Awful fee structure

Y'all seem like smart gamblers. Have you noticed how awful the fee structure is? As a proportion of winnings, it's way higher when selling longshots than buying them. This is because the price taking fee is a fixed amount, rather than a fraction, and because the expiry fee is a fixed amount which gets paid far more often by the seller of a longshot than the buyer. It's horrible, and will distort the prices.

I wrote up a detailed analysis with examples here:

http://www.overcomingbias.com/2007/11/intrade-fee-str.html

I encourage those who agree with me to write InTrade with your concerns. Perhaps if they hear from enough of us, they'll change things.

Also, what's the point of the price taking fee? It just discourages action, by encouraging people to put out unmatched orders rather than matching those on the books.

There are so many problems with Intrade and tradesports, it's hard to know where to begin. This is the reason I only play once in a while - elections, superbowl, etc. Frankly, they don't deserve my business. I opened my account with them many years ago, and the problems I expereinced way back then are still the same.

Slow/inaccessible server during peak trading, poorly designed website, illiquid markets, prohibitive fee structures, funding, etc.

I think the system itself is flawed. There's a reason stocks have market makers/specialists. What's the point of having all these contracts that you can't take any decent size in? Do people really trade for $5 here? lol.

You're absolutely right about the fee structure. Makes no sense.

One last thing...why use .10 instead of $1? Ridiculous. When you see the price of a contract, it should represent dollars per 1 contract. Who was the genius who chose that system?

patrissimo, I agree that the fee structure is very unusual and does bias prices at the extremes. But the bias is not as great as you claim, because full expiration fees can be avoided on winning contracts most of the time by closing out the contract at a price below the fee. Such trades benefit both winner and loser.

In my experience, it is always possible to avoid at least half the expiration fee. Example: If I short Edwards in NH, I place a buy order at 0.4 or 0.5 to close out the contract. Once it looks certain that he will lose, my order will be filled by those holding substantial long positions. They pay the trading fee but still end up better off than if they wait for expiration. And I pay half the expiration fee.

No fees for price makers is a good idea because it stimulates movement to get the bid/ask close together. Most of the contracts are pretty thin and we need people to step up and make prices.

Although I think the liquidity is reasonable here - at least on the popular contracts. It's on par with options trading, where you might see volume of only a few dozen contracts a day.

The $10 thing is kind of weird. I'd rather see a ratio of 1:100 (more like real options contracts) or 1:1.

Once it looks certain that he will lose

When would that be?

It's not like a hockey game, down 4 goals, with 1 minute to play. heh.

Yes, that would work for the longer-term political contracts, where the outcome is known far in advance of contract expiration.

But in your example of Edwards/NH...are you saying that early reports would suffice to bring the contract down far enough?

ranthambhore wrote:

patrissimo, I agree that the fee structure is very unusual and does bias prices at the extremes. But the bias is not as great as you claim, because full expiration fees can be avoided on winning contracts most of the time by closing out the contract at a price below the fee. Such trades benefit both winner and loser.

In my experience, it is always possible to avoid at least half the expiration fee. Example: If I short Edwards in NH, I place a buy order at 0.4 or 0.5 to close out the contract. Once it looks certain that he will lose, my order will be filled by those holding substantial long positions. They pay the trading fee but still end up better off than if they wait for expiration. And I pay half the expiration fee.

Ah, I see. Because the trading fee is less than the expiration fee, there is incentive to zero out positions towards the end and avoid the expiration fee. That's good to know. But still, that means that people are having to do extra work in order to avoid an InTrade fee - that's pretty much always the sign of a bad fee structure! (You don't get the money, and your customers are less happy).

slickvguy wrote:

But in your example of Edwards/NH...are you saying that early reports would suffice to bring the contract down far enough?

Yes, that's exactly what I'm saying. The election will be called before the official results are in, and before trading on the contract is paused. And the price will drop to below the expiration fee. It happens every time, I've almost never had to pay an expiration fee if I have a contract closing bid or ask in place ahead of time. Try it.

patrissimo wrote:

Ah, I see. Because the trading fee is less than the expiration fee, there is incentive to zero out positions towards the end and avoid the expiration fee. That's good to know. But still, that means that people are having to do extra work in order to avoid an InTrade fee - that's pretty much always the sign of a bad fee structure! (You don't get the money, and your customers are less happy).

Yes, I agree completely. A rational expiration fee would equal the trading fee at extreme prices. Intrade, are you listening?

Thanks ranthambhore.

I'm ashamed to say I never really thought of it. I guess if you trade often - or trade large - the difference (a few bucks per 100 contracts) can really add up. I've always held winners till expiration.

When my NH field contracts are sure winners - before the contract closes - I will try what you said. But I don't think too many people are aware of this (or care?), because the longs tend to hold their losers rather than close 'em out for a slightly better outcome. Better for them to recoup 5 cents less 3 cents in trading fees (netting 2 cents) than to just let it go. But I don't think most traders care because they trade small.

Further proof that the fee structure is nonsensical.

slickvguy wrote:

When my NH field contracts are sure winners - before the contract closes - I will try what you said.

No need to wait until then. For NH shorts, post a bid at around 0.4 right away. If the contract ends up winning, the order will be met sooner or later (believe me). If the contract ends up losing, the order will expire unmet. You won't save much but why pay fees you don't need to?

ranthambhore wrote:

Yes, that's exactly what I'm saying. The election will be called before the official results are in, and before trading on the contract is paused. And the price will drop to below the expiration fee. It happens every time, I've almost never had to pay an expiration fee if I have a contract closing bid or ask in place ahead of time. Try it.

Sure, but you'll have to pay something. And why should you have to pay anything? Or rather, why should you have to pay something that distorts the meaning of prices. Sure, InTrade needs to make money. But there are less distortive ways of doing so.

patrissimo wrote:

why should you have to pay something that distorts the meaning of prices. Sure, InTrade needs to make money. But there are less distortive ways of doing so.

The best system would probably be a zero fee for trades, and a fixed percentage take on winnings when contracts expire. I suspect that trading volume would be much higher.