Abstract
We examine individual-level trading data from several markets in the PredictIt exchange to determine what strategies correlate with financial success. PredictIt provides many markets with futures contracts linked to political issues, ranging from ongoing policy outcomes to political elections. High fees along with restrictions blocking automatic trading and constraining a one-to-one match between people and accounts, combine to severely limit the upside to investment returns over the fixed costs: this ensures that traders are all retail investors. We have the individual-level data from two markets: Democratic and Republican Iowa Caucuses in 2016. This data includes all orders and trades from every trader across the markets. We are able to fully reconstruct market activity and study trader behavior both within and between markets. We show that understanding how markets and trades works is more important to financial success than proxies for (1) confidence or funding (2) information or objectivity in trading. The work should be a call-to-action in favor of simplifying markets and trading for any exchange with retail investors, and for more research into effects of differential trading efficiency in all financial markets.
Highlights
We examine individual-level trading data from several markets to determine what strategies correlate with financial success
We examine trading data from PredictIt, which is a prediction market exchange that provides many markets linked to political issues, ranging from ongoing policy outcomes to political elections
We investigated with help from the PredictIt team and learned that PredictIt had a nightly process that removed unfeasible orders when traders no longer had the capital to cover an order and orders that would potentially put traders over the $850 contract limit
Summary
We examine individual-level trading data from several markets to determine what strategies correlate with financial success. We examine trading data from PredictIt, which is a prediction market exchange that provides many markets linked to political issues, ranging from ongoing policy outcomes to political elections. The exchange caps traders at $850 in exposure for any contract per Commodity Futures Trading Commission guidelines. All contracts are capped at 5,000 traders, but that was not an issue for any contracts in the markets we examine. The exchange charges users 5% of their all of their money in the exchange (including both their investment and profits) when withdrawing money. There is a 10% charge on all profitable trades. These restrictions certainly make this exchange unrepresentative of many other futures exchanges.
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