Donald Luskin is Full of It

I said earlier that I thought Luskin's claim that the TradeSports market was being manipulated was a load of bunk, and now someone's gone and literally proven it.

A surprising result in these markets is that manipulators subsidize information traders. Think about it this way, by definition manipulators aren't trying to predict the true outcome so they are likely to take losses and the more they try to manipulate the bigger the losses. Now if the manipulators are taking losses who is making money? The information traders! Manipulators, therefore, encourage and support the information traders. Manipulation isn't impossible but it's surprising how little information other trader's need to not only avoid the manipulation but to profit from it.

Our colleague, Robin Hanson, has written a paper explaining the theory (warning, not for the mathematically faint hearted) and an experimental paper showing that the theory works in practice.

If one of the two prediction markets is being manipulated, it is almost certainly the IEM, thanks to its limits on individual traders' positions; if a large portion of the participants were willing to act in concert to bid up one contract to unreasonable values, it would be impossible for just a few traders to make counterbets to take full advantage of their irrationality, thanks to the $500 participation cap.