I want to quibble with one of Dave Pennock’-s comments on the CFTC request. Pennock wrote “-It’-s not often that an industry in its infancy cries out for more government oversight.”-
It’-s actually quite common. The term in the economics literature that includes this is regulatory capture. When there’-s a regulatory body specific to a particular industry, it’-s very common for industry to be the major source of expertise in the area, and so for the regulators to be reasonably friendly with the businesses. The businesses can work for regulation that limits entry, and cuts down on competition that reduces profits, and they can work together to ensure that public relations problems are addressed in a cohesive way. But cutting down on competition often means fewer choices for consumers by way of tighter controls on what products are offered.
In our case, the thing I worry about is a narrow ruling that only “-socially valuable”- questions can be asked, and an expensive process for deciding what innovative questions can be posed. It seems likely that some interests will work to ensure that sports and entertainment questions be declared off-limits. The companies that have the strongest interest in fighting that faction are mostly persona non grata in the CFTC’-s eyes, since they currently operate outside the law (TradeSports) or outside the country (BetFair).
The narrower the set of approved questions, or the more expensive the process of getting approval, the less chance that markets will be commercially successful. I think the experiments within companies have indicated (though not proven) that a mix of valuable and popular claims is necessary in order to attract continuing participation.
My biggest worry about fighting for CFTC regulation at this point is that they’-ll approve something narrow, and this won’-t produce enough successes to demonstrate that loosening the restrictions over time would be beneficial. The alternative is to continue to find ways to introduce markets under the radar and demonstrate their value to the academic audience, which could lead to a friendlier hearing in a more distant future after prediction markets have demonstrated social value and little risk of harm.
Of course the other likely outcome is that the novel experiments don’-t happen because of the threat of litigation or regulation. But that seems unlikely given the growth in internal markets within companies. I think there’-s more likelihood of long-term success without regulation than with it, and we’-re better off waiting until the chances that the regulations will provide a broad approval are significantly higher.
(Cross-posted from pancrit.org.)
I agrre with 99% you say.
Chris Hibbert sounds more “pragmatic” to me than David Pennock —with all due respect to David Pennock.
Chris Hibbert is off the mark IMO.
Regulatory capture : “Regulatory capture is a phenomenon in which a government regulatory agency which is supposed to be acting in the public interest becomes dominated by the vested interests of the existing incumbents in the industry that it oversees.”
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But the CFTC’s request was made to the public, not to vested interests.
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From CFTC: “The CFTC is issuing a Concept Release to solicit the expertise and opinions of all interested parties, including CFTC registrants, legal practitioners, economists, state and federal regulatory authorities, academics, and event market participants.”
That’s always the goal, but the regulated industry almost always has a greater interest in the outcome than the general public, so they spend a lot more time lobbying, attending meetings, and talking to the regulators. In addition, it’s common when looking for new members of the regulatory body, to choose people who are experts in the area. Nearly always, those people understand the industry point of view more than the public.
The point isn’t that the government, the legislature, or those who are supposed to be “protecting the public” don’t mean well, it’s that industry cares more and pays more attention to the actions of the regulators, so the regulators hear more from them.
@Chris Hibbert: Medemi makes a point. I wonder whether the Wikipedia definition is a bit biased.
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“is supposed to be acting in the public interest”
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That implies that the process is rotten, in their definition.
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I wonder whether the Wikipedia definition is a bit biased.
I wonder about that too Chris. However, they do talk about a phenomenon.
This phenomenon could be what we’re witnessing with the UK Gambling Commission, who’s requests (those that I have read) were always to the betting exchanges, betfair in particular. It would be interesting to know whether the GC have made requests to the public, like the CFTC are doing now. I’m not holding my breath.
At it’s inauguration, the GC DID seek public input. Even though it did use the Mandleson Method of stating its policy (sort of) first, then tailoring the public input sections to suit that policy…. YES… it DID seek public input.
Problem is, now that it is duly authorised and established as a Public Regulatory Authority, it is behaving (in its communications policy) as a closed-shop “club”.
Regulation (IMHO) works best when it is applied consistently, universally and under the full gaze of the General Public (who, of course, pay for its upkeep!)
Where is the public statement directing to exchanges regarding acceptable operational methods?
Where is the publication of any penalties or cautions issued to any exchange found to have broken Integrity Rules and profitted from that breach?
I’m left with the consistent impression (FSA perhaps excepted) that most of these “Authorities” are mere political tools, established to sate occasional public concern, even outcry. Whose main purpose of existence though is to provide an account to charge the next lunch to…….
Big Brother was given HIS message a few days ago.
Has he conveyed it to his spawn yet?
Thanks for that Adonis.
I have some good experiences with some regulators as well, like the FSA, who continually focus on and monitor issues like market manipulation.
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As of yet, I don’t think we can justify condemning the CFTC for their policy.
@medemi: For your information, I have published on Midas Oracle, long ago, BetFair’s input to the Gambling Commission, at inception. If you dig well Midas Oracle, you’ll spot that. I don’t know whether the public was allowed to send opinions to the GC. Maybe, if you dig their website, you could find that info.
@Adonis: Yes, regulation agencies should publish everything.
An interesting immediate question is who is behind the CFTC’s request, and whether they would effectively be granted a monopoly on whatever type of market they have planned.
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My opinion on jurisdiction is basically the same as it was here:
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http://riskmarkets.blogspot.co…..fauna.html
http://riskmarkets.blogspot.co…..ation.html
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This is somewhat worrying given what happened to Hedgestreet, although it’s still not clear to me whether they had the CFTC’s blessing to launch presidential futures but didn’t want to, or were always blocked by the CFTC on that market. At one point I was told the former, but the latter is more believable.
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There is also the possibility that the CFTC will not exist in five years and even if something real begins to come from this process, the rug might be pulled from under it in one way or another.
An interesting immediate question is who is behind the CFTC’s request
From what i’ve read (and that’s not a lot (yet), so you shouldn’t trust my opinion on this) is that the CFTC have received requests from different sources to offer certain markets. And they haven’t got a clue how to deal with it… in a responsible way.
Yes, but the fact that they have no doubt received such requests for years suggests that there is a new relatively large (in terms of money – not nobels!) player at the margin. Sure, HS and others (including the company Paul M? suggested) have probably stepped up requests because it’s an election year, and the CFTC could be more actively trying to differentiate itself from the SEC. This is more an object of interest with respect to private investments than to the general future of prediction markets. In general I think the request was a passive-aggressive way of solidifying jurisdiction over event markets, and by 2012, say, will actually result in a few “interesting” US-regulated markets, perhaps more if an exchange gets serious about self-certification.. which might be the best case scenario.
I don’t know Jason, you could be right.
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Sure, this is an election year, and should act as a reinforcer, isn’t that why we should embrace it ?
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What matters to me (for now) is that those markets that will be offered, will be offered in a responsible way, because corruption is not a distant possibility. Little do they know in the States, perhaps?
Who is behind the CFTC’s request?
http://www.midasoracle.org/2008/05/05/cftc/
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