HedgeStreet issued a
press release
last week touting a new interface
and improved platform. The UI is somewhat simpler, but I can’t tell
that it is a big improvement. They mention two changes:

  • Rather than paired yes and no contracts on each question, they now
    have a single instrument for any claim that you can take either
    position on. They describe it as buying or “selling short”, but I
    think their terminology is confusing.
  • Their interface offers better charting, streamlined order entry, and
    centralised information about the holdings and account history.

Their description of betting against a position as “short selling”
seems confusing to me. After reading all their help screens, it
appears that when you sell short, you are investing money and
acquiring an asset that may pay out a positive amount, just like when
you buy. HedgeStreet wants to present it as simple by saying there is
only one asset, and you can buy it or sell it short. The problem with
their description is that it isn’t the same as short selling. Their
model is actually more similar to the “buying complementary assets”
model I described in my introduction to basic Prediction Market
formats. Brokers in the stock market can’t sequester the entire
amount that might be required to repay a short position, since the
underlying asset can grow without bound (see Google for an example.)
HedgeStreet’s contracts pay out at either $0 or $10, so HedgeStreet
can (and does) collect the entire price up front. Short sellers pay
$10 less than the stated price for an asset with a positive payout.
Buyers pay the stated price, and also get an asset with a positive
payout. The short selling terminology will be confusing to people who
understand short selling, and will be a handicap to anyone else who
tries to understand short selling later.

They could patch up this description by saying that rather than
having a margin requirement, they simply collect the maximum loss up
front, and repay it when the question is settled, but at that point,
they’d be better off describing it as buying the opposite position
rather than explaining how they stretched the analogy to short

HedgeStreet’s new interface is certainly simpler than their previous
version, which had paired markets in each outcome. When they divided
possible crude oil inventories into 4 bands (x < A, A < x < B, B < x <
C, and C < x), they had 8 distinct markets for one outcome. With
their new software, they will have only four markets, which is an
improvement, but as I said in my talk at the Prediction Market Summit
in San Francisco, and will repeat in New York, you can do better by
linking the markets together. I haven’t yet written up the
explanation for that point; it will appear on this blog when I do.

It also appears that HedgeStreet is now saying that all trades will be
made directly between their customers. I haven’t found their old
documentation (the Wayback
is slow-to-nonresponsive this afternoon) so I can’t verify
what they used to say, but they seemed to have automated market
makers in some cases with the old platform. I don’t see how it’s an
advantage to either HedgeStreet or their customers to drop that
possibility. In illiquid markets, an automated market maker can, at
limited cost, increasing trading possiblities substantially.