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Hanson's Automated Market Maker


  • Henry Berg
  • Todd A. Proebsting


From Hanson's “market scoring rule,” we derive all the necessary formulae to implement a corresponding automated market maker for a prediction market. The market maker has many desirable qualities and always stands ready to trade, thus providing liquidity to markets. The formulae cover all transactions for buying and selling market contracts. In addition, we address practical concerns like how to correctly treat rounding errors and how to prevent errors that allow traders to cheat the market, and provide a practical numerical example. We have used Hanson's automated market maker to run many markets at Microsoft.

Suggested Citation

  • Henry Berg & Todd A. Proebsting, 2009. "Hanson's Automated Market Maker," Journal of Prediction Markets, University of Buckingham Press, vol. 3(1), pages 45-59, April.
  • Handle: RePEc:buc:jpredm:v:3:y:2009:i:1:p:45-59

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    1. Jana P. Fidrmuc & Marc Goergen & Luc Renneboog, 2006. "Insider Trading, News Releases, and Ownership Concentration," Journal of Finance, American Finance Association, vol. 61(6), pages 2931-2973, December.
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    6. Meulbroek, Lisa K, 1992. " An Empirical Analysis of Illegal Insider Trading," Journal of Finance, American Finance Association, vol. 47(5), pages 1661-1699, December.
    7. Justin Wolfers, 2006. "Point Shaving: Corruption in NCAA Basketball," American Economic Review, American Economic Association, vol. 96(2), pages 279-283, May.
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    Cited by:

    1. Snowberg, Erik & Wolfers, Justin & Zitzewitz, Eric, 2013. "Prediction Markets for Economic Forecasting," Handbook of Economic Forecasting, Elsevier.
    2. Patrick Buckley & Fergal O’Brien, 0. "The effect of malicious manipulations on prediction market accuracy," Information Systems Frontiers, Springer, vol. 0, pages 1-13.
    3. Ivo Blohm & Christoph Riedl & Johann Fuller & Orhan Koroglu & Jan Marco Leimeister & Helmut Krcmar, 2012. "The Effects of Prediction Market Design and Price Elasticity on Trading Performance of Users: An Experimental Analysis," Papers 1204.3457,
    4. Lian Jian & Rahul Sami, 2012. "Aggregation and Manipulation in Prediction Markets: Effects of Trading Mechanism and Information Distribution," Management Science, INFORMS, vol. 58(1), pages 123-140, January.
    5. repec:spr:infosf:v:19:y:2017:i:3:d:10.1007_s10796-015-9617-7 is not listed on IDEAS

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    JEL classification:

    • L83 - Industrial Organization - - Industry Studies: Services - - - Sports; Gambling; Restaurants; Recreation; Tourism


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