Probabilities Should Sum To 1

1. those prices are stale. [and so obviously don’t need to add up to 1.]

2. the bid-ask spreads are laughable. the current trades for mccreery to be eliminated tonight are: sell at 1.5″%” or buy at 7″%”.

http://www.intrade.com/v4/markets/contract/?contractId=749337

To avoid arbitrage, the sum of the bids must be less than 1 (otherwise you can short all contracts) and the sum of the asks must be greater than 1 (otherwise you can buy all contracts). The prices at last trade are irrelevant. Right now the sum of bids is 92% of contract face value and the sum of asks is 111%. Absolutely no arbitrage opportunity.

In margin linked Intrade markets (such as the 2012 presidential winner or nominee, or Idol winner), an algorithm is triggered whenever an arbitrage opportunity arises and the opportunity disappears within a fraction of a second. There are traders with computer programs scanning the prices continuously for such opportunities. You can trigger these programs by simply entering a bid that takes the sum above 1.

On the night that Bin Laden was killed, the ask price for the Dem contract to win the 2012 election rose sharply from about 60 to about 65 with heavy volume. A smart trader could post an ask, let it trade, post a bid to trigger the arb bot, then post an ask again, etc. If you look at the trading data you’ll see evidence that this strategy was in fact used. The trade bots exploit arbitrage opportunities, but one can sometimes do better than the programs by strategically triggering them.