Mmmmm, aaarbitrage!
On Tuesday, the day of the Montana and South Dakota primaries, I backed up the truck and shorted as much Hillary as I could. The pundits on TV were talking, not about what would happen, but how it would be staged. Obama’s superdelegates were timing their announcements so that “the voters” would put Obama over the magic number. And yet, Intrade gave Hillary a 6% chance at getting the nomination.
On Wednesday, I noticed that Hillary was down to a 4.1% chance of getting the nomination, but she still had a 6.1% chance of being President. Hello!? Do the math along with me, folks: Hillary has a 2% chance of becoming President without getting the Democratic nomination. Is this a market inefficiency, or Hillary going to run as an Independent? Can you say “arbitrage”? AR bih trahzh. I knew you could.
So the obvious trade is to buy back the short position on the nomination, and short the Presidency, for a net gain of 2%. The Presidency contract runs until November instead of expiring at the end of August, but still, 2% in months is 12% annualized.
I looked into the mechanics of the trade. Intrade has the peculiar practice of charging commissions on market orders but not limit orders. I’ve always used limit orders on Intrade, but this trade would require market orders, so I had to allow for commissions. I still had my Al Gore short position, which was linked to the Hillary short position for the purposes of calculating my margin requirement. After covering Al Gore and paying three commissions, the 2% would just about disappear, so I didn’t bother. Instead, I ran a single contract through the trade to verify that I understood the commission structure.
Intrade is an inefficient market. The anomalies are real, the opportunities are there. The mechanics are a bit complicated, but nothing a computer nerd can’t handle. Mostly I can’t believe how easy it is. Nice hobby.