Thursday, July 21, 2005

More on Roberts Futures

Orin Kerr and Jim Lindgren had a bit of an scuffle about the predictive powers of A lot of this has to do with timing, so I've posted the chart of the trading in the relevant hours at right.

You can see that Roberts is trading very low until about 6:30 when there is one trade bringing Roberts up to 10. Over the next hour, Roberts flirts with prices in the 30-40 range. Then at 7:40, the time of the announcement, Roberts becomes a sure thing.

It is important to look at volume, too, though. In particular, the relatively low volume until around 7:30 suggests that there is not much liquidity in the market. One person deciding to buy at 10 does not a market prediction make. Volume did pick up around 6:45, so one could make the argument that the market had picked Roberts as a "favorite" by that point. Whether this is due to K. J. Lopez's sly pushing of Roberts or something else it is unclear.

I think that one thing we can do is rule out Henry Farrell's seemingly plausible explanation for the pre-announcement price increase. His hypothesis is that a few insiders close to the Bush administration decided to make some money off of being on the good side of the information asymmetry. But if we look at the volume, this clearly isn't the case. If someone really wanted to make money off their inside information, they'd just buy up all the limit sell orders. Clearly there were people willing to sell at 50, 55, 60, 75 and so on that did not sell before the announcement was made. One way to save this argument is to suppose that the White House leaked the names of the top 3 or 5 picks who had come in for interviews an hour before the announcement. Then it would make sense that insiders were only buying up to 30-40.

Did the markets work here? Yes. They aggregated the information that was available to the public quite handily. Will it be useful to look at Tradesports to see who the next nominee will be? No. Roberts wasn't even registering as a possibility (< 1) until 2.5 hours before the announcement of his nomination was made.


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