Market Inefficiency in Person-To-Person Betting: Examining 'Known Loser' Insider Trading on the Exchanges (Symposium‪)‬

1. Introduction Empirical tests of the efficient market hypothesis indicate that bookmaker-dominated horserace betting markets are weakly efficient at best (for example, Hausch, Ziemba, and Rubinstein 1981; Asch, Malkeil, and Quandt 1984; Crafts 1985; Gabriel and Marsden 1990). (1) Efficiency is undermined by 'market biases,' particularly the 'favorite-longshot bias' (Shin 1991, 1992, 1993), (2) which is commonly attributed to (racetrack) bookmakers' attempts to insure against insider trading (Schnytzer and Shilony 1995: Law and Peel 2002). Smith, Paton, and Vaughan Williams (2006, p. 1) applied the Shin model of market efficiency to the relatively new person-to-person internet betting exchanges (hereafter "exchanges") (3) and found "significantly lower market biases." The results are interpreted as evidence that insider trading on the exchanges "is not widespread" and "not as commonplace ... as is sometimes portrayed in the media" (Smith, Paton, and Vaughan Williams 2006, pp. 12-3).