Start a new topic

Fee structure distorts the market

Hi, others have alluded to this, but I haven't seen anyone come out and say it directly.  The current fee structure prevents this market from functioning properly.  Ask any economist, if you have a 10% take on profits and a 5% withdrawal take, you are going to influence behavior.  In this case, it has the effect of preventing most arbitrage, because gross spreads on trades have to be extremely large for it to make economic sense to put money on this site to do an arbitrage.


I get that the site is non-profit, and there are real costs to running it (for the record, I would not be against a profit for the site).  That said, I don't understand though why there isn't a subscription option for users, as it would eliminate the effects the fees are having on the market, which would create more realistic odds (assume that is academic purpose?) as well as a better experience for users.


A few examples specific examples:


a) The current Republic nomination odds are a joke.  They add up to well over 100% (top 7 alone add up to 139% on the "sell-yes" side of market right now, which is the easiest way for me to think about it, all 21 add up to something like 180%).  Let's say I sold 850 shares of each of top 7, that would cost me $4,769.  If none of them wins (not impossible), I make $1,181, or 25% gross.  More likely, one of them wins, and costs me $850, so I really make $331.  That's still 7% gross, and a 10% IRR to the republican convention.  That's a big spread.


In reality though, I'm going to have to pay ~$100 fee on my gross winnings depending on who wins (10% of my gross and I can't deduct the $850 loss I had to take to get here!).  I also have to pay 5% to take the capital back off the site, assuming I didn't want to let it all ride after the arbitrage (that's another $250-ish based on my 4,768 + ~$230 gross gains).  That is all my winnings.  I have a 7% guaranteed gross trade, and I can't make any money on a net-basis.  This is why the odds don't make any sense on the site, because the fees prevent arbitrage. 


b) Just to point out that this isn't the only place where such a discrepancy exists, Hillary + Bernie odds for winning the general election right now are 69% on the offer side, despite democratic odds of winning presidency at only 61%.  This is a huge spread for a normal market, but when you consider you'll be taxed on profitable trades, without an offset for losses, it's not very interesting.  


I could go on - you will notice nearly every question has odds that currently add up to well over 100%.  No one can take advantage of this because no one wants to add too much capital to the site since they're going to get hit with a 5% cut across the board to remove it later.  


Again, I want to be clear I am all for the site making money, but how it is structured today is influencing the odds and distorting the market in obvious and illogical ways.  For sake of argument, let's say site was willing to allow users to opt in to an alternate $350/yr subscription rate as the only fee (which seems very high for most users, but is in line with the fees generated from the trade above).  Who wants to bet that the spreads above would collapse within days?  I think it would meaningfully improve efficiency/accuracy of the market odds, and would still allow plenty of room for a very nice business margin/model for the operators and I'm guessing most users of the site would happily opt in at a more reasonable price point (maybe ~$100/yr?) although I'd love to hear others' thoughts or opposing viewpoints.




19 people like this idea

Just to reiterate what has been posted here, taking 10% of gross profits in a linked market instead of 10% in net profits in a linked market, (1) makes no sense and (2) distorts the pricing in a market.  I'm not aware of any other prediction market that does this when the markets are linked.  It undermines the customer and the market.


4 people like this

I have tracked PredictIt markets for a while but haven't ever bet. I saw one contract that seemed very enticing so I signed up and was considering placing a full $850 bet on it. However, I found that the returns didn't seem as enticing as I had thought once I modeled them out. Can someone tell me if the below math is correct?

If I were to buy 1,000 "No" contracts for $0.85 each (So $850 in total), and the contracts go to $1.00, that is a $150 gross profit. Then there is a 10% fee on that which comes out to $15. At the end of the contract, the total amount that would go into my PredictIt account would be $135 plus my initial capital of $850, which means I'd have $985. Then there is a 5% withdrawal fee on the $985 balance, which comes out to $49.25.

So then the total amount that goes back into my bank account is $935.75. This is a gain of $85.75 on my initial $850 investment. I then pay a 35% tax rate on that gain, of $30.01. So my total net gain is only $55.74 (in comparison to my $150 gross profit). The after-tax proceeds are $905.74.

Assume that a contract goes for 1 year. That means I get a 6.6% annual return on the investment (55.75/850=6.6%). The gross would have been (150/850)=17.6%. If we didn't have the withdrawal fee but still had the 10% fee on gains and taxes, it would be 10.3%.

Is this math correct or am I missing something? If so, then I'm calculating that you will lose money by betting on any contract that pays out $0.05 or less (just run that number through the math above). Why would anyone bet on any market that is lower than $0.05? (Someone help me out if I'm missing something)

This is a significant deterrent for me and means that I can't really deposit money and bet on a market unless the fee structure is changed or unless there is an opportunity were the risk/reward is very out of whack. It doesn't really seem worth it otherwise. This means the site is missing out on fees it could be generating from me, due to my opting out.

