Certain markets provide a strong edge to those with access to information that they can act on before the markets. Examples include:
- A Supreme Court clerk who learns of a court decision, a congressional staff member who has an accurate whip count on a close vote, or a pollster who has advanced knowledge of a new poll would all be in a strong position to beat the markets with their intelligence. Perhaps the most profitable trade I’ve ever made on PredictIt came from a tip I received from a member of my private group that a certain member of Trump’s cabinet would be named a few hours before the news broke.
- An investigative reporter with advanced knowledge of a political scandal or an economist who forecasts an economic crisis would be well-positioned to place bets on the high probability that the markets will move once the news breaks. Recently, for instance, a defense consultant shared with me that a date had already been set on the Trump-Kim summit, allowing me to adjust my relevant positions just hours before the president announced the date of the meeting.
- Given the press attention that prediction markets receive, parties have been known to place bets to drive the markets up or down for reasons incidental to their actual forecasts. This is tempting for candidates because even highly visible markets can be manipulated at costs that amount to a fraction of conventional tactics such as ad buys.
An aide to one of the presidential candidates in the 2016 cycle admitted to me that as their poll numbers started to decline, prominent media outlets noted not only their decline in the polls, but also their decreasing price on PredictIt. Campaign staffers immediately bought shares of their candidate on PredictIt to drive the price up. This allowed the campaign to offer a more favorable counternarrative to reporters, who subsequently wrote stories about the campaign’s rebound. The candidate himself also cited his PredictIt price to assure wary donors.
The most well-known case of likely market manipulation was in the 2012 elections on Intrade with the “Romney whale.” A study in the Journal of Prediction Markets found that a single trader accounted for more than one-third of all Romney Yes bets, and one-fifth of Obama No bets. This created a firewall that prevented market prices from moving in response to information. The result was “remarkable stability” on Election Day and other important moments on the campaign, with an effective ceiling on Obama’s price at around 70 percent and an effective floor of about 30 percent for Romney. Only when voting ended in the key swing state of Colorado were these orders removed. The study’s authors David Rothschild and Rajiv Sethi assessed that the most plausible explanation for these trades was that the trader was “attempting to manipulate beliefs about the odds of victory in an attempt to boost fundraising, campaign morale, and turnout.”
More recently, market manipulation has been reported on PredictIt. David Hill reported in a March 2018 piece in The Ringer that a group of traders created a fake polling company and made a fake poll suggesting that Kid Rock had a high probability of winning the Michigan Senate race. After they linked it on a PredictIt forum in an attempt to spike the markets, mainstream media sources began to report the poll as if it were real. On another occasion, a trader, claiming to be a pollster, sent to RealClearPolitics a photoshopped screenshot of poll crosstabs. RCP included the information in its polling average and then removed it after discovering the error, leading to volatility in the polling markets on PredictIt.