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Loss Deduction

I have only been a member for 2 weeks, but I am a fairly active user who wouldn't be opposed to depositing relatively large sums of money in a prediction market. (I was also an early adopter of Intrade.)  However predicitit as it is currently structured isn't a smart market for any user.

The most recent market I heavily traded was the extremely volatile RCP Obama popularity market.  I can see why Predicit decided to discontinue this market, as trades largely depended upon when RCP would chose to update polls.  Nevertheless I would have made quite a satisfactory rate of return had the volatility not caused me to wisely exit positions on several occasions.


Total Gross Profit $277.61  ($27.761 fees)       Total Gross Loss: 214.42   Total Net Loss: (Fees +Gross Loss)=$242.181.  Total Profit(after fees) under current system: $35.429 (not including 5% withdraw penalty on $1250 in deposits).

So 10% FIFO has an effective “taxation rate” in my particular case on Total Profit (before fees) of $63.19 of 43.93% (or $27.761). 

If the rate was only 10% on total profit, then I would have only paid $6.319, and this would be reasonable for a market maker (someone who posts buy and sell offers on both sides.)  It is likely that in that particular market I underestimated volatility and the risk of narrowing the spread. But this risk is always going to be present.

I wouldn’t mind a FIFO system, or the current status quo if layered unto it there was a Gross Loss rebate, which allowed those with losses to offset fees on Gross Profit.  Even if there was a cap on the amount of Gross Loss which could be deductible against future 10% FIFO gains of say $250 a month, and even if say these deductible losses expired three months from the date they were incurred (much less generous than the IRS), this would be preferable and would allow a sweet spot for traders who wish to close spreads and provide liquidity to the markets (earn frequent small profits, but risk taking large loss in a position that swings/gets overbought).


It is this type of trader that provides the “academic”/objective justification for prediction markets, after all one cannot accurately say that a market with a large spread is predicting much of anything…one needs a market such as Hillary Clinton democratic nomination @77 with a buy-sell spread of no more than 1 or 2 cents.

In addition letting traders offset future profit liability with losses will allow them to feel less bad about exiting a bad position which in turn also increases market objectivity.  If I can give any advice from experience, it is that you are always “even”, you shouldn’t be afraid to sell a position you bought for 60 for 45 if the facts have changed.  

So in review, while I did make a net profit, I paid an effective rate of 43.93% in fees. (If anyone chooses to comment, I would be interested if they would also give total profits and losses from history.)  Also, what effect does the current fee schedule have on your willingness to act as a market maker, i.e. place large limit orders (100+) within a narrow range (2-5 cents, depending on your view of volatility)?

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I would prefer all fees be taken out when cashing out.  Why discourage trading?

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I will think about pricing mechanisms some more, but wanted to second the motivating point of the OP. My behavior is altered by the incentives of the fees, making me a less active trader (particularly less tolerant of losses, not certain how rational it is).

While I'll think about specific mechanisms more and see if I have anything useful to contribute, in principle I do like the idea of some losses providing an expirable credit against your fees on profits. 

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I think the CFTC agreement limits the number of participants in a market.  If that is true, skewing the rules to favor market makers isn't worth the effort. 

BTW, hat tip to old intraders.  That was a great thing while it lasted.

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Kevmo, It isn't really skewing the rules to favor market makers. (putting it that way seems like it is a disadvantage to the little guy)

In fact because market participants are capped at 5000, once the market is larger there would be an incentive in terms of fees collected if folks who participated were closer to the $850 mark than say the $10 mark.

I don't think I can't justify a deposit and active trading with this sort of fee structure.  

No more than 5000 people can be active in a trade at a given time irrespective of their wager?  Is that correct?  

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