The Commodity Futures Trading Commission (CFTC)’-s recent request for comments about the regulation of prediction markets includes a number of specific questions. I am not sure whether I will manage to write up answers to all of them before the July 7 deadline, but question in particular—question 14—has attracted my attention. The CFTC there asks, “-Should certain underlying events or measures–-such as those based on assassinations or terrorist activities—be prohibited altogether due to the social perception and impact of such events? What statutory or other legal basis would support this treatment?”-
I answer the first part of question 14, “-No,”- (and thus need not answer the second part). I doubt that the CFTC wants to hear that sort of reply, frankly- I instead suspect that it wants a legal excuse to avoid the sort of political firestorm that followed the Pentagon’-s proposal to create a Policy Analysis Market that included claims about assassinations and terrorist events. My draft answer to question 14 explains why I’-m willing to risk disappointing the CFTC:
The CFTC should not forbid trading in claims based on assassinations, terrorist activities, or other criminal acts. Because event markets would offer only relatively thin and traceable trading, they would not offer an attractive investment option to anybody planning to profit from wrongdoing. A would-be terrorist would risk revealing both his plans and his identity if, for instance, he invested in a contract predicting another 9/11. He would instead find it more safe and profitable to simply short certain publicly traded stocks.
Furthermore, event markets in terrorist or criminal acts might benefit the public by revealing life-saving information. Suppose, for instance, that an anthropologist’-s study of corrido culture convinced her that narcoterrorists had begun planning military raids on border checkpoints in Arizona and California. If she had the opportunity to buy terrorist event claims, she might both profit from her research and tip us all off about looming trouble. Sound public policy suggests that we should encourage that sort of trading—not forbid it.
To judge from their reactions to the Policy Analysis Market proposed by the Pentagon in 2003, politicians might need to learn more about the benefits of using trading to help predict assassinations or other terrorist events. That poses a public relations problem, however—not a legal one. The CFTC thus has no sound reason to presumptively forbid trading in contracts related to such events.
Notably, my answer to question 14 differs sharply from the answer offered by Jed Christiansen. He said, “-There should never be any incentive to break a law, so there should never be any contracts that would pay someone if a law was broken.”- I disagree, of course, but I thank him for stimulating me to offer an alternative take.
[Crossposted at Agoraphilia and Midas Oracle.]
A collateral debate would be whether betting topics and information generated by the prediction markets are protected under the First Amendment of the US Constitution.
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RH talked about that a bit, a long time ago:
http://hanson.gmu.edu/ideafutures.html
Markets which involve the death (or well-being) of an individual should not be offered. It’s an invasion of privacy and society won’t tolerate it. You’ll find that even some of the die hards out there will find it unacceptable.
It follows that markets concerned with the well-being of the public in general, should be offered.
And, as you say, there are a lot of alternatives for someone who wants to profit from evildoing.
If we followed Jed Christiansen’s logic, we would not have Israel-bombs-Iran prediction markets —since that bombing would be illegal from the standpoint of international laws.
I forgot the link:
http://www.midasoracle.com/200…..lton-iran/
“Yes, markets are early warning systems for many things, they give you a sense of what your people know and do not know.”
That was David Perry.
http://hanson.gmu.edu/press/In…..e-3-08.pdf
If we followed Jed Christiansen’s logic…
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It’s heart-breaking when I see some people’s commitment.
No offence.
🙂
Actually, Chris Masse is wong in assuming that Israel’s bombing Iran would be illegal in international law. Preemptive strikes aimed at preventing an imminent attack on one’s own territory are legitimate. Besides, since Iran finances and arms Hizbollah, which has actively carried out hostilities against Israel, it’s arguable that Israel doesn’t even need to rely on the need for preemptive action to justify an attack on Iran.
The whole subject of developing intelligence warnings from market behaviour, whether of terrrorists shorting stocks they expect to be hit as a result of their future actions, or from prediction markets, is something that has been discussed in the intelligence community and among analysts like myself for some time. If you go to http://www.terrorfinance.org, you can find a link to an an article in which one of my colleagues and I were interviewed by another anti-money laundering publication about how terrorist groups may be able to profit from market manipulation. I’ve also taken part in a conference on economic terrorism where this and related subjects were on the agenda.
Although I’m not a lawyer, I would also point out that at least in some countries’ law, investment contracts in prediction markets for terrorism-related events would be considered unenforceable because they are against the ‘public interest.’
@David Nordell: “Preemptive strikes aimed at preventing an imminent attack on one’s own territory are legitimate.”
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Could be.
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However, if I am correct, the recent US Intelligence report on Iran said that they do not possess at this stage nuclear bombs. So, the adjective “imminent” is not appropriate.
A prediction market should never have the ability to lead events. If it does, then sometimes, the “wrong” outcome will occur, i.e. a player that wouldn’t have won, will win a match, a team will win a league that wouldn’t have done without the financial incentives for the real winners to have thrown away their title, etcetera. Launching a terrorist incident in itself is not that difficult (say for example using ricin). People who wager on prediction markets have to be independent of the different outcomes/participants in the market. Clearly, providing an incentive for people to create terrorist incidents is a remarkably stupid idea, in my opinion.
