Manipulation in Political Stock Manipulation in Political Stock - PowerPoint PPT Presentation

Manipulation in Political Stock Manipulation in Political Stock Markets Markets Koleman Strumpf and Paul Rhode Koleman Strumpf and Paul Rhode UNC Chapel Hill UNC Chapel Hill

Introduction Introduction � What is a manipulation? What is a manipulation? � � attempt to attempt to ∆ ∆asset prices when no asset prices when no ∆ ∆fundamentals fundamentals � � behave like insider possessing private info behave like insider possessing private info � � Common criticism for asset Common criticism for asset mkts mkts � � “ “large large” ” investors routinely shift prices investors routinely shift prices � � particular worries with prediction particular worries with prediction mkts mkts � → Tradesports Tradesports, 2004 , 2004 -- -- GRAPH GRAPH → � concern with proposed terrorism market: concern with proposed terrorism market: � “[PAM] [PAM] was a small program that faced a number of “ daunting technical and market challenges. Can futures Can futures markets be manipulated by adversaries?“ “ (DARPA press (DARPA press markets be manipulated by adversaries? release, July 2003) release, July 2003) � �

TradeSports Speculative Attack: 10/15/2004 Speculative Attack: 10/15/2004 TradeSports ✁ ✂ ✆ ✡ ☛ ✌ ✍ ✎ ✡ ✞ ✄ ☎ ✝ ✠ ✝ ☞ ✏ ✝ ✑ ✏ ✝ ☞ ✟ ✟ ✟ ✟ ✒ � ✕ ✕ ✖ ✓ ✗ ✗ ✌ ✍ ✔ ☞ ☞ ✠ ✝ ✟ ☞ ✟ ✏ ✑ ✘ ✁ ✕ ✚ ✚ ✎ ✂ ✜ ✂ ✞ ✠ ✝ ✟ ☞ ✏ ✔ ✄ ✝ ✛ ✠ ✛ ✄ ✑ ✄ ✔ ✝ ☞ ✙

Introduction – – Introduction Importance of Manipulation Importance of Manipulation � Sheds light on rationality Sheds light on rationality mkt mkt participants participants � IEM 2000 WTA mkt mkt: : IEM 2000 WTA � “ “mistake mistake” ” and reversal on election eve and reversal on election eve -- -- GRAPH GRAPH � � arbitrage opportunities arbitrage opportunities � � Issue: permanent effect on prices? If so problems Issue: permanent effect on prices? If so problems � for efficiency in an asset market for efficiency in an asset market � �

Day After Election in 2000 IEM WTA Day After Election in 2000 IEM WTA (based on popular votes) (based on popular votes) 1.0 0.8 0.6 � ✂ ✄ ✟ ✠ ✟ ✍ ✁ ☎ ✆ ✝ ✞ ✁ ✡ ☛ ☞ ✌ ✞ 0.4 ✎ ✎ ✏ ✑ ✒ ✓ ✖ ✎ ✗ ✝ ☎ ☞ ✡ ✔ ✝ ☎ ✘ ✞ ✌ ✕ 0.2 0.0 11/7/2000 11/8/2000 11/8/2000 11/8/2000 11/8/2000 11/8/2000 11/8/2000 11/8/2000 21:00 0:00 3:00 6:00 9:00 12:00 15:00 18:00 Dem Rep

