Wednesday, 27 January 2010

Bernanke markets at iPredict

Admin (presumably Matt) at iPredict has a few thoughts on the Bernanke conjunct contracts. Some of the problems noted here continue. At some points, US.NOTBNKE.DOW was trading at prices, given the probability of reappointment, beyond the capped payout level for the contract.

I continue to think the biggest problem is liquidity. If I could deposit $500 into my account, the pricing anomaly would quickly be gone. But the regulatory constraints under which iPredict operates ($1000 max deposit per 6-month period) mean that I can't deposit anything 'till March.

Given the liquidity problem, traders don't find continuous stocks terribly interesting. If you think the true value of the DOW stock is consistent with the contract being at $0.06 rather than $0.08, you have to tie up a lot of capital shorting (naked shorts prohibited) to make the play. Greater rewards are often possible in the binary stocks.

Finally, conjunct contracts are a bit confusing. I posted (at my prior post, linked above) an Excel table that handily converts market prices into conditional DOW prices, but having a facility like this built into the interface for these kinds of joint contracts would be pretty helpful.

The confusion wouldn't be a problem if big traders were more interested in these contracts. But because they're liquidity constrained and because they can usually get better returns in the binary stocks than getting a small sure thing, they're not keeping the prices sensible. That said, I'm not entirely satisfied with the explanation: somebody is buying my sure thing asks on the 2009 global warming contracts where I'm trying to get back some liquidity by selling at $0.998 some contracts guaranteed to pay out at $1 when Hadley finally posts its final 2009 data (or by March when iPredict reverts to NASA data if Hadley's still slow).

Finally, Matt notes that there's no serious price difference currently between the conditional markets. The Dow on 2 February will not vary substantially if Bernanke is or isn't appointed by then. I think this is because the markets are giving about a 98% chance of a Bernanke appointment, unconstrained by the 2 Feb deadline. So they're reckoning that if he's not confirmed by then, he will be soon, so who cares. If, on the other hand, we saw a Senate vote scheduled for Friday, I'd expect the two contracts to start moving apart considerably: failure to be confirmed by 2 Feb would then mean he's been voted down rather than that the vote's been postponed.

No comments:

Post a Comment