As investors bet on election, odd trading crops up

Money managers across the United States are avidly watching the Nov. 6 presidential election, gaming out investing strategies in the event of a second term for Barack Obama or a first one for Mitt Romney.

Others are simply betting on the election itself. The online betting markets that offer this opportunity have been pretty consistent, with narrow odds favoring Obama.

Every so often, however, odd trading occurs as these markets are notably less liquid and active than the average stock exchange. Tuesday was one such example.

InTrade, a Dublin, Ireland-based website that allows users to play events like the elections by trading contracts on predicted outcomes, showed a rash of bets that caused the odds for the Republican challenger to spike suddenly - and then evaporate.

The betting site is one of the more popular ones and its presidential election contracts are among the most heavily traded surpasses those it offers on U.S. Supreme Court rulings and the Academy Awards.

Romney, the former governor of Massachusetts, was viewed as having slightly less than a 40 percent chance of winning on Tuesday morning, but jumped as high as 48 percent on InTrade that morning before retreating.

"A Rasmussen poll came out showing Romney's strongest ratings ever, and that caused individual buyers to push the price around in basically a real-time aggregate of sentiment," said Manoj Narang, chief executive of Tradeworx, a high-speed trading firm in Red Bank, New Jersey.

Narang added that while he had used InTrade personally, Tradeworx did not use the service in its strategy.

Rasmussen Reports, a pollster that releases daily three-day tracking polls of voters' election preferences at 9:30 am EDT (1330 GMT), said Tuesday that Romney's support had risen to 50 percent, compared with 46 percent for Obama.

Carl Wolfenden, exchange operations manager at InTrade, estimated that there were 40 Romney buyers Tuesday morning, compared with five sellers, but "once word got around on the spike, other people stepped in and the market settled a bit.

"If someone comes into the market with a lot of money, they can shake things up, but that doesn't last long. The market tends to bounce back quickly," he said.

Notably, the Obama contract did not have the inverse reaction. Obama contracts currently show odds of his re-election at about 57 percent, though his odds have waned from late September, when they exceeded 75 percent.

Stock market traders are used to knee-jerk reactions to data and news, and how initial bounces can fade. Romney futures closed at $4.54 on Tuesday but fell 6.8 percent to $4.23 on Wednesday, putting his odds at winning at about 43 percent.

Contracts on InTrade range in price between $0 and $10, with each dime representing a 1 percent chance that an event will occur. If Romney wins, his contacts will be sealed at $10, with investors who buy in now reaping $5.77 of profit per share. If he loses, shares will drop to $0.

Obama and Romney contracts each get daily volume of about 50,000 to 60,000 shares, according to Wolfenden. That's minor compared to the millions of shares traded daily on a stock like Bank of America Corp. The relatively slight volume can make it easier for individual investors to push prices around.

It's "not really a great market," said Barry Ritholtz, chief market strategist at Fusion IQ in New York, citing the "extremely thin" trading. "It's really an instant poll of polls."

Trends indicated by InTrade often shake out. The site's markets were correct on the last two presidential elections and in 2004 correctly predicted the winner in all 50 states.

On the other hand, Intrade contracts in 2006 leaned heavily in favor of Republicans retaining the Senate, only to see those contracts shift dramatically late on Election Day when it became apparent that Democrat James Webb was going to surprisingly defeat incumbent Republican George Allen in the Virginia Senate race.

Much like the stock market, longer-term trends show a more nuanced view of the asset's value.

"If people are just buying their favorite candidate to manipulate the price and create a rosy picture, the price will be unfairly low or high," Narang said. "But InTrade has a pretty extensive user base, so people with a profit motive will go in and fix the price. It isn't perfect, but it tends to even out."