Six beliefs about event contracts, checked
The product is easy to misread, because its price looks like a forecast and its market looks costless. Six beliefs readers arrive with are stated as plainly as possible, then checked against the same ten samples the rest of the site uses.
- beliefs
- 6
- false
- 4
- partly true
- 1
- true
- 1
Six beliefs are checked: that the price is a prediction (false), that a market cannot be wrong (false), that a position is always easy to close (false), that a void is a loss (false), that a market has no cost without a bookmaker (partly true), and that a void returns the price paid (true). Four are false and the nuance is in the other two.
The six, checked
The price is a prediction of what will happen. It is the market's implied chance, not a forecast of the result. On the sample 62c is a 62% chance, and the 38% of the time the event resolves no is already inside the price. A price being right about the probability does not make the event happen.
A market price cannot be wrong. A market aggregates the traders looking at it, and a thin market has few. The samples show the same event at 62.0% on one market and 55.0% on another, a 7-point range, and neither is guaranteed to be the true chance.
A position can always be closed before settlement. Only if someone is buying. On the samples 16 of 120 exits found no bid at all, and 33 more filled only in part, so a position can be stuck to settlement whether the holder wants that or not.
A void means money lost. A void refunds the price paid, not the payoff, so it removes both the gain and the loss. A holder of 100 contracts at 62c who expected 1.00 receives 62.00 back, which is 0.00 of profit and 0.00 of loss on the contract itself.
Without a bookmaker there is no cost. There is no house margin, which is the true part, but the spread and the fee are still paid. A 2c spread and a 2c taker fee make a 4c round trip, 6.6% of the 61c mid, on every position that opens and closes.
A void returns the price paid. This one holds. Four of 200 contracts on the samples were voided and refunded, and each returned the 0.62 paid rather than 1.00 or 0.00. The cost left behind is only the spread and the fee already spent to acquire it.
The arithmetic behind the verdicts
Each belief against the samples' own numbers
- The price is a chance, not a forecast, and a right chance can still lose.
- A market is only as right as the people looking at it.
- An exit needs a buyer at the size you want, not just a price on a screen.
- A void returns the price and leaves the costs already paid.
- There is no house margin, and there is still a spread and a fee.