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@David Nordell: “you can find a link to an an article in which one of my colleagues and I”
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Please, give us the deep link —the precise URL.
OK, sorry, I was writing my comment on the fly. The full URL to the article about terrorism finance in the investment markets is http://inform.fortent.com/Fort…..25d%7d#%23 .
Regarding the National Intelligence Estimate on Iran, almost every intelligence source with which I’m familar has described this document (which is of course only the declassified version of a very highly classified original) as highly politicised. All the indications from more independent sources are that Iran is working at full speed on both nuclear warhead capability and delivery capacity using both ICBMs and unconventional vectors. Besides, I’m not sitting in an ivory tower on the Cote d’Azur, but in the predicted target zone for the Iranian missiles, so I tend to see this ‘market’ in slightly different terms from Chris.
By the way, an additional angle on the risk prediction market for a conflagration in the Arabian/Persian Gulf can be seen in the warnings that both the USA and UK have been publishing for their citizens’ benefit about the risk of staying in Dubai, to say nothing of the questions that various Arab banking professionals are debating internally about the need for business continuity planning for their institutions in the UAE. You can see an article of mine about this at http://www.analyst-network.com…..rt_id=2178
@Ed Murray: “A prediction market should never have the ability to lead events.”
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I agree with that.
Because event markets would offer only relatively thin and traceable trading, they would not offer an attractive investment option to anybody planning to profit from wrongdoing.
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I find that a huge assumption. In the UK we see money attracted to various bizarre markets over recent years, such as what colour a page 3 girls hair will be the next day on flutter, spread bets on the number of sips of water that the chancellor of the exchequer will take during his budget speeches with most spread firms, and millions of pounds going on really petty things like who will be the next manager of non-leading british clubs, like sunderland, southampton, leeds, portsmouth etcetera.
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What if the market grew? What if the next Lee Harvey Oswald saw a chance to place contracts which would pay out money to his relatives after he had assassinated his victim? JFK, John Lennon, Yitzhak Rabin (?) were all assassinated, and a meaty prediction market with healthy trading volumes, could prove a huge incentive to actually assassinate say another big pop star. It would be morally wrong if somebody could place huge bets that Ginger Spice would be assassinated, and then they themselves pulled the trigger to ensure payout of the contract. How would the world cope if Ginger Spice or Posh Spice were bumped off? It would be like Princess Diana all over again.
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The whole question posed by the CFTC is irrelevant.
Tom Bell read it well IMO, they want to know (are looking for excuses) whether those markets should be offered or not. But that question shouldn’t be asked NOW.
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I’ve said before that we should take this step by step, and that means that we certainly shouldn’t offer markets involving terrorism now. That also means we shouldn’t rule it out. What’s first on the agenda is the fight against insider trading and market manipulation, and it will be one hell of a fight.
Once you get that under control, you could have another look around.
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To the question “are markets involving terrorism socially acceptable”, in general, I’d have to answer “yes” because it concerns us all. But again, whether they should be offered or not, is a question to be asked a couple of years from now, when market participants have gained a lot of experience and are better capable making the right decisions. But we can’t rule it out, because we don’t know how effective we’ll be in solving other, crucial problems.
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And I would like to reiterate that restrictions on fresh accounts could be extremely effective against insiders, but also against evil-doers.
Q) Is the market at all times independent from the participants/runners in the market?
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If “Yes” then the market can be offered. If “no” then the market should never be offered.
I’m agreeing with Ed on this one. There’s every possibility these markets can grow to be massive, never assume liquidity will be thin with these things, if there is an ‘opportunity’ then unsurprisingly liquidity has a habit of arriving. More so when some of the participants know they can change the result.
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I’m having a hard time deciding on what scale I would be in favour of this and my gut feeling is strictly on an international level… ‘wars’ rather than terrorist attacks. I do have a hard time with Jed’s post above, where he talks only about criminal acts under US law ?! These markets are on the internet…the World is a much smaller place these days, allowing markets on a certain scale (by “scale” i’m talking assassinations vs bomb vs larger scale terror attack vs war etc) on one country’s ‘future’ and not on another is unacceptable. I very strongly disagree with Jed here – “It also WOULD allow for event contracts on terrorist attacks and assassinations that did NOT take place in the United States (as no United States laws would be broken).” Personally I think that would be outrageous. Markets are markets, they exist everywhere and are accessable everywhere by anyone (there’s always a way)…where there is money involved, people will always find their edge, anywhere in the World.
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By doing things on an international scale you remove almost all risk of the market creating the event, unless liquidity is so high that governments begin to get interested in investing.. highly unlikely. You would also get a much more accurate reflection of sentiment from large samples of people worldwide, who, individually cannot have an impact on the outcome.
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[…] Tom believes that the CFTC should not forbid trading in these claims because they would offer thin and traceable trading. Perhaps part of my difference with him is in these assumptions; I don’t believe the CFTC should be regulating event marketplaces so tightly that trading would be 100% traceable. To do so would force exchanges to verify customers identities and take other steps that I personally believe are too burdensome in a regulatory sense. […]
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