Gambling on Economic Data

The CME and for that matter Goldman Sachs treat the auction algorithms as proprietary. The CME literature states:

All prices are based on relative demand. As demand increases for a given option and participants bid up the price, other options become relatively less expensive. In this way customers can trade a market-driven price that reflects the consensus view of all participants in the auction. Prices are based on the commitment of capital by all participants, and are not set by any individual market-maker. All claims that settle in-the-money are funded by those that settle out-of-the-money.

As Ronald Reagan said, "Trust, but verify." I am sure experienced racetrack bettors and those better versed in pari-mutuel betting than I will be able to look at the real-time auction prices and sense what is going on as participants place their bets on the various digital and digital range options. But why the mystery? The answer, of course, is that CME and Goldman Sachs do not want someone to duplicate their intellectual property. But if the market really valued the guarantees of the CME Clearing House and the transparency of Web based price display, no one should fear as trading goes off-exchange.

The Experience

There are five NFP auctions in the week of the release; this past week's auctions began on Tuesday and extended through Friday morning. Let's take a look at the results in two different ways.

The first is the implied distribution of the bets in each 25,000 job bucket, including the bounding buckets of values less than zero or greater than 250,000. The chart below displays the progression of implied distributions over time. The final mode of the distribution was in the 75,000-100,000 NFP bucket, which is not bad considering that the announced number was 92,000. The legend contains the succession of implied forecasts over the five auctions, which began with an estimate of 112,800 and ended with 103,900.

Implied Distribution The buckets in which the bets fell into during each auction

Source: CME.com

The second view is of the implied standard deviations for each bucket. Recall how last week was filled with a large number of bearish economic reports. The initial auction was skewed toward a wider range of estimates at the higher-than-expected range, which is similar to saying the out-of-the-money calls were priced to insure against a surprise to the upside. By the end of the week, a secondary bias was priced into the low strike. This is an interesting insight into bettors' thought processes.

Implied Standard Deviations Measuring the variability of the bets in each auction

Source: CME.com