Stocks quoted in this article:
So, unless you were watching Fox or CNN, you probably heard that the Supreme Court upheld the Affordable Care Act (ACA).
And that kind of caught many by surprise -- including the trading markets at Intrade. Of course, that’s not the first time.
This, from Barry Ritholtz:
As I have said over the years (repeatedly) this is the sort of thing that Intrade gets wrong.
Futures markets are really a focus group unto themselves: When the group is something less representative of the target market, they get it wrong with alarming frequency. Indeed, the further the traders are as a group to the target decision makers/voters, the worse their track record.
…Today’s SCOTUS [Supreme Court of the United States] decision is a classic example of why Prediction markets have minimal value.
The Wisdom of Crowds is wildly overstated...
I totally agree with his last sentence, but disagree with the one right before that.
Yes, the Wisdom is wildly overstated. Calling these things “prediction” markets is the first error the Pundit Class makes. Of course, it's easy to see how they make that error. Want to actually trade a market? Intrade has you click on a green icon that says “Make Your Prediction.”
But just because a company frames a product a certain way, doesn’t mean you have to just adopt their framing. If Altria Group, Inc. (NYSE:MO) dubbed Marlboro cigarettes “Cotton Candy Freedom Sticks," I doubt the press would call it that.
The Intrade markets are better called the Reaction markets. They simply snapshot the conventional wisdom of a tiny and very non-representative group of individuals, as Barry says. There’s probably more money "bet" in a minute's worth of Facebook Inc (NASDAQ:FB) trading than the entire life of the most popular of the Intrade contracts.
So, if you want to actually "predict" an outcome, no, Intrade won’t help you too much.
But I do believe Intrade markets have value. Even if you don’t agree with the Conventional Wisdom, there’s merit in at least knowing where that Wisdom stands. If nothing else, it gives you a sense of what’s discounted in the market. Intrade gave the ACA a near 80% chance of getting struck down. Obviously that was wrong, but it suggested that if this decision had any bearing on the stock market, the market was basically discounting the news. If you believed that disapproval of the ACA was bullish, you probably shouldn’t have anticipated much of a market rally, as we can guess the market largely priced in disapproval already.
As to whether the SCOTUS news actually did have much impact on the market, there’s no way to tell for sure. We don’t have a “control” market where ACA got slammed. We do have the CBOE Market Volatility Index (VIX), though, and if market-moving news pends, the VIX tends to lift ahead of the news and then sell off once the news hits. That’s not what happened, though, as the VIX lifted fairly strongly, and pretty much just in line with the decline in the market itself. So, I’d suggest this ruling didn’t drive the market as a whole all that much, though it did obviously drive sectors like pharmaceuticals and insurers.
Disclaimer: The views represented on this blog are those of the individual authors only, and do not necessarily represent the views of Schaeffer's Investment Research.