Chasing the Xenophobic Vote?

One piece of evidence perhaps consistent with that that Labour's "dey terk yer house" xenophobic housing policy was in pursuit of votes that otherwise go to NZ First: shortly after Shearer announced it, traders at iPredict downgraded Winston's chances of returning to Parliament.

It's hardly conclusive: it's a pretty thin market. But traders reckoned that Peter's chances of returning to Parliament dropped from about 85% to about 62% on Sunday, 28 July.

And here's the strange part. Q&A, the TVNZ Sunday newsmagazine programme on which Shearer made his announcement, airs at 8:50 a.m. I'm not sure at what time after 8:50 Shearer made his announcement, but the trading on NZ First started at 7:19 Sunday morning, when what looks like a single trader pushed Peters to a 30% chance of returning to Parliament. That returned to 68% later in the day, and since eroded to 54%. So either:

• iPredict's time stamps are a couple hours out;
• Somebody knew what Shearer was going to announce and predicted that it would hurt NZ First - that somebody would most likely be in Labour as the announcement only came on Q&A;
• Something else served as shock to NZ First prices early Sunday morning and that move then stuck, perhaps because of the Shearer announcement, perhaps because of something else.

I don't think iPredict's time stamps are out. I shorted one "NZ First not to be in Parliament after next election" share at 10:35 to check it, and it's reporting that that's the last trade time. So pick one of the other two. 

If somebody in the Labour camp put a few bucks against Peters in anticipation of Shearer's Q&A appearance, that would be interesting.

Thanks to @JohnnySharland for the pointer.

Spillage Markets

Australia, Australia, we love your political theatre, Australia, amen.

iPredict was a bit overloaded during the surprise Labor leadership vote yesterday - it probably saved me from losing money. But it's fun to see what the markets thought of the whole mess.

Recall that Simon Crean put himself up yesterday for Deputy Labor leader, expecting that Rudd would declare his candidacy for the leadership. Gillard announced there would be a leadership vote to be held at 4:30 Oz time, 6:30 PM NZ time. This came as a surprise, or at least my Twitter feed was filled with very surprised Australians all tweeting at #spill and #spillage. Note that this was to be, I believe, the third time that Rudd has tried ousting Gillard.

Labor's odds have been in the toilet for, well, ages. At iPredict, contracts paying $1 if Labor were to win were trading in the $0.15 - $0.22 range; for the couple days prior, they sat at 15%. Gillard's odds of surviving to be Labor leader on nomination declaration day were around 70% prior to the vote's being called - they'd eroded by about ten points over the prior fortnight.

When the markets saw there was to be a leadership vote, Labor's odds jumped as high as 30% while Gillard's odds of surviving to nomination day dropped below 10%.

Labor's odds stabilised around $0.17 afterwards, with Gillard now 88% likely to lead Labor into the next election.

The pictures:

When the markets thought Rudd would be coming back, Labor's odds of winning went up. After #spill failed, Labour's odds went back down.

I wouldn't necessarily interpret this as the markets saying that Gillard should have been turfed; you might want to keep a less popular leader through an election you're likely to lose to keep your options more open after the election.

Me? I'm hoping that, after a year of a very large majority Coalition government, Andrew Leigh becomes Labor leader. He then loses the next election but not by a lot. Instead, he gets a lot of new Labor talent in who gain experience. Then he wins the subsequent election. I don't think I'd pay more than $0.05 for that contract, but I can hope.

Syrian arbitrage? [UPDATED}

InTrade says there is about a 63% chance that Bashar al-Assad will no longer be the President of Syria for any reason (including death) before midnight ET 30 June 2013.

iPredict says there is a 57% chance that Bashar al-Assad will be President of Syria AND have effective control of the government and military at 12:01 am 1 July 2013 NZT.

UPDATE: I had read the contract Long Description but not the Judging Criteria at iPredict. The Judging Criteria includes this:

This contract will immediately pay $0 if mainstream media reports say Bashar al-Assad has lost effective control of the Syrian Government or military, or words to that effect. For example, mainstream media reports that Bashar al-Assad has fled the country, or is on the run, or has gone into hiding, or has been overthrown, or has been imprisoned or arrested, will cause this contract to immediately close at $0.