✙ ✙ ✬ ✬ ✧ ✧ ✧ ✧ ✫ Types of Stock Market Manipulation ✫ Types of Stock Market Manipulation ✩ ✪ ✩ ✪ ★ ★ ✞ ✞ ✘ ✘ ☎ ☎ ✞ ✞ ☛ ☛ ✝ ✝ ✧ ✧ ✏ ✏ ✄ ✄ ☛ ☛ ✦ ✦ ☛ ☛ ☛ ☛ ☞ ☞ ✦ ✦ ✠ ✞ ✠ ✞ ☛ ☛ ✞ ✥ ✥ ✄ ✄ ✞ ✁ ✁ ☛ ☛ ✎ ✎ ✝ ✝ ✌ ✌ ✝ ✖ ✝ ✡ ✡ ✙ ✖ ☎ ☎ ✙ ✬ ✬ ✁ ✁ ✝ ✝ ✞ ☎ ☎ ✞ ✞ ✞ ✧ ✤ ✧ ✤ ☎ ☎ ✙ ✙ ✞ ✞ ✞ ✞ ✧ ✂ ✂ ✧ ☛ ☛ ✞ ✆ ✆ ✞ ✝ ✝ ✌ ✑ ✌ ✑ ✆ ✏ ✏ ✆ ✫ ✫ ✏ ✏ ✏ ✏ ✒ ✒ ✆ ✆ ☛ ☛ ✆ ☛ ☛ ✄ ✆ ✄ ☎ ✞ ✞ ☎ ✎ ✎ ✠ ✄ ✔ ✠ ✝ ✄ ✔ ✪ ✝ ✭ ✪ ✭ ✁ ✁ ✝ ✝ -based manipulation based manipulation ✆ ✆ ✄ ✄ ✮ ✮ ✝ ✑ ✑ ✝ ☎ ☎ ✂ ✂ ✏ ✎ ✑ ✭ ✄ ✄ ✏ ✎ ✑ ✭ ✍ ✍ ✍ ✍ ✝ ☛ ✝ ☛ ✁ ✁ ☛ ☛ ✏ ✏ ✘ -based manipulation ✘ based manipulation ☛ ✒ ☛ ✌ ✒ ✌ ✄ ✆ ✄ ✍ ✆ ✍ ✞ ✒ ✒ ✚ ✚ ✞ ✞ ✞ ✌ ✍ ✒ ✌ ✍ ✒ ✍ ✍ ✁ ✁ ✧ ☛ ✧ ☛ ✙ ✝ ✙ ✝ -based manipulation ☛ based manipulation ☛ ✣ ✣ ☎ ☎ ✞ ☞ ☞ ✞ ✫ ✝ ✆ ✫ ✝ ✆ ✒ ✒ ✟ ✟ ☛ ✌ ✌ ☛ ✦ ✦ ✁ ✁ ✁ ✁ ☎ ☎ ☛ ☛ ✔ ✄ ✔ ✄ ✌ ✌ ✖ ✥ ✔ ✝ ✝ ✖ ✥ ✔ ✁ ✁ ✡ ✡ ✄ ✄ ✆ ✖ ✁ ✆ ✖ ✁ ✔ ✔ ✝ ✝ ✝ ✝ ✎ ✠ ✎ ✍ ✍ ☎ ☎ ✠ ✎ ✎ ✰ ✄ ✰ ✁ ✁ ✄ ✏ ☎ ✏ ☎ ✟ ✜ ✟ ✜ ☛ ✁ ✖ ✖ ✍ ☛ ✁ ✍ ✠ ✆ ✠ ✆ ✞ ✞ ✎ ✎ ✏ ✏ ✞ ✞ ✓ ✓ ✂ ✂ ✘ ✘ ✌ ✌ ✆ ✝ ✝ ✆ ✆ ✆ ✁ ✝ ✝ ✁ ☛ ☛ ☛ ✑ ☛ ✑ Allen and Gale (1992) Allen and Gale (1992) ✄ ✄ ✝ ✁ ✁ ✝ ✠ ✆ ✖ ✠ ✆ ✖ ☎ ☎ ✤ ☞ ✤ ☞ ☛ ☛ ✜ ✜ ✘ ✂ ✘ ✂ ✒ ✒ ☛ ✜ ✜ ☛ ✁ ✞ ✁ ✞ ✒ ✒ ☛ ☛ ✆ ☎ ✆ ☎ ✞ ✞ ✝ ✞ ✝ ✠ ✞ ✠ ✠ ✠ ✔ ✤ ✔ ✤ ✓ ✛ ✎ ✓ ✛ ✎ ✌ ✌ ✁ ✆ ✆ ✟ ✁ ✞ ✟ ✞ ✁ ✁ ✝ ✂ ✂ ✝ ✁ ✁ ✞ ✞ ☛ ✓ ☛ ✓ ✆ ✆ ☎ ☎ ✏ ✄ ✌ ✌ ✏ ✄ ☎ ✯ ✌ ✒ ✒ ☎ ✯ ✞ ✌ ✌ ✌ ✍ ✍ ✞ Information- ✄ ✄ ✄ ✄ ✝ ✏ ✏ ☛ ☛ ✒ ✝ ☛ ✎ ✎ ☛ ✒ 2. Information ✞ ✞ ✆ ✝ ✢ ✆ ✝ ✢ ☛ ✄ ☛ ✄ ✞ ✞ ✁ ✁ ✔ ☛ ✔ ☛ ✆ ☛ ☛ ✆ ✠ ✠ ✗ ✗ ✜ ✜ ✡ ✡ ☛ ☛ ✜ ✜ ✌ ✌ ✖ ✖ ✌ ☎ ☎ [*]Trade- ✁ ✌ ✁ ✄ ✏ ✏ ✁ ✁ ✒ ✄ ✒ ☛ ☛ 3. [*]Trade ✑ ✚ ✂ ✒ ✑ ✚ ✁ ✁ ✂ ✒ ✔ ✔ ✄ ✄ ✖ ✄ ✝ ✁ ✖ ✍ ☛ ☛ ✄ ✝ ✁ ✞ ✍ ✞ ☎ ☎ ☎ Action- ☎ ✝ ✝ ✓ ✓ ☛ ☛ ✆ ✆ 1. Action ✆ ✆ ☎ ☎ ✠ ✂ ✠ ✓ ✂ ✓ ✏ ✏ ✟ ✝ ✟ ✝ ✒ ✒ ✁ ✁ ✕ ✕ ✕ ✕ ☎ ☎ ✕ ✕ ✕ ✕ 1. 2. 3. � �

