Mar

14

Measurement of Insider Trading in Wagering Markets

 Shin (1993) proposed a method to calculate the extent of insider trading in bookmaker markets, with z as the measure of insider trading. He assumed that bookmakers manipulate the supply-side of the market to protect themselves against the risks of adverse selection involving counterparties with proprietary or inside information and against excessive payouts from wins by high odds horses. This article uses a large sample of thoroughbred races (n = 1796) over 4 years on Saturdays at major venues in Melbourne to validate the Shin methodology. Analysis derives a z-measure of insider trading in bookmaker markets of just over 2% (which closely matches results from multiple UK analyses). The surprise is that an almost identical value (p < 0.001) is obtained for z in the Tote market which does not have a supply side and so should have a zero value of z. It seems that factors driving a nonzero value of z arise in the demand side of wagering markets and not the supply side as assumed. This conclusion illustrates the risks associated with what Fama (1991, p. 1575) termed 'the joint hypothesis problem' where the conclusions of a mis-specified market model are likely to be invalid.

I have published an empirical refutation of Shin and can supply it to anyone interested. But more to the point, if the extent of insider trading in horse betting markets is really 2% (2% of what? turnover?) then insider trading is a trivial and unimportant phenomenon. Now, since such trading is legal in horse betting markets, it would be expected to be even less in markets where it is illegal. This is a load on rubbish. Read Shin's paper and think about his assumptions. Then decide whether you think he ever saw either end of a horse! He's a brilliant economic theorist, but knows little about betting markets. Les Colemen's work is interesting and he and I are planning to hunt down insiders in the stock market when I take a sabbatical in Melbourne in 2009.


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  1. Joe Gelman on March 15, 2007 10:51 pm

    I actually haven’t read the study, but attributing a figure of 2% to ‘insider’ or ’smart’ money is ,on the face of it , absurd.

    There are professionals that PAY for information from insiders, that alone would account for as much as 10% or more (depending on the value of the information) of the pool at major US racetracks. This , even before the insiders themselves bet.

    I don’t believe an accurate figure can even be calculated by traditional methods. To know how much ’smart’ money was in the pool, you’d have to have a baseline ‘normal’ (ie uninformed public only) odds that you were comparing the actual odds against.

    The morning line is useless for this purpose. I don’t have access to the paper , so I can’t comment on the methodology used.

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