What happens when the market prices diverge? The arbs start betting:
PS: So right now it's October 4, 2012 at 12:50 pm EST. President Obama's got 66 percent odds [of winning the election] on Intrade, 69 percent on Iowa and 73 percent on Betfair. If you were trying to make money right now, what do you do?
AJG: Well, I would if I could -- Betfair is locked for U.S. persons -- sell President Obama's contracts on Betfair and buy President Obama's contracts on Intrade, and wait, because eventually the prices on these two contracts would have to converge. They just predict the same event happening, so they will have to be worth the same once the event happens or doesn't. So come November 6th, both of these contracts will expire at the same value, but because I sold one high and I bought the other one low, I will pocket the 8 points difference between the 2 contracts.HT: Merle Hazard