Trump Rising: Digging into the Iowa Electronic Market

Iowa Now: Buying into the election
This year’s five election markets opened in November 2014, and more than 2,100 traders have executed about 600,000 trades so far. The traders come from 18 countries and have invested about $267,000 in the markets.
The Winner-Take-All market (WTA) currently has $91,279 in play.

Both a Clinton and a Trump contract trade in the same market, one will expire at $1 and one will expire at $0, based on which candidate wins more popular votes. Al Gore contracts were paid in 2000.

There are a two ways to trade in the market. You can buy and sell a contract from other traders (no short-selling or margin is allowed), or you can buy bundles from the exchange for a fixed price of $1 (and sell them back for $1). Depending on how the market is pricing each contract, it can make sense to buy a bundle as opposed to trading directly for a contract. As an exaggerated example, if someone is bidding 70 cents to buy a Clinton contract and someone else is asking 40 cents to sell you a Trump contract, you can buy a bundle for $1, sell the Clinton contract for 70 cents, and hold the Trump contract at a cost of 30 cents.

You don't know how deep the bid/ask go. Sometimes it is 1 contract, sometimes 100 or more.

This chart below compares the dollar volume of Clinton to Trump. The market is starting to trade both contracts more than back in June, but it's easier to buy Trump in size by taking a bundle and selling the Clinton contracts, indicating the bid for Clinton is stronger than for Trump. Clinton has been priced 2 and 3 times as much as Trump, a reflection of the market's perception of her better chances. The gap is also larger due to the payouts of $1 and $0. I expect volume and prices will quickly shift in Trump's favor if the race tightens inside of 60-40 because Clinton holders might start selling. If Trump were to drop off in the polls or screw up in the debates, his contracts could quickly dive into the teens or even single-digits since the end value is zero if he loses. Unless things swing decisively in Trump's favor, I anticipate a ceiling the the 40 cents range because while no one supporting Trump thinks Clinton has no shot, a segment of the electorate believes Trump's odds of winning are zero.
Based on the average volume and average price, the average Hillary contract holder who bought the contract (not from a bundle) has a cost of 72.7 cents. The average Trump holder has a cost of 29.6 cents. Right now the average Hillary contract holder has a small loss, the average Trump holder a similarly sized monetary gain, but a higher percentage gain at about 15 percent.

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