Nate Silver at FiveThirtyEight has an interesting post about why Intrade’s futures prices have barely reflected the major upswing in Obama’s polling over the last week. After the GOP convention, when McCain passed Obama in the polls for the first time, bettors priced McCain as high as 54% midday on Sep 13, a really scary number. But when the polls began to move back Obama’s way last week, prices were sluggish to respond, and still have only got Obama at 52, which given the electoral math, is almost certainly undervalued. Most other betting sites currently price Obama above 60%, while 538 itself puts him above 70%. For markets to be this far out of sync is bizarre:
This is the equivalent of the Giants being 3-point favorites at the Bellagio Sportsbook, and 7-point favorites at the Mirage down the block. Those things just don’t happen in efficient, sufficiently liquid markets, because they create arbitrage opportunities: you’d lay $10,000 on the Giants at the Bellagio and $10,000 on their opponents at the Mirage. Any time the Giants win by fewer than 3 points or more than 7 points, you lose nothing, since your two bets cancel out. But any time they win by fewer than 7 points but more than 3, you win both bets, and take home $20,000 (less the casino’s vigorish) for absolutely no risk. Pretty good deal, right? That’s exactly what’s happening with these futures contracts.