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evand comments on Actually existing prediction markets? - Less Wrong
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The primary reason why Predictit can't interest anyone in arbitraging is that they don't take "netting" into account when they determine your maximum possible loss. Arbitrage therefore requires you to tie up way to much money, such that it will rarely be a worthwhile investment
At the well-functioning prediction market Intrade, you were required to cover only your maximum possible loss across a mutually exclusive set of contracts (such as a list of people of whom at most one will be elected president). In contrast, PredictIt binds up your funds based on your maximum possible loss at any given contract.
As an example: Suppose buyers are offering to buy one contract on each of 10 possible candidates, at 15 dollars per contract. In other words, there is 50 dollars of free money on the table. On Intrade, you could sell a contract on each, and bind up 100 dollars for a year. This secures you a return of 50% In contrast, on PredictIt you would have to bind up 850 dollars for a year to secure the 50 dollars; which dramatically reduces the effective return to 6%
PredictIt also has a fees structure that discourages arbitrage (by taking cuts on the profits, and calculating the profits on the basis of each individual contract).
I tried to start a discussion about this on the PredictIt forum, but the comment did not make it past moderation. The lack of arbitrage is due to the poorly designed structure of the market. Possibly their hands are tied by the CFTC, I don't think it indicates anything sinister about PredictIt.
This is almost certainly one of those cases where there really is free money lying on the street, but each contract price will have to substantially exceed the interest rate in order to make the investment worth it.
Even so, at the moment there are sane interest rates available if you tie up your money that way. It's not just the lack of netting; it's the lack of netting, combined with the small deposit limits, combined with the high withdrawl fees. Fix any of those, and you'd see more arbitrage (I think).
Also, they have a really dumb system where each candidate has both yes and no shares, instead of each election having shares per candidate. Which means there are more different prices than there should be, and no system-enforced rule that the sum of the probabilities = 1.
Actually, the "yes" and "no" shares are the same contracts: Buying a "yes" contract is exactly the same thing as selling a "no" contract. The best offer for "buy yes" plus the best offer for "sell no" will always equal 1, without requiring arbitrage or any action on the part of the market participants.
For some reason they have chosen a counterintuitive user interface such that these contracts appear to be different from each other, but they are the same.
Yes, I suppose my comment wasn't clear. There are twice as many distinct prices as there should be, not 4x. There should only be one price per candidate (plus an additional price for "other" in many cases). The "buy no" price for a single candidate should be equal to the sum of the "buy yes" prices for all the other candidates, and that relationship should be fully enforced by the exchange.