By “can’t pay each other” is the author referring to the fact that agents can engage in side-trades outside the market? Or that agents are interacting with a mechanism and not directly trading with each other?
In the latter case, I’d point to Appendix E where we explain that we can just easily cast our mechanism as one where traders are trading with an automated market maker, so yes, agents still aren’t trading with each other directly, although can trade “securities” with a market maker.
I think this is totally fine since it’s the same “user experience” for traders (it’s just an algorithm, not a person on the other side of the trade). The market maker in the middle greases the wheels of the trade, providing liquidity so you don’t have to wait for a counterparty to arrive at the same time. If one is still unhappy with this, they can just have it operate as a direct exchange anyway. We just can’t allow for that in our theory because of some technical theoretical results (“no-trade theorems”) which are pretty unrealistic, but nothing (in practice) is stopping one from using a continuous double auction to have traders trade with each other.
In the former case, it’s true we don’t consider outside incentives (which traditionally are not included in our kind of analysis anyway). It could be an interesting direction for future work, but I’m not sure that side trades are any more fatal to self-resolving markets than regular prediction markets. For one, you don’t know who the last trader is because of random termination, so market manipulation will probably be inefficient (you might even have to pay others more than you put in). If you just want to pump the price and cash out — this is no different from pump and dumps in regular prediction markets. And in general, it takes a whale to sustain a price at a level unwarranted by fundamentals — and this applies to regular prediction markets too. Another way I view this is by analogy to stock markets — is it easier to buy a stock and then pump the price by paying others to buy the stock too? In some contexts, yes, but this is why market surveillance is helpful and such behavior is illegal. All of this is to say I think that concerns around manipulation apply, but not much more than regular prediction markets…perhaps I misunderstand the concern, in which case a concrete example of the concern would help.
Here’s Siddarth’s response: