Higgs Boson 2013 Intrade Contract Is Signaling A False Higgs Find Or Its Mispriced

The 2013 Intrade Higgs Boson discovery security is signaling a likelihood that a find of the Higgs Boson will subsequently be determined a false positive result or inconclusive.

There are four different expiration date Intrade securities on the discovery of the Higgs Boson particle that have trading prices. Payment of $10.00 per contract is made if the Higgs is discovered before the expiration date of the contract.

• Higgs Boson discovery before December 31, 2011 Intrade security price is $3.00 or 30 percent.
• Higgs Boson discovery before December 31, 2012 Intrade security price is $4.50 or 45 percent.
• Higgs Boson discovery before December 31, 2013 Intrade security price is $3.00 or 30 percent.
• Higgs Boson discovery before December 31, 2014 Intrade security price is $5.00 or 50 percent.

The Intrade Higgs prices are $3.00, $4.50, $3.00, and $5.00 for 2011, 2012, 2013, and 2014. Why pay $4.50 for the 2012 contract to get $10.00 when one can pay $3.00 for the 2013 contract. If the Higgs is discovered before the end of 2012 both contracts pay $10.00. Why not buy the cheaper 2013 at $3.00 instead of the 2012 at $4.50. Additionally, the buyer of the 2013 gets an extra year's chance of the Higgs discovery at a lower price, $3.00.

One reason may be Intrade's Rule 1.4. (Any changes to the result after the contract has expired will not be taken into account - Exchange Rule 1.4 -- see below).

If there is publication in a major scientific journal of the observation of the Higgs Boson particle before expiration of the Intrade contract, the holder will be paid. Any event that happens after the expiration date of the contract will not be taken into account.

Intrade allows short selling. So, anybody can short the 2012 contract, receive $4.50 and use $3.00 to buy the 2013 contract. It is a risk free arbitrage unless one factors in the risk that in the subsequent year from 2012 to the end of 2013, the results will be changed and the arbitrageur will have to pay $10.00 to the 2012 securities without recouping the ten dollars from the 2013 contract.

If the arbitrage works, the short seller will get $4.50 on the 2012 contract and spend $3.00 to buy the 2013 contract, for a gain of $1.50. If Higgs is observed before 2012, the arbitrageur will get $10 on the 2013 contract to use to pay the 2102 contract holder. The arbitrageur keeps the $1.50. If the Higgs is not discovered before 2012, or 2013, the arbitrageur again keeps the $1.50 difference in price. The arbitrageur, without paying more, also has a chance to make an additional $10 if the Higgs is found after 2012 but before the end of 2013.

The fact that Intrade allows shortselling, and the 2012 and 2013 prices are not much closer, indicates to me that the Intrade Higgs market thinks there is some significant probability that false positive results will be announced and subsequently quickly overturned. A 2013 contract holder has the risk that a 2012 contract payment will be made but not a 2013 contract payment.

Intrade Rules

The Intrade rules for payment on the security are:

Confirmation of the Higgs Boson particle having been observed must be published in a major scientific journal for this contract to be expired. Clarification (Jan 5th 2009): for the Higgs Boson particle to be "observed" there must be a "five sigma discovery" of the particle.

Due to the nature of this contract please also see Contract Rule 1.7 Unforeseen Circumstances.

The Exchange reserves the right to invoke Contract Rule 1.8 (Time Protection) if deemed appropriate. [Intrade can unwind trades if occurred within an hour previous to an announcement or news story.]

Any changes to the result after the contract has expired will not be taken into account - Exchange Rule 1.4.