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September 20, 2004

Gaming the Markets

Just a thought, but let's say that you're a deep-pocketed Republican interested in methods of suppressing Democratic turnout. Let's say you've heard about the predictive nature of the Iowa Electronic Markets, and decided, for whatever reason, that a certain segment of the opinion leadership within the Democratic Party takes the market's predictions at face value. Let's say you decide to spend a chunk of the cash in your deep pockets in order to manipulate the market in favor of George Bush--thus so depressing Democrats that they don't bother to turn out on election day.

Yes, it's a ludicrous theory--though any Democrat looking at the latest IEM graph is going to be depressed--but set that aside for a moment. Is it possible to do?

The short answer is "No," or at least "No, it's not supposed to be."

The minimum investment for U.S. Dollar denominated accounts is $5.00 and the maximum is $500 per account. Investments may be increased at any time, provided they do not exceed the maximum $500 limit, by completing the Additional Investment form found at the IEM website and submitting a check to the IEM office.

The $500 max should make it impossible for a single individual investor to manipulate the market, but what if a number of investors decided to act in concert? There's no reason I'm aware of that a group of investors acting in concert shouldn't be able to manipulate the market, but how large would the group need to be in order to do so?

I've written UNC economics prof Koleman Strumpf--perhaps he'll know.

Hi Professor Strumpf,

Tried looking for this on the Iowa Electronic markets site, but it's obviously not information they would make public.

My question--and it's an idle one--is; given the size of a particular Iowa electronic market, how much money would it take to manipulate the prices within it?

I realize the $500 max on individual accounts makes this impossible for a single person to manipulate an IEM market to any extent, but what if a group of investors decide to act in concert?

For instance, let's say I and a largish group of my deep pocketed Republican friends have decided, for whatever reason, that Democrats have bought heart and soul into the predictive nature of the IEM Winner take all presidential market. Let's say further that we decided that the best way to depress the Democratic turnout on election day is for the presidential take all market to show a huge price difference in the relative values of George W and John Kerry for a month or two beforehand. In essence we would use the market as a kind of self-fulfilling prophecy. Democrats would see a high Bush price, then not bother to vote, or perhaps not work as hard as getting out the vote. Low democratic turnout leads to a Bush victory, and the "predictive nature" of the IEM is once again validated.

I realize the scenario above is somewhat ludicrous, as very few people are even aware of the IEM, but it could be argued that those who are aware of it tend to fall into the "opinion leader" category within the two parties. But given the idea, how large would my theoretical group of Republicans need to be in order to manipulate the market?

Obviously this would work as well for Democrats, but from the looks of things on the market lately it would need to be an even larger group.

I'll let you know if I get a response.

Update: Koleman writes back.

That is a good question. In fact this is something which I tried to do as part of a research project in the 2000 IEM market. Basically the idea was to make a series of random investments in the market and see if the prices could be permanently altered. Without going into all the details, the investments were relatively large for this market (at least $100 and typically much more) and were successful at moving the prices noticeably (several cents in the WTA market). However, the markets appear to undo most of the activity relatively quickly, say in the next day or so. I am in the process of writing all this up in a paper and it will be posted on my website, though I do not have an expected completion date right now.

Regards,
Koleman

Posted by Bigwig at September 20, 2004 10:35 AM | TrackBack
Postscript:
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Comments

Looking forward to the answers you get.

Re: who might manipulate the Iowa markets, given the overwhelming percent of 527 money coming from wealthy Democrats, it's not clear it would be the Republicans. Heh ...

Posted by: rkb at September 20, 2004 12:59 PM

You just can't get coverage like this anywhere else- sterling work, BW.

Posted by: Kevin at September 20, 2004 08:22 PM
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