Sure, someone could manipulate online prediction market Intrade

What if, with just two weeks to go until the presidential election — and the media obsessively following and deconstructing every number in every poll and every other metric to determine who might win — someone decided to mess with the numbers?

Intrade is an online prediction market where people can bet on the likelihood of various outcomes by buying shares in that outcome. For instance, one could buy shares in  “Barack Obama to be re-elected president in 2012.” If, on Nov. 6, Obama won, that person would make money. If Mitt Romney won that person would lose money, but other bettors who bought “Mitt Romney to be elected president in 2012” would make money. As with the stock market, the more people buy shares in an outcome the more the price of those shares rises and, by Intrade’s metrics, so too the probability of that event happening.

Rigging the polls isn’t an option, but Intrade is more malleable. It may not be as closely watched as the polls, but it’s still a metric that reporters use, and someone with the time, money and inclination could push the numbers one way or the other to try to create a sense of momentum or a sense of failure.

Intrade forbids “Any attempt by you to interrupt the operation of Intrade, disrupt the operation of Intrade website, to manipulate Intrade market prices or act in a manner that may be injurious to Intrade” and doing so “may result in the immediate closure of your account, and/or unwinding of your trades and/or being prevented from accessing all or any part of Intrade or the website in future.”

But that hasn’t necessarily stopped people in the past.

In 2004, recalls Eric Zitzewitz, an associate professor of economics at Dartmouth College who has co-written several papers on prediction markets, “somebody, in the middle of the night, drove the price of the [George W.] Bush re-elect contract – which was probably trading about 60 at the time – down to 15.”

In 2007, he recalled, someone attempted to run up the odds of Hilary Clinton winning the presidency, buying up contracts until the odds of her being the next president were listed at 40 percent.

The most reported instance of manipulation was one month before the 2008 elections when several traders and reporters noticed price fluctuations of Sen. “John McCain to win the presidential election” contracts that seemed to be the result of someone trying to artificially inflate his odds of winning – buying up lots of “McCain to win” contracts while simultaneously selling lots of “Obama to win” contracts, resulting in the odds of McCain winning looking much better and those of Obama winning looking much worse.