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Zocalo and Prediction Markets Design Chris Hibbert Principal Investigator Commerce. Net Prediction Markets Summit Zocalo and Prediction Markets Design Chris Hibbert Principal Investigator Commerce. Net Prediction Markets Summit New York City February 4, 2006 © 2006 Commerce. Net | www. commerce. net

Overview • Work at Commerce. Net related to PMs • Zocalo status report • Overview • Work at Commerce. Net related to PMs • Zocalo status report • Adding liquidity in existing prediction markets © 2006 Commerce. Net | www. commerce. net

Zocalo Proposal © 2006 Commerce. Net | www. commerce. net 3 Zocalo Proposal © 2006 Commerce. Net | www. commerce. net 3

Opportunity • My Objective: • Promote broader use of Prediction Markets • One Key Opportunity • My Objective: • Promote broader use of Prediction Markets • One Key Obstacle: • No common software platform for prediction markets yet. • Working at Commerce. Net provides: • More Visibility for my Views • More Collaboration possibilities © 2006 Commerce. Net | www. commerce. net 4

Software Development • Support for Experiments • • Instrument all Activity Export Data in Software Development • Support for Experiments • • Instrument all Activity Export Data in Useful Formats for Analysis UI updates asynchronously Flexible Support for UIs © 2006 Commerce. Net | www. commerce. net 5

Zocalo Released as Open Source • Released on Source. Forge in July http: //zocalo. Zocalo Released as Open Source • Released on Source. Forge in July http: //zocalo. sourceforge. net • New releases in August, September and December • In use at GMU • Others in planning © 2006 Commerce. Net | www. commerce. net 6

An Experiment at GMU using Zocalo • The question: • Do Manipulators effect the An Experiment at GMU using Zocalo • The question: • Do Manipulators effect the market price • An innovation: • Forecasters interpret the price signal © 2006 Commerce. Net | www. commerce. net 7

Zocalo Screenshot: Forecaster's view © 2006 Commerce. Net | www. commerce. net 8 Zocalo Screenshot: Forecaster's view © 2006 Commerce. Net | www. commerce. net 8

Zocalo Screenshot: Trader's view © 2006 Commerce. Net | www. commerce. net 9 Zocalo Screenshot: Trader's view © 2006 Commerce. Net | www. commerce. net 9

Zocalo Demo See http: //labs. commerce. net/ ~hibbert/test/replay. html (browse with Fire. Fox!) © Zocalo Demo See http: //labs. commerce. net/ ~hibbert/test/replay. html (browse with Fire. Fox!) © 2006 Commerce. Net | www. commerce. net

Project Phases • Short Term: • • Support Experiments; Work with Experimenters Demonstrate Reuse Project Phases • Short Term: • • Support Experiments; Work with Experimenters Demonstrate Reuse Ensure Easy Configurability Expand Variety of Market Institutions • Medium Term: • Deploy Internal Pilots to Businesses • Continue to collaborate and proselytize • Long Term: • Deploy Public Markets with Partners © 2006 Commerce. Net | www. commerce. net 11

Adding Liquidity in Multi-Outcome PMs © 2006 Commerce. Net | www. commerce. net 12 Adding Liquidity in Multi-Outcome PMs © 2006 Commerce. Net | www. commerce. net 12

Missing A Bet • Lack of liquidity is a problem • Wide spreads mean Missing A Bet • Lack of liquidity is a problem • Wide spreads mean fewer trades • Traders are less willing to bet against things • Many (most? ) traders are Price Takers • Failing to display best possible prices means potential trades don’t happen • Arbitrage doesn’t address this problem © 2006 Commerce. Net | www. commerce. net 13

Prediction Markets • Pose a question, specify a judging date • Securities pay $1 Prediction Markets • Pose a question, specify a judging date • Securities pay $1 depending on outcome • Bank sells pair when total bid reaches $1 • Allow people to buy and sell the security • Price reflects Probability © 2006 Commerce. Net | www. commerce. net 14

Binary Outcome Market © 2006 Commerce. Net | www. commerce. net 15 Binary Outcome Market © 2006 Commerce. Net | www. commerce. net 15

Prediction Market as Double Auction • Buy Long or Sell Short • Shorts are Prediction Market as Double Auction • Buy Long or Sell Short • Shorts are liabilities • Issue Pair when bid/ask match • Bets against are assets • Buy basket in order to sell • Isomorphic in 2 -outcome case except for psychology • Investors have good reason to be wary of short selling in the stock market © 2006 Commerce. Net | www. commerce. net 16

Complementary Views © 2006 Commerce. Net | www. commerce. net 17 Complementary Views © 2006 Commerce. Net | www. commerce. net 17

Parallel Double Auctions for N-way claims • Separate Double Auction in each outcome • Parallel Double Auctions for N-way claims • Separate Double Auction in each outcome • Each Outcome has a separate bid/ask list • Combined Auction • Allow offers to buy or sell each position (like now) • Short on A Long on all but A • Sell a set when combined bids total $1. 00 • Sell Not-A when combined asks fall to $1. 00 • => increased liquidity © 2006 Commerce. Net | www. commerce. net 18

Parallel Double Auctions for N-way claims • In an n-way market, bank sells a Parallel Double Auctions for N-way claims • In an n-way market, bank sells a set when bids total $1. 00 • If bids total $1. 00 - , you can buy any coupon by improving the bid by . • When Asks fall to $1. 00, buyers get the complementary coupons. © 2006 Commerce. Net | www. commerce. net 19

Parallel Double Auctions for N-way claims © 2006 Commerce. Net | www. commerce. net Parallel Double Auctions for N-way claims © 2006 Commerce. Net | www. commerce. net 20

Parallel Double Auctions for N-way claims © 2006 Commerce. Net | www. commerce. net Parallel Double Auctions for N-way claims © 2006 Commerce. Net | www. commerce. net 21

A Graphical Version of the Argument • In a combined market, bids on each A Graphical Version of the Argument • In a combined market, bids on each good add liquidity for the others © 2006 Commerce. Net | www. commerce. net Pro A Pro B Pro C 22

A Graphical Version of the Argument • In a combined market, bids on each A Graphical Version of the Argument • In a combined market, bids on each good add liquidity for the others • When separated into distinct markets, each trade relies on a separate set of bets against © 2006 Commerce. Net | www. commerce. net Pro A Pro B Pro C Anti A Anti B Anti C 23

N-way Claims • Manage as a Combined Market • Display Best Available Price & N-way Claims • Manage as a Combined Market • Display Best Available Price & Quantity • One trade may involve N traders ®More Trading from Same Participation © 2006 Commerce. Net | www. commerce. net 24

Summary • One goal in building Zocalo is to demonstrate this kind of improved Summary • One goal in building Zocalo is to demonstrate this kind of improved interface for Prediction Markets © 2006 Commerce. Net | www. commerce. net 25

companies • code • community © 2006 Commerce. Net | www. commerce. net companies • code • community © 2006 Commerce. Net | www. commerce. net