This is because Intrade decided to change the wording of the contract regarding the public option. The result being, that the contracts on Intrade have little to no ability to predict whether or not the public option is passed or not.
At first, the contract seems pretty clear and simple. If there is a public option, the contract will expire at 100%, if not it will expire at 0%. The problems started when Intrade decided to add some clauses to the contract unbeknownst to anyone who had already acquired a position on the. Below are the clauses that were added to the above contract.
The first revision about co-ops seems to be a very smart addition. I certainly wouldn't consider a national co-op a public option. It seems to have been added because co-ops were a hot topic at the time and Intrade wanted to cover all basis by making it crystal clear that the contract is specifically about the public option.
The 2nd revision is about the "trigger" which was basically a compromise that stated that the public option would only take effect if the private insurance industry did not meet some type of standard for health-care coverage. I can kind of understand why Intrade decided this would not expire the contracts at a 100%. The public option does not automatically come into effect anywhere and might never happen. The "trigger" might not even qualify as the public option under the original wording of the contract.
The next two revisions are where I and many others have had problems. Intrade decided that only a very specific definition of the public option would lead to the US.GOVT.HEALTHPLAN.DEC09 expiring at 100%. The "opt-out" version of the public option will not qualify and as a result, there has been much confusion and frustration by frequent users of the Intrade prediction market.
User WonkoChan wrote
Luckily for me, I never got involved with the US.GOVT.HEALTHPLAN.DEC09(Public Option) contract on Intrade, but I feel sorry my fellow users who are getting more and more alienated by the actions and judgments of Intrade's management. The most unfortunate aspect of this whole ordeal is that once Intrade added those clauses to the contract, they can't really take them off without pissing even more people off. Now they are stuck with a contract the gives no useful information to the casual users and political pundits who browse Intrade simply for the predictions it makes.
Originally, US.GOVT.HEALTHPLAN.DEC09 contract looked like this.
This contract will settle (expire) at 100 ($10.00) if a US federal government run health plan (a public option) is approved in the United States before midnight ET on the date specified in the contract.
The contract will settle (expire) at 0 ($0.00) if a US federal government run health plan (a public option) is not approved in the United States before midnight ET on the date specified in the contract.
A federal government run health plan will be considered approved once legislation establishing the plan has been passed into law. Expiry will be based on the passage of the required legislation into law, as reported by three independent and reliable media sources.
This contract covers only the creation of a government run health insurance plan that is an alternative to private health insurance. It does not cover existing health insurance programs such as Medicare or Medicaid, or any changes made to these programs or the cover they provide.
Due to the nature of this contract please also see Contract Rule 1.7 Unforeseen Circumstances.
The Exchange reserves the right to invoke Contract Rule 1.8 (Time Protection) if deemed appropriate.
Any changes to the result after the contract has expired will not be taken into account - Exchange Rule 1.4
Please contact the exchange by emailing help@intrade.com if you have any questions regarding this contract before you place a trade.
A co-op system of health care provision is not considered a government run health plan and will not result in an expiry of 100 (added 28/07/09).
A system involving a "trigger" would not be considered an absolute establishment of a government run health plan as it may never be used. Therefore the contract will not expire at 100 should this system be introduced (added 04/09/09).
For the purposes of this market any public option must be national for the contract to expire at 100. If it was offered in certain states then not others then the contract would not be expired at 100 (added 08/09/09).
If a system is established that allows states to opt-in or opt-out of a government run health care plan the contract will not be expired at 100. (added 09/10/09).
The 2nd revision is about the "trigger" which was basically a compromise that stated that the public option would only take effect if the private insurance industry did not meet some type of standard for health-care coverage. I can kind of understand why Intrade decided this would not expire the contracts at a 100%. The public option does not automatically come into effect anywhere and might never happen. The "trigger" might not even qualify as the public option under the original wording of the contract.
The next two revisions are where I and many others have had problems. Intrade decided that only a very specific definition of the public option would lead to the US.GOVT.HEALTHPLAN.DEC09 expiring at 100%. The "opt-out" version of the public option will not qualify and as a result, there has been much confusion and frustration by frequent users of the Intrade prediction market.
User WonkoChan wrote
Can someone please explain why this contract has dropped to 8.1 even though most commentators are now suggesting that a bill with some kind of public option will be passed before the end of this year?User MC_Pundit wrote
Perhaps Intrade will clarify whether an opt-out public option still qualifies?
That scenario brings me to my principal complaint, which is that the timing and notification process for contract revisions needs to be improved and spelled out. Although Intrade regularly posts "News" about new contracts, they evidently make no attempt whatsoever to inform anyone, including members who own affected contracts, when they change the definition of existing contracts. Thus someone who happens to check the "Contract-Specific Rules" sooner than another member has a huge advantage. Worse yet, someone who requests and receives a clarifying change in the contract knows in advance to keep an eye out for this.User John Remington wrote
There's really no way to guess how a ruling is going to go. It's basically however Carl Wolfenden feels on the day a question is asked.
Okay, I can understand the ruling on a co-op, because that would not meet the definition in the original contract of a "US federal government run health plan." Same for a trigger, because in all likelihood the trigger would never be used. But an "Opt Out" plan still wouldn't cause an expiration at 100? It's a health plan run by the federal government. There's no requirement in the initial text of the contract that the plan be available to all states. That was made up out of thin air.
Intrade -- remember the Guantanamo closure contract? Remember the -10%.GDP.CUM disaster? And now health care. Every time someone gets an arbitrary ruling against them, it sours them on Intrade. You guys need to fix how contract writing and interpretation works, or you're going to alienate your entire customer base.
What a mess...
ReplyDeleteGreat recap. How can this be avoided in the future? Of course, Intrade needs to explain it's expiration policies more clearly when a new contract is listed, but what should they do when they inevitably have to post a clarification?
I really think that any changes to a contract shouldn't radically change what the contract is perceived to be about. It should merely clear up a common misunderstanding.
ReplyDeleteIn the case they do have to change a contract, I think the best solution would be to notify everyone who has the contracts and tell them that they have changed. If they don't like the new terms then allow them to exit their position at the closing price before the change.
This comment has been removed by the author.
ReplyDeletePrompt and full communication of changes would help, but the system you suggest isn't quite feasible. If there is a market with one long trader and one short, if the rule change makes the contract worth less, the long trader has no-one to sell to at the old price, unless the exchange eats the difference between the contract's old and new prices.
ReplyDeleteA rule change is always going to hurt either the longs or shorts to some degree. At least you could theoretically halve that amount. It would be a technical nightmare and would strain liquidity, but upon a rule change, the exchange could issue each contract holder 2 half-size ($5) contracts (1 with old, 1 with new rules). When trading restarts, each contract will jump to its new value, but passive contract holders suffer only half the pain (gain).