Topic: Large Trades Distort Prediction Accuracy

I’m not sure I understand your point. Of course large trades move the market in a significant way. I don’t understand, however, why that necessarily “distorts” prediction values.

You note that in the real world the impact of a clumsily executed large trade would revert to prior market levels whereas in the Inkling world it doesn’t. In the real world that is only true in the event the large trade is actually distorting (i.e. sets wrong price) as sellers will enter the market and drive down the price to its appropriate equilibrium. If the trade ultimately reflects new information, it will not revert. In either case, there is generally sufficient market liquidity on both sides of the question to set the “right” (one could quibble with that adjective) price, though clearly not in all cases (e.g. the current illiquidity in the mortgage backed markets).

In theory, if a large buy (or sale) in an Inkling market moves a price beyond what is reasonable, other traders are free to sell their positions or short the stock (or buy) and drive it back to where it belongs. Certainly both you and I have done so. Indeed, other traders should thank the distorter for creating opportunities/liquidity to take inklings off the table and/or earn outsized returns for the risk being taken. There are certainly a number of markets with a larger number of traders that appear to be reasonably efficient. If an Inkling market doesn’t revert, presumably other traders believe the the new prediction value is close enough to correct that there is no value to be had in taking a contrary view. In all of the above cases, there is no particular reason to think that the predictive value of one large trader (with conviction) is no better or worse that the predictive value of a bunch of smaller traders. Indeed, if the value predicted by one large trader doesn’t revert in the face of all traders presumably seeing it, the fact that everyone else doesn’t sell arguably implies that the other traders agree so the price does reflect the view of the many.

On the other hand, the alternative is that there is not enough liquidity to drive the price back to where it belongs. However that, presumably, is the distorter’s problem, not anyone elses (OK, maybe the market creator’s if they were using the results for something but they can read in to the lack of trading whatever they want). For what it is worth, I subscribe to that theory – there is not enough liquidity in many Inkling markets.

While I can’t speak to the trading strategies of other large balance traders, as one of them I can only tell you what I do. I almost never invest in more than 50 shares of anything unless I think that a stock is grossly over or under valued based on objective research. Often that means that the market isn’t well followed (no liquidity so minimal predictive value until I enter), or I happen to check in shortly after new markets open with default prices where outsized profits are available. Given that there are relatively easy inkles to be had with that strategy, there is little point in making large uninformed clumsy speculative investments. If anything, I’m guessing that my participation, and that of other large balance players, makes markets more efficient/accurate rather than distorted. In my view, if anything, there are not enough large traders to make every market efficient/accurate – take a look at my separate posts under Locks of the Week – opportunities that should not exist if the masses were paying attention and/or had plenty of liquidity.

Maybe your real complaint is that large balance traders find and exploit the lucrative investment opportunities before the small guys had a chance. Maybe, or maybe the large balance folks are more informed or interested in doing a little research. Last time I checked, the internet was available to every Inkling trader while new markets appear to be launched somewhat randomly. I will admit that large inkle balances probably provide more freedom to take positions in longer pay out markets which is otherwise a sub-optimal investment strategy for lower inkle balance players. I would submit that it makes those markets more predictive though.

To be honest, I’d love your solution to have prices automatically revert to pre-buy levels which would allow me to buy grossly under valued stocks over and over again.

By the way, my potentially “distortive” positions of 250 shares or more are listed below. Please let me know where you think I’ve grossly distorted the true probabilities aside from not buying or shorting enough (i.e. Yes I know the probability of Frei scoring the most points in Euro 2008 is 0, I just don’t have enough inkles to drive it to that level).

1824 long on when the 787 will be delivered
1554 long on the next NASA mission post shuttle retirement
1317 long on when 24 will premier
250 -1,000 shares short in the stocks of primary losers and other non-participants in the New Mexico election markets.
800 short on when the Pittsburgh Casino wil open
600 long on where Boston City Hall will be on 6/21
587 long on when Belgium will have its next astronaut
500 long that a Democrat will have the delegates necessary to win by 8/1 according to CNN & Fox
400 short that Arthur will be the strongest Hurricane of the season
400 short that Michael Strahan will play for someone other than the Giants
382 long that the Amazing Race 13 will premier in September
300 short that Wikipedia will hit 2.5MM English articles by 6/15
250 short in will McCain pick a VP today
250 short that Alexander Frei will score the most goals in Euro 2008
250 short that Rogers Clemens will be doing anything other than “something else” or “defending against perjury charges” on July 1
250 short that the US will have an Avian Flu outbreak before 7/1/2008
250 long that Hillary will speak at the Democratic convention
250 short of every stock in the Battlestar Galactica “Final Five” market except for the 4 already identified members

Topic: Standing Position Stop-Exit & Open-Risk

Yes, it would be a great feature and thanks for the input you guys. It’s on a list of things to consider getting done soon.

Topic: Standing Position Stop-Exit & Open-Risk

In principle it is possible to integrate these kinds of bids/offers into the kind of automatic market maker that Inkling uses, but my understanding is that it very significantly complicates the operation of the market. (Currently, the market maker can calculate directly the price effects of various offers. I think to integrate standing orders would require the market maker to combine the formulaic calculation with database look-ups and adjustments to the calculation for each order found, with a resulting significant slow-down in performance.)

However, I’m just tossing in my two bits; I don’t speak for Inkling.

I can see the value in what your propose and would be interested in hearing Inkling’s response.