Thursday, January 17, 2013

Syrian arbitrage? [UPDATED}

InTrade says there is about a 63% chance that Bashar al-Assad will no longer be the President of Syria for any reason (including death) before midnight ET 30 June 2013.

iPredict says there is a 57% chance that Bashar al-Assad will be President of Syria AND have effective control of the government and military at 12:01 am 1 July 2013 NZT.

UPDATE: I had read the contract Long Description but not the Judging Criteria at iPredict. The Judging Criteria includes this:
This contract will immediately pay $0 if mainstream media reports say Bashar al-Assad has lost effective control of the Syrian Government or military, or words to that effect. For example, mainstream media reports that Bashar al-Assad has fled the country, or is on the run, or has gone into hiding, or has been overthrown, or has been imprisoned or arrested, will cause this contract to immediately close at $0.
And so the arbitrage opportunity below is much stronger: it only then fails to be arbitrage if al-Assad loses power exactly at midnight. Original post follows below, but do note that this error exists; the case for an arbitrage play consequently is much stronger.

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The iPredict blog poked me wondering if this is an arbitrage opportunity for clever traders. And while I've taken a short position at iPredict, it isn't pure arbitrage. Imagine that the rebels over-run Damascus in April and take the government temporarily before al-Assad's forces come back to regain control in June. In that case, both markets pay out at $1: he would no longer have been President of Syria for a brief period, but he would be President as of 1 July.

Now I find the likelihood of that rather small: I would have thought that if opposition forces took effective control of the government, satisfying the InTrade rules, there wouldn't be more than, what, a 10% chance of al-Assad making it back in before 1 July. So that would justify a small price gap between the two markets.

I will continue to accumulate a short position at iPredict. Once the total value of the position at iPredict gets large enough, I will lay off some of that risk by sending money back into the InTrade market. It isn't a perfect arbitrage as it doesn't protect against the scenario above and I'm at risk if InTrade drops down to the iPredict price in the interim. But getting money out of InTrade takes a long time and standing accounts there draw a $5/month fee. If iPredict were thick enough to make a big play on this, then it could be worth heavily shorting both markets and taking a net short position on that al-Assad will not lose then regain power before July.

Shorting InTrade means paying $0.37 for a contract paying $1 if al-Assad is President on 30 June. Shorting iPredict means paying $0.43 for a contract paying $1 if al-Assad is not President on 1 July. You then pay $0.80 for a contract paying $1 UNLESS al-Assad loses and regains power. If you think the chances of that kind of reversal are around 10%, and if it takes about a 10 cent price gap to make an arbitrage play across the markets worth the hassle, then it's just barely worth making the play.

Twitter tells me al-Assad is now having fighter planes shoot rockets through a university dormatory.

InTrade also has just opened markets on the Oz election (HT: @Insteconomics); interesting arbitrage plays could come up with BetFair and iPredict. BetFair has the Coalition as most likely at about 72%; iPredict has the Coalition at 76%; InTrade has a spread between 64% and 80% for the Coalition. So no real arbitrage plays there yet, but worth watching.

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