Trade- -Based Manipulation in Practice Based Manipulation in Practice Trade � Field: Field: � � Common feature of *successful* manipulations: Common feature of *successful* manipulations: � thin mkts thin mkts; emerging ; emerging mkts mkts; supply constraint ; supply constraint � Stock pools in 1920s (MJM, 2004) Stock pools in 1920s (MJM, 2004) � � Pump Pump- -and and- -dump penny stocks (AW, 2004) dump penny stocks (AW, 2004) � � Brokers trading on own behalf in Pakistan (KM, 2003) Brokers trading on own behalf in Pakistan (KM, 2003) � � Cornering in futures Cornering in futures mkts mkts (MNY, 2003) (MNY, 2003) � � Racetracks Racetracks -- -- unsuccessful (C, 1998 unsuccessful (C, 1998-- -- SEE next slide) SEE next slide) � � Experiments with prediction Experiments with prediction mkts mkts: : � See other talks at DIMACS! See other talks at DIMACS! � �

Trade- -Based Manipulation in Practice (cont) Based Manipulation in Practice (cont) – – Trade SKIP at DIMACS SKIP at DIMACS � Here: Here: � historical + contemporary evidence from historical + contemporary evidence from political prediction markets political prediction markets → observational evidence based on real bets observational evidence based on real bets → � Camerer Camerer (1998) is most closely related. (1998) is most closely related. � Key differences: Key differences: � clear control (two markets linked to same fundamentals; clear control (two markets linked to same fundamentals; � external valuation via polls) external valuation via polls) � Camerer Camerer’ ’s s manipulation occur prior to most of bet activity manipulation occur prior to most of bet activity � � (final) prices known at all times (final) prices known at all times— —not pari not pari- -mutuel mutuel � (efficiency conditions must hold at every instance) (efficiency conditions must hold at every instance) � no short no short- -selling constraint selling constraint � � �

This Paper — — This Paper Trials from real- -world political prediction world political prediction mkts mkts Trials from real 1. Controlled manipulation in the IEM Controlled manipulation in the IEM 1. well- -known, online political futures known, online political futures mkt mkt well � � operating since 1988 operating since 1988 � � make “ “controlled controlled” ” trades in 2000: trades in 2000: make � � planned and random investments (details below) planned and random investments (details below) simulate large investor, perhaps with inside info simulate large investor, perhaps with inside info � � 2. Observed manipulation in historical markets Observed manipulation in historical markets 2. huge and formally structured political bet mkts mkts huge and formally structured political bet � � $100M+ in current dollars wagered in one election $100M+ in current dollars wagered in one election � � ✂ ✂ ✁ ✁ late 19 Century – – WWII WWII late 19 Century � � examine instances of accused price rigging examine instances of accused price rigging � � � �