Will I be able to take a short position in a Yes/No market Feb. 15, 2023?
Shorting YES is different from buying NO because buying NO ties up a lot of capital. The difference is most significant when the probability is very close to 0.
I think (correct me in the comments if I'm wrong!) being able to short YES (when the probability is very low) is equivalent to the following policy: (1) if you buy NO at a low prob, most of your cost is immediately loaned back to you, and (2) if the probability rises significantly, your position will be liquidated, i.e. you are forced to sell the NO to repay the loan. (Unless someone convinces me I'm wrong) such a policy, equivalent to shorting, will also cause this market to resolve YES.
Fine print: Resolves based on what's possible midnight California time the night of Feb. 14 / morning of Feb. 15. If (for some weird reason) I'm allowed to short one direction but not the other (YES but not NO, or vice-versa) that still counts and I will resolve to YES. I used the first-person pronoun, but in fact the market resolves based on what a regular default user with no special privileges or bans is allowed to do.
Related market -- same question, but for free response markets instead of yes/no markets.
https://manifold.markets/Forrest/will-it-be-possible-to-short-an-ans-9b304a614ba4
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I think allowing high-margin shorting is extremely risky because there's no guarantee that there's any opportunity to liquidate if the price rises. The price of a prediction market can instantaneously go from 1% to 100% when it resolves YES. So no sane financial exchange would allow traders to take such a position.
@Boklam Yeah, so I agree with what you said in the market description about the equivalence.
It's actually not just about resolution. If news breaks and a market moves from 10% to 90%, there's almost never enough liquidity to liquidate any significant holding.
In that case I disagree. It's messy, but you could resolve this issue by force-liquidating my position before the market is allowed to move to 90%.
In other words: Let's suppose I'm holding a bunch of NO shares on margin, and the market is at 10%. If I sold them right now, I'd be able to pay back my loan and even get some money back.
Let's say 20% is the break-even point, where if I sell my NO shares at 20%, I'll exactly pay back my loan.
You could imagine the Manifold system placing a sort of "anti-limit order" at 20%. When the market reaches 20%, Manifold automatically liquidates my position. So if you are the one buying YES at this point, the price of YES jumps as a result of my NO being sold.
This is probably a terrible idea -- what if there are multiple margin buyers? how does Manifold decide who gets priority? -- but it's not immediately obvious to me that it can't work.
@Jack In case of resolution, well... I suppose one could argue that injecting liquidity into the market always increases the money supply, and Manifold seems to be perfectly happy to increase the money supply in other ways... but other than that I don't think I can dispute what you said.
This means there is a real, significant difference between "the market resolves YES when it is at 10%" and "when the market is at 10%, news breaks, moving the market to 100%, and then the market resolves YES", in terms of overall effect on the money supply. I don't quite understand this, yet...
If the market is at 1%, then you can buy cheap YES to cover potential losses. Does this completely counteract the expected value of shorting NO?
In a traditional market losses are unbounded but manifold operates on a defined range and I expect that someone staring at various option payoff curves would eventually come up with something workable
@Boklam That's not about Manifold in particular, it's true of any financial markets. If someone owns 50% of the shares in a big company and for some reason wanted to instantaneously liquidate their holdings, there's no way they could get their whole value back - the market doesn't have that many people willing to buy at a moment's notice.
Well, Manifold is not any financial market, and I'm not sure I agree with you yet.
I think if I go into any yes-no market, buy M$500 worth of NO, and sell them immediately (before Velocity or anyone else has the chance!), I'll end up exactly where I started. (This is a feature of Manifold's price-setting scheme that is unlike any real-world market I know.)
Every move someone else makes (Velocity undoing part of my move, regular actors bidding the price back up, anyone making a limit order that gets in my way...) changes the amount I stand to recover when I sell my NO shares. That amount starts at M$500, and we're afraid it will eventually fall below, say, M$250.
Suppose I had the authority to guarantee that, once my liquidation amount reaches M$250, my transaction is prioritized above everyone else's -- I think that would guarantee that I get my M$250 back.
(I think this is the same sort of "authority" that limit orders have now, so maybe it's not too unreasonable to imagine?)
@citrinitas I'm a little confused. I'm imagining the market is at 1% and I want to force it down, because I think the true probability is lower. I could buy tons of NO... but then I quickly run out of cash. The question is whether I can borrow on margin to push it down faster.
In this setting, I don't want to buy cheap YES to cover potential losses.
I also don't understand what you mean about unbounded losses and a defined range.
@Boklam Yeah, what you said is correct. If you buy from the AMM and sell right away, you get back what you put in. However, there are many scenarios where that doesn't hold:
You buy 1000 no shares by filling a limit order. The other person now has 1000 yes shares. If you try to sell, you need to sell on the open market, that other person's bet of 1000 yes is locked in unless they decide they want to sell it.
You buy 1000 no shares in several trades over time with other people betting in the other direction in between (like what you described)
And yes, liquidation like you described could work to provide some amount of collateral. But I think it's a pretty narrow set of situations where there is enough liquidity for this to work on a meaningful scale. I think in most markets the liquidity available at any given point in time is much much smaller than the total size of the positions people are holding (which makes sense and is also true of stock markets).
@jack Fine.
I think stock markets (or brokers I guess) allow you to buy on margin, with no collateral besides the stocks. (There are some restrictions -- you have to be an "accredited investor" or something -- but afaik these are more about protecting you from yourself than about protecting the broker from loss.) I guess the difference is that in the stock market, total liquidity will far exceed one person's holdings... ?
@Boklam Yep, but also volatility is much lower in the stock market. If there are a ton of short sellers on a stock, that can also create problems if the price suddenly spikes - sometimes the brokers can be unable to liquidate fast enough to recover the positions when the prices shift a ton. So they need complex risk models to limit the risk.
@ManifoldDream I like it but this does not look anything like the picture you drew for the related market :)