Political Futures Markets? Bah, humbug

I keep hearing a lot of jabber about the Politcal Futures markets like Intrade.com and Iowa Political Futures, and how significant the political action is relative to the equities markets.

This is utter nonsense.

Lets compare these exchanges with the U.S. Capital markets, which are, in a word, massive. Total market capitalization for equities are ~$13 trillion dollars; for Federal debt (Bonds and notes) its about $4 trillion; while corporate bonds total in excess of $5 trillion.

The total dollar amount invested is the political futures? An absolute pittance.

Let’s start with Intrade.com. They state they are the largest political futures exchange in the world. Their biggest contract – The George W. Bush Futures — has about two million dollars invested. Over the past year, these futures have traded a grand total of six million dollars. The Iowa Political Futures market is downright tiny in comparison. Over the summer, they had less than $20,000 invested in their “winner take all” exchange.

Let’s put this in even simpler terms: eBay trades 10 million shares a day, and is priced at $91. It takes eBay less than 3 minutes to trade the entire years worth of Intrade presidential futures value. General Electric, at 15 million shares / $33, requires about 6 minutes. Microsoft takes one and half minutes.

And yesterday, when Merck got clocked, it traded the entire years worth of Presidential contracts in 25 seconds.

What does all this mean? Like it says in the fine print, this is good for “entertainment purposes” only. The dinky futures trading outfits are too small to reach even the level of unreliability as forecasters that the major capital markets are.

There is no alchemy: Pooling our collective ignorance does not somehow yield wisdom.

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  1. zgveritas commented on Oct 1

    I track the Tradesports political futures market. Right now I wish I had shorted GWB at 70 instead of AAPL.

    I can’t help but notice that Tradesports is a prominently featured link on Don Luskin’s Trendmacrolytics website. Luskin is unabashedly to the right on the political spectrum. I wonder if the bias of Luskin devotees skews the positions taken there. I might be giving him too muxh credit. But I can’t discount the possiblity that the link there may have created a self reinforcing dynamic based on word of mouth of right leaners.

    Also I think your friend Cramer is not tuned in to how close the election really is.

  2. Pete Harrigan commented on Oct 1

    The political markets are clearly a pittance compared to the capital markets. Their advantage, as I understand it, is that their forecast is unambiguous. They are a purer play.

    If the Bush contract trades higher, it means people are betting Bush will win. If the stock market trades higher, as it did today, it could mean that the capital markets believe Bush will win. It could mean the market has become comfortable with Kerry, in case he wins. It could mean that economy is in better shape than we think. It could mean a lot of things.

    Besides, I believe the main point about the political markets is their superiority to polls, rather than their superiority to the equity markets.

    On the other hand, if anyone is saying the stock market must rally because the forecast from the political market is bullish for Bush, then, yeah, that would be kooky.

  3. rex commented on Oct 3

    i see the political markets as another way of seeing how the wealthy classes are reading the polls and other clues about the election. i doubt there’s much collective wisdom here about the actual outcome. (remember nasdaq 5000?)
    there’s also a lot of wishful thinking in these markets about bush’s chances, especially on tradesports. does anyone really think bush’s chances of winning are twice kerry’s?
    Iowa has done a pretty remarkable job of predicting the popular vote in the past, but we can assume that opinion polls in the last days before the election are an important input into the final prices.

  4. non sense reactor commented on Oct 15

    Liquidity does not mean rationality. One cannot presume that the liquidity of markets is indicative of their predictive potential. It is possible that illiquid markets offer unusual investment opportunities. If that’s the case, would the originator of this thread care to share how he/she intends to take advantage of such opportunities?

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