Manipulating political stock markets: A field experiment and a century of observational data

Political stock markets have a long history in the United States. Organized prediction markets for Presidential elections have operated on Wall Street (1880-1944), the Iowa Electronic Market (1988-present), and TradeSports (2001-present). Proponents claim such markets efficiently aggregate information and provide forecasts superior to polls. An important counterclaim is that such markets may be subject to manipulation by interested parties. We analyze this argument by studying alleged and actual speculative attacks- large trades, uninformed by fundamentals, intended to change prices- in these three markets. We first examine the historical Wall Street markets where political operatives from the contending parties actively and openly bet on city, state and national races; the record is rife with accusations that parties tried to boost their candidates through investments and wash bets. Next we report the results of a field experiment involving a series of planned, random investments-- accounting for two percent of total market volume-- in the Iowa Electronic Market in 2000. Finally, we investigate the speculative attacks on TradeSports market in 2004 when a single trader made a series of large investments in an apparent attempt to make one candidate appear stronger. In the cases studied here, the speculative attack initially moved prices, but these changes were quickly undone and prices returned close to their previous levels. We find little evidence that political stock markets can be systematically manipulated beyond short time periods.