Rajiv Sethi points to this thread and writes:
Very interesting failed attempt at manipulation on Polymarket today (would have been very profitable if successful).
I have to say, this sort of thing creeps me out. Recreational or business-hedging betting on elections doesn’t bother me, but this idea of manipulating sources of information . . . it seems wrong somehow. Not just wrong in the same way that it would wrong, and possibly illegal, to manipulate sports-betting odds or stock prices or whatever, but more wrong in the sense of interfering with democracy.
I expect many of you will disagree with me and say it’s just a funny story—and it is a funny story—and I can’t offer strong arguments in favor of my reaction to this one, but here it is.
P.S. More here from Rajiv, with lots of details and the conclusion:
Derivative contracts of this kind continue to be listed on Polymarket. It would be a good thing if they were discontinued.
The problem arose here because there was a market that referenced prices in another market; this kind of thing serves no purpose at all and opens up very obvious manipulation strategies. The trader tried to push and hold the DJT contract price below the KDH price over a three hour period so that a different contract on who would lead over this period could pay off spectacularly.
Rajiv:
I suppose that the people who run such a derivatives market would argue that it has a benefit by providing an incentive for more liquidity in the primary market. But, yeah, it seems like a problem to me.
Stepping back, I see a contradiction between two views of sophisticated participants in a market. The first view is market players as sincere bettors, looking with eagle eyes for mispricings and arbitrage opportunities. The second view is market players as strategizers who are using the market itself as a tool and are using methods such as insider trading and market manipulation to make money. If you have enough of that second type of player, that creates problems, no? But often it seems that defenders of markets conflate the two, in the most extreme case defending insider trading as a form of market correction.
Andrew, I think that market participants are basically all of the second type, but for many of them sincere betting happens to be the best available strategy.
Perfect!
As someone who mostly just cares whether the implied probabilities are useful, I’d move inside trading to the first group. That’s just sincere betting with more information than most!
Market manipulation (like this example) is a pretty different thing. That could really mess things up.
David:
I agree that insider trading as a one-time thing is a way for information to be passed to the market. But insider trading as a practice creates a set of incentives that degrade the informativity of the market, partly because people can manipulate in anticipation of inside information they will be receiving and partly because it reduces the trust that other participants will have in market prices.
The attempt is kinda troubling.
But the fact that it failed is heartwarming!
My biggest takeaway was that the Polymarket presidential market is surprisingly robust and thick. Given that you have to use crypto to participate (I think), I’d have thought someone spending almost $3 million would be able lower trumps price by a few cents for more than an hour.
I’ve also wondered who’s willing to play market maker in these cases. I mean, who can really say 49% is obviously too low for trump, but 52% is pretty reasonable. I suppose you could ask the same of stock markets and the like though.
I was recently looking at your posts from the last presidential election cycle on Taleb’s conception of election forecasting being akin to pricing a binary option — see here and here.
Maybe someone has progressed this idea further and is attempting to implement it to their benefit.