And so the arbitrage opportunity below is much stronger: it only then fails to be arbitrage if al-Assad loses power exactly at midnight. Original post follows below, but do note that this error exists; the case for an arbitrage play consequently is much stronger.

---

The iPredict blog poked me wondering if this is an arbitrage opportunity for clever traders. And while I've taken a short position at iPredict, it isn't pure arbitrage. Imagine that the rebels over-run Damascus in April and take the government temporarily before al-Assad's forces come back to regain control in June. In that case, both markets pay out at $1: he would no longer have been President of Syria for a brief period, but he would be President as of 1 July.

Now I find the likelihood of that rather small: I would have thought that if opposition forces took effective control of the government, satisfying the InTrade rules, there wouldn't be more than, what, a 10% chance of al-Assad making it back in before 1 July. So that would justify a small price gap between the two markets.

I will continue to accumulate a short position at iPredict. Once the total value of the position at iPredict gets large enough, I will lay off some of that risk by sending money back into the InTrade market. It isn't a perfect arbitrage as it doesn't protect against the scenario above and I'm at risk if InTrade drops down to the iPredict price in the interim. But getting money out of InTrade takes a long time and standing accounts there draw a $5/month fee. If iPredict were thick enough to make a big play on this, then it could be worth heavily shorting both markets and taking a net short position on that al-Assad will not lose then regain power before July.

Shorting InTrade means paying $0.37 for a contract paying $1 if al-Assad is President on 30 June. Shorting iPredict means paying $0.43 for a contract paying $1 if al-Assad is not President on 1 July. You then pay $0.80 for a contract paying $1 UNLESS al-Assad loses and regains power. If you think the chances of that kind of reversal are around 10%, and if it takes about a 10 cent price gap to make an arbitrage play across the markets worth the hassle, then it's just barely worth making the play.

Twitter tells me al-Assad is now having fighter planes shoot rockets through a university dormatory.

InTrade also has just opened markets on the Oz election (HT: @Insteconomics); interesting arbitrage plays could come up with BetFair and iPredict. BetFair has the Coalition as most likely at about 72%; iPredict has the Coalition at 76%; InTrade has a spread between 64% and 80% for the Coalition. So no real arbitrage plays there yet, but worth watching.

Final Arbitrage Tally

The final tally for the InTrade arbitrage:

• Lost $NZD 636.77 at iPredict going long Romney. I should have lost $679.68, but backed out of some of my Romney position when things were looking clear. I'll count $679.68 as arbitrage loss; I did take on some minor risk in reversing some of my Romney position. 
• I made a series of credit card deposits to InTrade, ultimately reaching the $5000 US limit. My NZ card was charged $6209.96 for the USD$5000 deposit.
• I sent BetFair AUD$1000 to buy Romney; BNZ charged NZD$1286.51 to my card. I'll add $15 AUD to that to cover the money I there pulled from my standing account as BetFair charges 1.5% on deposits. So NZD $1305.81 lost at BetFair.
• Total costs then were NZD $8195.45
• InTrade wired me USD$7373.65 - my deposit, plus my winnings, less the $20 my account was in the red when I deposited, less a $20 bank wire fee charged by InTrade. This turned into NZD $8915.89, less a $15 wire charge from BNZ: $8900.89. 
• It took a fairly long time to get the money out of InTrade; I requested the withdrawal on the 7th of November; it arrived on the 19th of November. Fortunately, the credit card isn't due for a couple more days. 
• Somebody charged me an implicit currency exchange fee: Yahoo Finance cites rates of $0.818 for Monday, 19 November; $7373.65/$8915.89 = 0.827. This matters on these kinds of plays: had I been charged the interbank rate rather than somebody along the way taking a cent on the exchange rate, I'd have received $9014.24 instead of $8915.89. Because of the long lag between the withdrawal request and the relative volatility of the $NZD, you need some reasonable expected gains to be sure you don't lose out. Every one cent move in the $NZD costs about $100. If I'd only had expected arbitrage gains of $200, the realised amount could halve or increase by 50% ridiculously easily. 
• $8900.89 - $8195.45 = $705.44 net profit.
• UPDATE: Wow. I entirely forgot this one. I've a BNZ Platinum that gives me $1 in Airpoints Dollars for every $90 spent. So I get $91 in AirPoints dollars. 

