Ideosphere Forum

fx-discuss: Re: if-discuss: too many Claims?

Author: James Jones
Conversation: if-discuss: too many Claims? ( prev | next ) reply!
Topic: fx-discuss ( prev | next )
In-Reply-To: Dave Steele's post
Date: Mon Jul 22, 1996 02:28 pm
Dave Steele
James Jones
Dave Steele

On Mon, 22 Jul 1996, Dave Steele wrote:

> >The trouble is, what happens if the "right" bid/ask contains a wide
> >spread? I.e., what if the right bid is 20 and the right ask is 80? You get
> >no trades, except those made by eternal optimists... which don't help the
> >market.
> Then the traders are a bunch of wimps (sorry, had to say that). Seriously,
> with a 'large enough' trader population, bids should converge to a price
> (as the marginal trader is willing to take on the risk, is willing to
> profit off of the spread, etc). So if the 'right' bids are 20/80/0, I'd say
> it is a limit of the present market. If you can find a way to increase the
> ratio of trading to the number of issues traded, then the spread should
> narrow.

Not necessarily. I don't mean to start a big war like I did unwittingly
last September, but the interest rate question still remains an issue for
long-term claims. To be specific, people won't invest in a claim which can
only barely beat a riskless investment; even assuming that IF-$$$ is tied
to a mutual fund and appreciates over time, there are risk/return regimes
in which there is a real spread between bid and ask. If the "real" price
falls in one of these regimes, no trades should be taking place,
regardless of the density of the market.

> >...One further possible change
> >that could be made would be to make the prices finer by adding decimal
> >places. It's too easy for a bid/ask to hit 5/6 and then never trade,
> >whereas if it were 5.49/5.51 it might be trading around in that range
> >quite a bit.
> You've said that before, and I don't understand your reasoning.
> Is it simply because the resolution is too course? The difference in your
> example is a payoff of 20:1 vs 17:1. How much more accurately can you
> predict?

The reasoning is basically that the resolution is too coarse, yes.
Remember, to make trades you must have both a buyer and a seller; the
potential gain for the SELLER in my example is 5.26% vs. 5.81%, definitely
big enough to matter. I admit that my assertion that this effect leads to
less trading is not grounded in experiment; perhaps I should create such a

> I would counter and say that the problem at the fringes of the price range
> are due to the effects of MY pet theory :-). You need a high ratio of
> funding in order to get trading at extreme price ranges. Given equal
> investment by each trader, the accuracy of the price is affected by the
> resolution of that ratio of Yes to No traders. And..., given that we only
> have a total population of 300 traders to start with, it is going to be
> hard to maintain high/accurate ratios on all extreme claims.

I don't deny that your pet theory has an effect, I'm just saying it isn't
the ONLY effect. Certainly more trading will help with liquidity (by
definition)... which leads me to my next question: How can the system
avoid the problem of overloading in a real-money environment, unless there
is claim oversight? It would seem easy to generate any number of identical
claims for the express purpose of diluting liquidity in a particular issue
that someone had a vested interest in obfuscating.

James Jones
"Oh, well, what the hell." - Yossarian


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