A Parimutuel Market Microstructure for Contingent Claims

"Parimutuel principles are widely used as an alternative to fixed odds gambling in which a bookmaker acts as a dealer by quoting fixed rates of return on specified wagers. A parimutuel game is conducted as a call auction in which odds are allowed to fluctuate during the betting period until the betting period is closed or the auction 'called'. The prices or odds of wagers are set based upon the relative amounts wagered on each risky outcome. In financial microstructure terms, trading under parimutuel principles is characterised by l1r call auction, non-continuous trading; l2r riskless funding of claim payouts using the amounts paid for all of the claims during the auction; l3r special equilibrium pricing conditions requiring the relative prices of contingent claims equal the relative aggregate amounts wagered on such claims; l4r endogenous determination of unique state prices; and l5r higher efficiency. Recently, a number of large investment banks have adopted a parimutuel mechanism for offering contingent claims on various economic indices, such as the US Nonfarm payroll report and Eurozone Harmonised inflation." Copyright Blackwell Publishers Ltd, 2005.