The manipulation problem, in short, is when a speculator privately benefits from a particular decision and hence is willing to buy excessive conditional stock so that is enforced. I've heard Robin Hanson explaining that other speculators will react to counter manipulation but I'm not sure I get how it's supposed to work in practice:
Suppose that the optimal decision is and denote as the expected value of one conditional stock (given that is enforced). The rational, risk-neutral & disinterested speculators will pay at most for each .
If a speculator receives a private benefit when is enforced, she'd be willing to pay for conditional stocks , or for each . It seems to me that given finite stocks and a large enough , the conditional price of might outweigh that of the optimal decision (i.e.)
A counter to my description is that speculators can also short-sell, but short-selling (at least currently) involves borrowing existing stocks and selling them, whereas in futarchy the manipulator can simply refuse to lend stocks to short-sellers. In addition, if only one speculator receives the private benefit , then short-selling to other investors would only gain in revenue, which undermines the incentive of short-selling in the first place.
Is my analysis wrong? Or is there some other mechanism to counter market manipulation?