Wednesday 17 March 2010

Markets and information aggregation [updated2]

I have just lost about $114. But, I lost it in a particularly interesting way.

The graph above shows the price of a contract paying $1 if Sir Roger Douglas's Private Member's Bill allowing the youth minimum wage to diverge from the adult minimum wage were to pass first reading. This wouldn't drop the youth minimum wage but would allow future reviews of the minimum wage to set a different rate between adults and youths. I figured this likely would lead to erosion of the real value of the youth rate over time rather than any sudden cuts.

I thought there was at least a 25% chance of the bill passing first reading: it seemed likely to me that Key would let it get through first reading, see what evidence would be presented, then stick his finger up in the wind to see what public opinion said about the evidence presented at committee. And so I bought fairly heavily, but at prices below the $0.33 or so where it stabilized for the last couple weeks.

National's weekly caucus meeting was Tuesday morning. At 11:03 Tuesday morning, somebody went in and put in a sell order for $60, running the order book down to $0.0001. As the market maker had a slight glitch, it didn't re-seed the book with sell orders all the way down; instead, the low ask stayed at $0.2315. At 11:54, somebody bought at that ask price; the price bid up again to $0.256. Tuesday evening saw more determined selling, with a few big sell orders against the order book: the first for 140 units at 18:33, another for 160 units at 19:09, 40 units at 19:45, 100 units at 19:46, 210 units at 19:47. There were a couple of small price rallies, but it came down to the $0.01 mark again this afternoon at 14:35.

A very plausible interpretation is that somebody came out of the National Caucus meeting and started selling like hell. [UPDATE: Caucus closed at 11:40. So somebody started trading DURING THE MEETING.] An alternative interpretation is that a noise trader came in at a time that made it look like a very well informed trader, and everybody subsequently herded. I find the former more likely because of the succession of hard runs down the book.

So a best guess is that National's decided not to support the bill. I wonder at what time they'd have informed their coalition partner, because they seem to have decided to tell the market almost immediately. I wonder whether information travels through Parliament more quickly via iPredict than through normal channels.

If the story above is true, then National are utter cowards. John Key seemingly hasn't even the balls to let this bill through first reading as a trial balloon, getting some of the evidence out there. I'm disgusted with the National Party and annoyed that I've lost $100.[Updated below, maybe that's too harsh.]

But I'm heartened that the market seems to aggregate information so quickly. A victory for iPredict, even if a loss for Crampton.

Aha: last minute check of the forum confirms that National won't be supporting. Cowards. What a waste of a government. At least they're not saddling us with a Commonwealth Games.

Update: Maybe Key's just saving up his political capital for the budget. He's been saving it all up since 2008, so he should have room for a lot of good stuff in there: serious welfare reform, serious tax reform (top rate below 33 percent), serious spending cuts even if they're only scheduled for implementation later on. Getting harder to remain optimistic though.


  1. Looking the the net worth page ( it appears the two biggest winners amongst the top traders are dpf ($5905, up $80) and ST00 ($4621, up $156). dpf is of course David Farrar, a well-known National Party insider. ST00 is a bit more anonymous, but he was the first to post Bennett's Question Time response to Sir Roger Douglas' question about what the caucus will do, so he probably either spends all day sitting in front of a TV watching question time, or he knows what Bennett will say before she says it.

  2. ST00 in forum says he started trading after the first spike, reckoning it an informed trader; whoever had inside knowledge made $60 on the first downward spike alone.

  3. Silly question, but if National won't touch this one I'm just wondering what could be in it for Labour if it was to pass first reading? Labour could always vote against it at second reading, and the whole thing might make National a bit awkward in the mean time. I'm just wondering when the last time was that an opposition major party and government minor party teamed up to get legislation through first reading over opposition from the major government party. Did the Greens and National ever work together when Labour was in charge?

  4. I so wish I had money on that one. I felt from the get-go that it would be too big a flip for the Minister. I've a forum post to prove it, too, but alas, no sudden riches: I had no real-life money back then :(

  5. @pollguy: Doubt Labour would go for it - they're happier to take the early symbol voting against I'd expect, and I can't see ACT partnering with Labour to do it as would tick off National and no chance of getting past second reading.

    @bk: Wilkinson sounded sympathetic early on; guess I read too much into that. Is fallacy to expect that after string of cowardly bad decisions that it must be time for a good one; rather, more likely it just signals type. Sigh.

  6. Hi Eric

    Was sitting at a table at the backbencher with hidn, bkd and DPF tonight, so i though I should comment on this post to let you in on what I know about the trading in this stock.

    I understand that DPF made his $80 gain from a historical short position on the stock when it was first listed and trading at 50-80c.

    Personally, I started on Tuesday with a position 250 short - stocks that I had shorted before 1 March.

    I was responsible for much of the trading between 18:30 and 20:00 last night. I was operating on the hunch that a large trade during a meeting when the national party caucus was discussing the bill was a sign that someone knew something.

    I was also placing sell orders of 50, 100 and 200 at various points on the order book that I had sold passed, in the hope that you, or someone else would buy the stock back up to 25c

    Over Tuesday evening and Wednesday morning, I increased by position to 1252 short. After the National party position was confirmed in the house by Paula Bennett, I placed a buy order for 1250 stocks at 0.0051 to recover my capital.

    I have ended the two day period $200 up - which is always good :-) The most interesting thing for me was the strategy on selling down the order book vs placing sell orders and waiting for buyers, given a market with few traders and an insider who might return to sell down the order book again.

    Great fun, even if the government has made a bad decision!

  7. I agree it's a great opportunity for Labour to highlight the 25% youth unemployment. More importantly the 35% Maori youth unemployment, which the Maori Party must be happy about?

    If they were smart about it they could say we don't want to see vastly different wage rates, but lets get it to the committee to put the government under pressure to do something.

  8. @ST00: I did put a few more orders in the book after the crash, but I wasn't biting on folks asks. You're right: there's always a risk in leaving standing orders!

    @TraderV: Unless ACT wants to burn whatever capital it has with National, I'd guess it wouldn't take the bill to committee supported by Labour: no chance anything it wants gets through second reading...