Trading Strategies and Market Microstructure: Evidence from a Prediction Market

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Published: Sep 20, 2016
DOI: https://doi.org/10.5750/jpm.v10i1.1179

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David Rothschild
Microsoft Research
Rajiv Sethi
Department of Economics, Barnard College, Columbia University and the Santa Fe Institute.

Abstract

We examine transaction-level data from Intrade's 2012 presidential winner market for the entire two-year period for which trading occurred. The data allow us to compute key statistics, including volume, transactions, aggression, directional exposure, holding duration, margin, and profit for each of 6,300 unique trader accounts. We identify a diverse set of trading strategies that constitute a rich market ecology. These range from arbitrage-based strategies with low and fleeting directional exposure to strategies involving large accumulated positions in one of the two major party candidates. Most traders who make directional bets do so consistently in a single direction, unlike the information traders in some canonical models of market microstructure. We present evidence suggestive of manipulation by a single large trader, and consider the possible motives for such behavior. Broader implications for the interpretation of prices in financial markets and the theory of market microstructure are drawn.

Article Details

Issue
Vol. 10 No. 1 (2016)
Section
Articles

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