I phoned IRD. They count this as winnings on betting and those aren't taxed. I did note that iPredict is a futures exchange for regulatory purposes in New Zealand; they didn't much care. The woman on the phone said that if I were trading on these every day so that it were more like income, then it would count. But one-offs like this are fine. I didn't ask how it would be treated if someone set up a Kiwisaver fund that accepted investments for trading on these markets.

Because it took almost two weeks to get my earnings out of InTrade, I was exposed to unhedged currency risk, making this not a pure arbitrage play.

Lesson: it's worth having standing accounts across a range of trading platforms. It takes far too long to set up an account to only do it when an opportunity comes up. Arbitrage gains are real, especially when a whale lands like the one that seemed to be trading at InTrade propping up Romney's price. But it takes a reasonably large price spread across markets. A one-cent spread covers the bank's exchange rate charge one-way; a two-cent spread covers two-way bank exchange rate charges; a three-cent spread covers the exchange charges plus half of BetFair's deposit fees; a four-cent spread leaves you a small amount of arbitrage gain but exposed to currency risk.

And be careful if you're financing this on the credit card: if the expected payout date plus a fortnight is after your credit card is due, your costs are going to be higher.

Final arbitrage position statement

InTrade will not allow me to deposit more than $5000 in a 30-day window, so I can't arbitrage any longer. My current positions:

• 739 shares on Obama at InTrade bought at USD$6.74 per share on average. 
• If Obama wins, I net USD$2389 less credit card exchange rate losses two ways.
• If Romney wins, I lose USD $5001 and credit card exchange rate losses one way.
• AUD$1000 on Romney at BetFair at 4.4.
• If Obama wins, I lose USD$1053 and credit card exchange rate losses one way.
• If Romney wins, I net USD$3335 less credit card exchange rate losses two ways.
• 2959 shares on Romney (mix long Romney short Obama) at iPredict, average price NZD$0.2297.
• If Obama wins, I lose USD$563
• If Romney wins, I gain USD$1849

On net, then, if Obama wins, I'm up $773. If Romney wins, I'm up $183. Less credit card exchange rate fees and realised currency risk in both cases. I expect Obama to win, so I don't mind having an unbalanced position. I'm currently cheering only for that the election be decisive and not go into endless recounts or Supreme Court challenges that push the payout until after my credit card comes due. If you're a voter in a swing state, I strongly encourage you to go with whatever everybody else seems to be doing.

I'd like to resist the temptation to play at range trading on iPredict during the day so I can get a clean final outcome, but I doubt I'll be able to.

Previously: Barriers to Arbitrage (why most folks may not be doing this); Documenting the Arbitrage.

In other news, it's fun to compare these two Twitter searches [ht @LyndonHood]:

• "if Obama wins New Zealand": about 19 people claiming they'd come here if Obama wins.
• "if Romney wins New Zealand": about 14 people claiming they'd come here if Romney wins.

In both states of the world, it's optimal to move to New Zealand. Tiebout gives you the only vote where you're guaranteed to win.

Heresthetics and the alcohol purchase age

I lost about $300 on iPredict a little over a month ago. I had really strong expectations that the Government's bill proposing a split alcohol purchase age was going to pass. Standard rules of order seemed to ensure that the government's bill would pass. The amendment to keep it 18 would fail as all those preferring Split or 20 would vote it down; the same would hold in reverse for the amendment to increase the age to 20 across the board.

As we all know, Parliament decided at the last minute to change the normal procedure for this bill and this bill only. Instead of the normal rules of order, Parliament voted for the three options on first preferences. Then, the one with the fewest votes was dropped. So the Split option was dropped and we were left with the head-to-head contest between 18 and 20, won by 18. It's remarkable. Split looked like it was a Condorcet winner. And, had the "increase it to 20" group had their act together, the outcome still would have been Split: they'd have counted noses and all voted strategically for Split over 20. 

