Latin America

Latin America

Sovereigns shape up for differentiation

Project Neptune rising…

Project Neptune rising…

… amid renewed liquidity concerns

Thursday, February 21, 2013

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Illiquidity blights Intrade’s European predictions

Weak trading on Italian election further undermines beseiged online prediction exchange's allure.

When Mitt Romney’s electoral odds spiked on Intrade from 41% to 49% after the final US presidential debate on October 22nd, it was a sobering reminder of the newfound power of online prediction markets. The jump in odds generated much heat given the widespread media perception that President Obama had emerged victorious from the confrontation, with some analysts, such as University of Pennsylvania economist Justin Wolfers, questioning the online prediction exchange’s liquidity. Nevertheless, figures revealed by Intrade appeared to confirm its relative liquidity, notwithstanding the perennial risk of temporary distortions.

However, Intrade traffic has collapsed in recent months since the end-November crackdown by the US government, prompted by allegations over improper betting. After hitting 287,000 unique visitors in November, Intrade traffic currently fails to meet ComScore reporting thresholds.

Intrade continues to operate in European markets. Nevertheless, the jury has always been out over the extent to which liquidity in European market trading is sufficient to generate a statistically significant prediction of market sentiment.

A key question dominating European markets is the re-election prospect of Italy’s Silvio Berlusconi, which threatens to redraw the eurozone’s political map, with analysts grappling for data points, including Intrade.

Carl Wolfenden, exchange operations manager at Intrade, told Euromoney via email that there has been “fairly low trading volumes in the Italian election markets but enough to generate fairly reliable predictive information”. A total of 2,249 shares in total have been traded – the equivalent of about $22,000 changing hands. As Wolfenden concedes “there has been a drop in volumes in all markets following our withdrawal from the US market at the end of 2012.”

By comparison, as of late-October, there were over 4 million shares traded on Obama and Romney (evenly split), with over 1.4 million shares in open interest between them.

By contrast, Wolfenden declined to specify trading volumes for the "Euro to be dropped by any country" before the end of 2013 and 2014 poll, but said these have “traded well” and the current liquidity levels “are reasonable”.