Prediction market guru Chris Masse, along with columnist Don Luskin, takes a well aimed potshot at the prediction markets: Tradesports’ Bad Call.
"GEOPOLITICAL RISK — uncertainty about war, terrorism or political developments — can be very hazardous to your portfolio’s health.
Fortunately, modern financial markets have developed innovative new
products to help hedge geopolitical risk. Now you can trade futures
contracts on who the next president will be, whether or not the U.S.
will bomb Iran, whether Hamas will diplomatically recognize Israel,
whether Osama Bin Laden will be apprehended, and many more.But this week some investors learned that this particular
financial innovation carries special risks all its own — as one of
these geopolitical futures markets blew up right in their faces.The blow-up happened in the market for futures contracts on
whether North Korea would test a long-range missile. That’s just what
Kim Jong Il’s totalitarian regime did on July 4, raising tensions
throughout the region and triggering a 6% drop in the Tokyo stock
market. Anyone who bought the futures contracts should have had a big
payday. But that’s not the way it turned out. Those investors ended up
losing 100% of their money.The big payday came for those who took the wrong side of the
trade. Even though North Korea did test its missiles, those who bet
that it wouldn’t are the ones who made all the money.These futures contracts trade online at Tradesports,
a web site based in Dublin, Ireland, that offers trading in all manner
of sports, political and geopolitical events.
Understand what happened here: The North Koreans launched their missile, but Tradesports was unable to officially confirm that with the U.S. DoD. That’s a rookie mistake, and it certainly would make me uncomfortable risking real cash with a firm with such a silly management team in place.
Kudos to Chris Masse
— one of prediction markets biggest fans — for going postal on
Tradesports for their bad judgement. (If you are interestedin the
subject, then definitely read Masse’s full post here: TradeSports / InTrade’s North Korean Missile Contract),
~~~
As I’ve said before, I do rely on markets as part of my modelling, and as a forecasting tool: Anytime you look at a trend, or an inverted yield curve, or the yield on a 10 year treasury bond, or the tips spread, or the relative performance of the Transports to the Dow, or any combination of traded items as a tool, you are using the tools of prediction markets.
My overriding issue (of the many I have with them) is that they are too thinly traded, and there is not enough money being traded for them to be reliable. Or, they are trying to determine issue inknowable by the participants who are voting/betting.
Now, you can now add another problem: Tradesports management has commited a managerial faux pas. Their hyper-technical definition of "launched" would never be tolerated by markets such as the Treasury, NYSE or even Nasdaq.
That’s pink sheets material, buddy.
>
Sources:
TradeSports / InTrade’s North Korean Missile Contract
Chris. F. Masse
The Journal of Prediction Markets
http://www.chrisfmasse.com/2/2006/2006-07-22_
contracts_tradesports_intrade_prediction_markets.html
Tradesports’ Bad Call
Donald Luskin
Ahead of the Curve
Smart Money, August 4, 2006
http://www.smartmoney.com/aheadofthecurve/index.cfm?story=20060804
The only claim to fame with Luskin, as I remember was
his bullish call on inflation and bottom for Gold bullion back
somewhere around 1999, It made Cramer so angry,
that Luskin got kicked off the Street.com,,,
since then he has been a steadfast tech bull,,
no longer on the commodities bandwagon.
My hats off to him on the Gold call, he nailed it on the
head at a time when anyone calling for a bull market
in any commodity , esp gold was considered a lunatic
Question…..
Does anyone know about the Real Estate Futures are they trading yet, what exchange, what are your thoughts, etc. etc….?
albiegf13: yes, RE futures trade on the CME. Wide bid-ask, poor liquidity. Not too much of an issue if you don’t need big size and want to play for a big move either way. There are other ‘derivative’ plays, though. Mortgage originator stocks and mortgage bonds are just two.
RE: TradeSports, there was a rumor going around on election day in ’04 that Soros had been propping up the ‘Bush Wins’ futures and selling spoos into it. Of course, propping up the Bush Wins futures didn’t take any capital, so he could prop it up pretty easy. Then, when he puked his phony Bush Wins bet, he cleaned up becuase the SPX tanked, too.
Finally, if anyone is looking for a good book on trading, check out Drobny’s ‘Inside the House of Money.’ It’s a compilation of interviews with macro fund managers. It is without question the best book I’ve read in a while on making money. Not so much about specific strategies, but in terms of reminders about what matters and what’s possible. I’m curious if anyone else out there has read it.
Great find, BR. I’ve often thought about Tradesports for some of these props, but NO WAY.
Hello Barry Ritholtz,
I think that many people in Wall Street will agree with your take.
The intent of the contract was whether NK would launch missiles. It
became whether the US DOD would confirm the NK missile launches after
July the 4th, but that was not wanted originally by TradeSports.
Which is why TradeSports apologized to its customers and promised to
carry some reforms.
http://www.tradesports.com/aav2/news/news_58.html
The problem is that TradeSports apologized and promised to reform, but
they did nothing to compensate the victims.
Anyway. Have a good evening,
Chris Masse
Hello Barry Ritholtz,
I think that many people in Wall Street will agree with your take.
The intent of the contract was whether NK would launch missiles. It
became whether the US DOD would confirm the NK missile launches after
July the 4th, but that was not wanted originally by TradeSports.
Which is why TradeSports apologized to its customers and promised to
carry some reforms.
http://www.tradesports.com/aav2/news/news_58.html
The problem is that TradeSports apologized and promised to reform, but
they did nothing to compensate the victims.
Anyway. Have a good evening,
Chris Masse
Actually, the issue was whether or not the missiles left North Korean air space.
Tradesports is awesome and extremely innovative. Prediction markets have immense power to improve forecasting and risk management.
Who wants to bet with a bookie who doesn’t pay off?
Luskin is an expert on bad calls…anyone remember his mutual fund that traded hot IPOs while you watched online? One of my favorite bubble moments.
Barry,
You raised the issue of the low volumes of most of the prediction markets. You’re right. There’s high volumes for sports, celeb stuff, and US presidential politics, only.
This TradeSports mess shows that there might be a causality link between the traders’ distrust for TradeSports and the low volumes, at least for the “legal” and “current news” prediction markets. This is from a Tradesports trader:
“The ONLY way to avoid getting caught in ‘similar situations’ is to not trade any of these types of contracts on TradeSports, and most experienced, high-volume traders there have learned to stay away from anything in the Legal and Current Events categories. It’s the relative novices, trusting that common sense will prevail, who get screwed.”
Anyway,
Best Regards,
Tradesports Does the Right Thing
Strict and correct adherence to the stated Contract rules ensures the integrity of the Exchanges markets, and our members ability to rely on what is written in our rules.
North Korea launch a test missile that leaves North Korean air spac…
I agree, these markets aren’t quite ready for primetime. I’ve been betting some at HedgeStreet, but it’s really hard to see how someone could actually use it to hedge anything. You can trade bets on oil, but they all expire tomorrow! How exactly is that useful as a hedge? I guess you could hedge it between now and the next tank of gas….
I agree, these markets aren’t quite ready for primetime. I’ve been betting some at HedgeStreet, but it’s really hard to see how someone could actually use it to hedge anything. You can trade bets on oil, but they all expire tomorrow! How exactly is that useful as a hedge? I guess you could hedge it between now and the next tank of gas….