I have nothing but admiration for whatever heresthetician came up with this move. You, Sir or Madam, are deserving of some kind of award. I don't know what happened, but somebody managed to convince enough people in Parliament that the proposed rule change was actually more democratic for this kind of choice.

I've held off on blogging this one - I set it as a midterm exam question in my undergrad Public Choice class. Then things got busy. But here's the fun part.

Green MP Kevin Hague supported Keep It 18, as did I. But here's what he wrote after the vote:

In the wake of the parliamentary vote on alcohol purchase age there are some people (the ones I have seen are people who favoured 20) who are suggesting that the voting procedure used led to a perverse outcome.

I disagree completely. This is not a post about the merits or otherwise of the various options, but an argument that while the voting procedure was highly unusual, it produced a more democratic outcome than otherwise would have occurred, and should be considered more often. [emphasis added]

The first thing that I tell my public choice students about social choice is that if there's a Condorcet Winner, we generally consider it to be desirable that a social choice mechanism choose the Condorcet Winner. Here's Hague on what would have happened had we used the standard rules of order:

So recall that in this case the option that was in the Bill was the split age option, but that there were proposed amendments both to retain a uniform age of 18, or to raise it to a uniform 20. The ordinary House process would have seen first a vote on 18. If that had passed then the 20 proposal would have been ruled out of order. If it had failed we would have voted on the 20 option. If that had failed then the split option would have remained in the Bill.

...

Under the traditional voting method, what would have happened is this: the proposal for 18 would be put and fail. We would then have moved on to the 20 proposal, and this also would fail. This would leave the split age in the Bill – the option that was actually the least favoured by MPs.

I agree completely with Hague on the above. That's why I had $300 riding on it.

Instead first preferences were canvassed and the split age option, as the least favoured excluded. Then effectively those who had favoured the split age added their support to their second preference. Hence 68 votes for 18, 53 for 20.

The voting method used ensured that the result could command a majority in the House whereas the traditional method would not have done (except by excluding this whole part of the Bill I guess).

This is truly bizarre. Hague is saying:

1. There was a Condorcet winner: Split would have won against both 18 and 20.* 
2. The system we used, which ruled out the Condorcet winner on the first round, was more democratic.

Deciding what is more or less democratic is a bit of a mess because of all of the various problems in the social choice literature: we're usually trading off horrible features of various systems against each other. But it's awfully strange to prefer, on democratic grounds, that a Condorcet winner be suppressed!

I really really want to read the inside account of how they pulled this off. Think about everything that here was required:

1. Flip from the normal rules of order and convince everybody that you're doing it for fairness reasons rather than to change the outcome.
2. Do it late enough in the game that all the "Increase to 20" group don't have time to think through the game theory. If you do it early, somebody will point out to the ones too dim to figure it out on their own that they cut their own throats by supporting 20 over split at the first round, if their true preference ordering has 18 last. 20 then gets dropped in the first round and Split wins in the second. 
3. Do it despite the government seeming to prefer the split age option, which lets them to be seen to be doing something on alcohol, where there's been a lot of public pressure. 

A proper account of this could make up a chapter in a revised version of William Riker's truly excellent little book, Heresthetics: The Art of Political Manipulation. The youth wings of some of the parties in the Keep It 18 movement seem to have completely gazzumuped their elders. Heck, I'd never even considered it possible that the rules of order could be a choice variable. This was a truly entrepreneurial act in the proper sense of the word. I have nothing but admiration for these kids. A beautiful application of heresthetics. 

Even worse, I doubt that anybody responsible for it would want to take credit for it as doing so might hinder future entrepreneurial efforts. Didn't the CIA award medals anonymously to operatives? Can we do that here?

David Farrar has all the data up on who voted which way in each round. I'll have to think of a fun honours project around this.

* You can build weird cases for non-single-peaked preferences if you think a lot of 20 supporters preferred 18 over Split, maybe so that, in their view, things would get so bad that we'd be able to increase the drinking age to 20 across the board (or a similar case for those who most preferred 18). And maybe then preferences could have cycled. But I don't buy it at all. And, more importantly, Hague doesn't buy it: he's saying there was a Condorcet winner.