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Comment by cj | Hacker News Reader

Prediction markets (like the trump vs harris bet on Robinhood) can also be used as a hedge.

E.g. if before the election you think that a certain candidate winning would cause the markets to react in a certain direction, you could "bet" on the other candidate so that if your portfolio value goes down, you earn the proceeds from the bet to recoup some of your portfolio losses. Or if the "good for stock market" candidate wins, you loose the money you bet but the gains in your portfolio balances it out.

In that case, you're not really betting on who you think will win. You're just betting as a hedge just in case that person wins.

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> You're just betting as a hedge just in case that person wins.

But this itself is a form of market distortion. It calls to question what, precisely, people think the market is supposed to be measuring, both in theory and in practice.

Exactly. Similarly, companies impacted by weather have access to trade "weather futures".

If it's an extremely dry year, you profit from the weather futures instead of your crops (and vice versa). Buying weather futures isn't necessarily a prediction of what you think the weather will be.

But, it is a function of what you believe the future will be (and your risk tolerance).

If you have a higher risk tolerance, you will buy fewer futures. If you believe the next year will be dryer than normal, you will buy more futures than normal. If you believe your crop is likely to be better/more reliable than normal, you will buy fewer futures.

> If you believe the next year will be dryer than normal, you will buy more futures than normal.

The point is that you, the farmer, don't need to take a view on whether the next year will be drier than normal. You just buy $X worth of rainfall futures.

The same way you shouldn't buy more flood insurance if you think the next year will be exceptionally wet. You can't really predict that, after all. You should buy flood insurance roughly up to the value of restoring your house after a flood, and you should hope the insurance market is healthy enough that the cheapest provider of that insurance offers you a price that reflects the expected value of the insurance plus a small markup.

> The point is that you, the farmer, don't need to take a view on whether the next year will be drier than normal. You just buy $X worth of rainfall futures.

And I'll reiterate, this is a function of your risk-aversion/efficiency. One would expect, for example, climate change to increase the price of weather futures as extreme/problematic weather events become more likely. It's often difficult to see the impact of these changes on the scale of a single farmer, but in aggregate lots of farmers do a market make.

> You should buy flood insurance roughly up to the value of restoring your house after a flood, and you should hope the insurance market is healthy enough that the cheapest provider of that insurance offers you a price that reflects the expected value of the insurance plus a small markup.

And the insurance companies have a small army of actuaries who make sure that the prices they provide take into account conditions like the relevant risk factors of where your home is. This is instead of a betting market style concept, where you could instead imagine every individual actuary as a potential insurer.

> You just buy $X worth of rainfall futures.

The cost of that varies though. If you have to pay $95 to get a $100 payout that’s a very different calculus from $50 for $100.

> The point is that you, the farmer, don't need to take a view on whether the next year will be drier than normal. You just buy $X worth of rainfall futures.

Sure, but if I, a non-farmer market player that couldn't give two fucks what the market is even about, can predict that the next year will be dryer than normal, and to what degree, better than anyone, I can make money buying up however many of these futures I can afford. It works even better if I can actually make the weather more dry somehow.

This, I believe, is called "providing liquidity to the market", but curiously, if I tried that with flood insurance, I'd just be guilty of insurance fraud.

How much you're willing to pay for those futures is the prediction.

Who cares? Should we abolish wheat futures?

The fact that futures markets are so heavily regulated, precisely because of the market failures described above, should aid in understanding why markets do not "predict", they "determine". Have you ever wondered why trading onion futures has been banned since the 50s? https://en.wikipedia.org/wiki/Onion_Futures_Act

That's so strange. What makes other commodities amenable to having futures, but not onions? Or are they going to ban each thing in turn the first time someone corners the market and causes trouble?

Apparently it's onions and box office returns? What weird corner cases. Why not strawberries too?

Can't the onions futures market be regulated the same way as all the others?

If anything, this makes me think all the rules are arbitrary.

> What makes other commodities amenable to having futures, but not onions?

Nothing (at least for other perishable foodstuff); law often doesn't even in theory have a broad universal theory behind it, but instead responds narrowly to observed or perceived immediate problems.

> The fact that futures markets are so heavily regulated, precisely because of the market failures described above, should aid in understanding why markets do not "predict", they "determine". Have you ever wondered why trading onion futures has been banned since the 50s?

You're saying the answer to the above question is "because there was an immediate problem with onion futures in the 50s". I don't think that's what they meant. That would be unrelated to "the fact that futures markets are so heavily regulated".

I guess if everyone has a different opinion, and every reply comes from a different person, there's no "discussion" as I understand it.

It has more to do with the nature of the product – can it be reasonably stored in bulk for length without eroding in quality. This goes for anything physically settled. Look at the agricultural products traded at the CME and you'll see there aren't any markets for perishable products like strawberries.

What about orange juice futures?

We saw Trading Places.

Lol frozen concentrate

But is there a law forbidding strawberry futures? The wiki page mentions only onions and box office returns. How can other perishable futures "ban themselves" while onions need to be banned?

They're not banning themselves. There's no market for them. A market will arise based on the market size, product characteristics, etc. Without anyone willing to make markets and trade strawberries, there's no futures market for them. All that to say, there's no need for a law banning something if there's no willing market for it. There was an onions futures market and that's why the law is specific to onions.

Every transaction on a market affects that market.

Calling some of those effects "distortions" is a tricky business at best.

In a perfect market, the market maker who sells you that option offsets it with correlated assets in the other direction, eg by buying or selling stock that is sensitive to the election.

Large trading firms exist on finding and exploiting small arbitrages between various correlated assets. If you assume a perfect market with infinitely many participants and infinite liquidity, then this “works” - there is no distortion at scale.

> It calls to question what, precisely, people think the market is supposed to be measuring, both in theory and in practice.

I'm starting to think that the answer is what mhh__ wrote: who cares? Markets aren't there to measure anything. Markets are there to make money for participants. Any measurement that can be attributed to the markets under some conditions is, at best, an incidental side effect.

>In that case, you're not really betting on who you think will win. You're just betting as a hedge just in case that person wins.

Some people did exactly this back in 2016, and just ended up feeling bad, because they were profiting off a "bad" (in their eyes) event.

With this last election, there were also some big differences across markets, which presents the opportunity for not only hedging, but constructing a win-win set of bets.

Not really. Transaction costs / vig (commonly 5%) and counterparty risk eat up theoretical arbitrage profits.

The main arbitrage opportunity was in finding ways to place illega bets in the bettor's jurisdiction.

I read that some markets had >10% differences and from what I can tell, polymarket transaction costs are 2% of profit. That said, Im not sure that all of the listed markets had open financial access, so it stands that there were real reasons the differences were sustained and people didn't do exactly what I said.

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