7 comments on “Automated Market Maker Results

  1. I wonder if part of the reason is that not enough people knew about the subsidies. From looking at the contracts online, I could not tell they were subsidized.

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  3. Maybe you can build in some efficiency by having the decision market constantly monitor the presidential market and move the bid/ask midpoint as appropriate.

    The AMM would essentially be making a market on the implied price (Mike Linksvayer’s graphs), and the prices posted in the decision market will be those AMM prices divided by the presidential market price. There are details to work out, but that’s the sort of thing I would try.

    There is something to be said for the original design which does not automatically move prices based on P(B) because it should (if it’s easy to get cash into the exchange) get people involved in the market.. but this is very expensive. The subsidy should not just give money away to people who have no new information, which is what happens when the AMM doesn’t respond to price changes in related markets.

    It would also save money to initialize with low risk and only tighten things up when the market tells you roughly what the implied value should be.

  4. Thank you Jason, I should have thought of adjusting the AMM orders based on the presidential market. Although it may become hard to evaluate how much money the AMM would lose.
    I’m less certain about your initialization advice. In addition to complicating the calculation of how much the AMM risks, it might cause some traders to decide early on that there isn’t enough liquidity to make the contracts worth paying attention to. That could in principle be handled by a more conspicuous description of the AMM, but Intrade hasn’t designed their system to do a good job with contracts that need more than a few words to describe them.

  5. Yes, the market should be tightened as soon you’re comfortable that the initial estimate isn’t too horribly off, and a relatively dense/deep book of small lots could help with the perception of liquidity.

    While the losses aren’t strictly bound with these approaches, with some care I don’t see how their expected value could be worse.

  6. As someone who traded two of these contracts and followed their movements fairly closely, it seems to me that the main problem was how few traders knew about and understood the contracts and the subsidies. There was little incentive to try to figure out what the implied price should be when it was consistently possible to sell the two non-dem contracts at prices at or above the McCain or REP pres prices, witht he added plus of paying no fees.

    By the time I was heavily invested in these contracts, I had come to see Obama’s victory as close to a lock, and so was usually not willing to push the price more than a point or two lower than the McCain price. This was especially so given the higher liquidity and possibility for fluctuation in the main markets. From what I observed, the apparently small number of other traders participating in these markets (I think I accounted for about a third of the total volume) were behaving similarly.

    You should know that matters may been complicated by an the role of an institutional investor that, on several occasions, enterred very deep long McCain and short Obama positions, driving the price of each contract several points from its ex ante equilibrium. The opportunities for quick profits from the strikes gave traders an incentive to have significant amounts of free margin available on hand so they could take full advantage. At least in my case, that affected my thinking with regard to the contingent markets you subsidizede.

  7. Pingback: Why Nate Silver is wrong about the usefulness of long-term prediction markets: IT DIDN’T WORK. IT IS A PATENTED FAIL. | Midas Oracle .ORG

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