat against that.

Happy trading.

Morning update

At current prices in the VS markets, and subbing in Ron Mark's chances in his electorate rather than Peters's chances (as either is sufficient for NZ First to return), PM.National is currently substantially underpriced. Only two unlikely potential Parliamentary configurations yield PM.National probabilities under 80%: if NZ First returns and the Maori Party supports Labour, PM.National would be at 75%; if ACT also doesn't return, that probability drops to 19%. The most likely scenario is:

ACT	4
National	60
UF	1
Maori	5
NZ First	0
Labour	41
Green	10
Progressive	1

The above gives us a 122 seat Parliament and a 65 seat Act-National-UF coalition governing handily, with or without Maori Party support.

Unless prices elsewhere in the system are out, and they don't look out to me, National's a strong buy at anything less than 90%. The spreadsheet's telling me 97.5% chance of a National coalition government, but I'm not confident enough in it to go above 90. Full disclosure: I'm current high bidder on PM.National and have substantial position long PM.National and short PM.Labour.

63 of you have downloaded the spreadsheet to play with: any thoughts on it?

Yesterday saw some interesting trading on MP.Peters: what looked like a couple of attempts to drive the price up, or a strong Peters partisan hastily trying to build position, or somebody with inside info about Ron Mark's chances of winning his seat. We now have a market on whether Ron Mark will take his seat, and that's saying 6.1% chance that he does. Is there really a 10% chance that NZ First beats 5%?

Addendum It's happened again. Somebody's run the MP.Peters price up from 0.16 to 0.20; it's now back down again to 0.1825. Why do I think one trade? Because it happened between quick refreshes of my browser window! If this were somebody trading on fundamentals, we'd see movements in Rimutaka.Mark or in Tauranga.Peters or in VOTE.NZFirst. I suppose it's possible that somebody's making this play figuring that the true standard deviation of the minor party stocks is more like 1.1 than 0.9, but just ramming the price up seems an odd way of going about things. Recommendation: if you think that the fair price of MP.Peters is below $0.18, throw some asks into the order book above $0.18 in case our Peters fan returns!

Prices in our VOTE markets

David Farrar at Kiwiblog maintains a running time and size weighted average of public polls. Let's compare current polling figures with our prices (at current high bid, 9:15 am):

Party	Polls	iPredict
National	47.4	46
ACT	1.9	3.468
Maori	2.4	4
Labour	35.3	40.13
Green	7.7	7.968
Maori	2.4	4
NZ First	3	4.013

The PM markets suggest a 76.26% chance of National leading the next government.

If we run the current market prices through the spreadsheet, I get a 45.4% chance of a National-led government. But, if I use the poll numbers instead (and combine it with polling estimates of 4 Maori electorate seats rather than 6), I get 75.17 -- pretty close to the current trading price in PM.National. Now, it's somewhat dodgy putting polling numbers into the spreadsheet because the variances then don't make sense, but something's wrong here. As a first guess, I'd say Labour is 3-5 cents too high in the VS markets.

I can believe National being lower and ACT being higher than the polling numbers, netting out to about the same total. I can believe Labour being a bit lower than the polling numbers and the Greens a bit higher. I can't see Labour on 40. But if the folks trading here are happy with Labour on 40, then PM.National just isn't worth 76.

I'm going to short VOTE.LABOUR if prices haven't moved before the US election contract settles and I get my $132 in Obama payout.

Addendum Lots of volatility this afternoon in VOTE.NATIONAL and VOTE.LABOUR. I saw VOTE.NATIONAL as high as 52; it's since dropped back down to 46.67. If I had cash balances, I'd be seeding both sides of the order book!

Labour's Seismic Shift

Labour has seen a step change in their chances of leading the next government in the past four days, a point brought home in the chart (click for a larger view).

In the days following iPredict's launch in early September, Labour's chances of leading the next government hovered around the 25% mark. Towards the end of September, a downwards trend in this market began with Labour sinking to the low 20's by the end of last week.

And then there was the Morgan Poll on 10 October, which produced a surprisingly narrow gap of 3% between National and Labour. This was followed up later on Friday by the release of a TV3 poll also showing a narrowing gap between Labour and National.

This shocked the market and the result was a step change up for Labour by 6% - a significant change give Labour's relatively low starting point. And there is some indication of an additional upwards movements in Labour's re-election prospects since Friday, which may be a product of two major announcements, the first that the government will insure bank deposits, and the second being Labour's universal student allowances policy in kick in four years from now.

This upwards trend in Labour's chances of leading the next government has of course been mirrored by a decline in National's chances. National is now down to $0.69, not its lowest level since iPredict launched but close to it.

What is striking is how little other recent events have moved Labour's election prospects. The global financial meltdown, the release of National's tax policy last week, and the disclosure that the government is looking at 10 years of budget deficits did not move traders on iPredict - producing at most a gradual downwards movement in re-election chances.

The current momentum is with Labour, it will be interesting to see what National does reply and whether that response is enough to convince traders.

Morgan Poll Hits PM Stocks

Take a look at the effect of tonight's shock Morgan Poll, out in the past hour, on our PM stocks.

The Morgan Poll is an opinion poll on vote share and its latest results show Labour closing the gap on National, and traders on iPredict have reacted vigorously to the news.

The PM.LABOUR contract, which closes at $1 if Labour leads the next government, skyrocketed all the way to 38 cents, up a full 15 cents from what has been a fairly long term average in the low to mid-twenties.

However, the spike did not last, and other traders appear to have come in and take advantage of some traders' willingness to pay up to 38 cents for PM.LABOUR contracts.

PM.NATIONAL also reacted but not as strongly and few trades were being done than on the Labour contract.

The present volatility in the PM stocks reflects traders trying to understand the new information that has unexpectedly arrived and the consequences for Labour and National. The question of who will lead the next government is complex in an MMP environment. Traders must not only consider vote share, but also the combinations of parties which could go into forming the next government.

What is clear is that this Morgan Poll is of a consequence that other major events this week - the shock news that the government is forecast to be in deficit for the next decade, the release of National's tax policy, and the unexpected turn for the worse in global finance markets - are not. None of these other events moved the PM stocks at all. For that, we need shock poll results.

It will be interesting to see where the market settles at as this new information is understood and incorporated.

Click on the chart for a bigger view.

Update 11/10: Labour's chances of leading the next government seems to have settled 5% up from their long term average in the low 20's. National's likelihood of leading the next government has seen a corresponding 5% fall. National's 50 point lead in the leadership stakes has been cut to 40.

Another poll out tomorrow, Sunday. Will be interesting to see whether it has a similar effect.

Arbitrage opportunities

The Prime Minister markets currently show a 26% chance of a Labour-led government and a 74% chance of a National-led government.  

In the Party Vote markets, Labour and its most likely allies (Green, Maori, NZ First) sum up to 53% of the vote; National and Act together sum up to 51% of the vote.  Yes, the sum of all bids is about $1.04 and there's then a risk-free arbitrage opportunity for anybody who wants to short the set of all party vote stocks.  There is an inconsistency across the two markets though: from the Party Vote markets, it looks like we're headed for a Labour-led government, while that's very unlikely according to the Prime Minister markets.

I'm going to go and do a bit of work to take advantage of a bit of that arbitrage, but I'm curious why nobody else out there is working on this one.  Either the sum of bids on the Labour side in the vote share market is too high, or Labour's chances in the PM market is too low, or a combination of both.  Any other traders out there have any insights?