I don't understand why PredictIt doesn't just let you use your checking account to deposit money rather than using a credit card and then not charge the 5% fee for those users. In the specific opportunity I'm looking at (not the example above), the IRR is 11.7% with the withdrawal fee and 20.8% without the withdrawal fee.

If the 5% fee is truly to offset credit card fees, then it should be free for the site to not charge a fee if I were to deposit from my checking account. In addition, they would actually be gaining revenue by doing this because I would be participating in the market and generating fees, whereas now I am not due to the way the system is currently structured.


1 person likes this

Isaac,

Indeed, the fee structure makes it very difficult to turn an expected profit on this site, especially if you are planning to make only a single trade. It's disappointing that PI has not addressed this issue, and I hope that they do so very soon.


1 person likes this

@isaacrose,

As @loconnor said, you're right.  I would also just add that I don't necessarily view it as their main goal to help people make money, BUT:

1) As you point out, several situations still exist where the odds are illogical (ie. wrong) until you understand the fee structure.  If they are using the site for some academic/research purpose this should matter.  I believe the site predictwise has to adjust odds from this side before they can use them because of these issues (and as I posted earlier, the NYTimes has noted in print that the odds here make no sense).  If we're all going to waste our time betting on stuff on this site, it would be much better for everyone if we were creating an outcome (set of odds) that was actually realistic.  

2) I think the structure of the fees is a bigger deal than the size (since it is the way in which fees are levied that influences behavior), but as we've been discussing and you note, the credit card vs. bank account thing is a good example of an apparently unnecessary (and possibly large) expense in the current model.  

PredictIt Staff,


Your markets will never be efficient.


If you add up all the "SELL NO" numbers on the Obama Gallup approval polls ending April 15 right now, they add up to 106% (maxing out buying $850).  Of course, the buy yeses are much higher.


If I buy all the nos, no matter which contract wins I will lose $$$ because I'm paying the fees on gains for the contract that wins (go ahead and calculate it or reach out to me for the scenario analysis).


So, my answer is no thanks - and the market stays inefficient.


As mentioned a few times in this thread, if all the contracts close and I pay the fees on my 7% market-ending gains rather than contract-by-contract, that actually makes some sense and will encourage smart traders like many of us who want to arbitrage.  And congrats!  You will have efficient markets.


As a top economics graduate and trader, this fee structure is pretty disappointing.  If you change your fee structure, you will make us happy and your markets will become efficient.  When will this change finally be done?  I haven't read all the  replies, but it doesn't look like any are from support.


Best,

MarketMaker25


1 person likes this

I only wish I understood this site as well as you. So this thread was talking about the odds for Trump getting the nob being to high at around 24%.. so how did you make or loose money betting he would or wouldn't?

Part of the fundamental issue here is getting enough volume of trading so that fees can be low also there are some revenue sources beyond trading fees that need to be considered. If Volume were really high, I think the whole site could be run on a small percentage of the "float" or interest on the deposits placed at predictit.org In fact if volume were high enough, those deposits might be interest bearing which would make long term bets more feasible. In the meantime, I think we need to consider any options that will increase trading volume and a clear policy to lower fees as volume increases. One option might be to give folks a fee credit for referring other customers to the site.

1 person likes this

Fees should be fixed on withdrawals and maybe a smaller percentage on earnings. 

Will the responsible persons at PredictIt tell us at some time what they think about the suggestions and what they intend to do in the future?  Reading no feedback at all makes me wonder if PredictIt will change anything without market pressure when traders migrate to another better site.

. . . I find the 5% withdrawal fee OK, but the 10% profit fee too high, because, as the original posting stated, it prevents arbitrage, and it prevents connecting bets well to each other.  5% on winnings would be a better value.  This is no casino with bettors relying on pure luck, and the lucky ones compensating the staff.  On the other hand, a subscription fees puts up a barrier and punishes the infrequent traders who might add valuable knowledge to outcomes of some bets.

. . . I saw the difficulty to make informed bets by once betting a lot on YES for a bet A, while I expected it to result in YES only if a bet B had a YES outcome, too, which seemed unlikely though.  I betted a lot on NO for bet B, to hedge my YES on bet A, which turned out to be necessary, because bet B, unexpectedly, turned to NO and so did bet A.  Still, I had to pay the full 10% fee on my winnings for bet B and couldn't get my losses on bet A subtracted first, despite this being one combined bet.

. . . One other thing for PredictIt to keep in mind is the return of inflation.  Right now, I don't mind keeping thousands of dollars at PredictIt, because I wouldn't earn interest at a bank.  If inflation returns and interest rates rise again, this changes, and my willingness to keep money at PredictIt without due compensation will fall.


1 person likes this
Login to post a comment