I will try to be clearer.
PROBLEM: Other than on popular prediction markets at TradeSports-InTrade and BetFair, liquidity is a problem.
HANSON’-S SOLUTION [*]: Market Scoring Rule. (See it in action: I’m betting the farm on AL Gore for the Oscars.) Cool, but not really customizable. In my example, I had the choice between three options, only. Quite poor.
WEATHER BILL SOLUTION: Forget trading on markets, forget automated market makers, forget mixing betting and trading (MSR), forget all this —-impossible to go retail with these mechanisms. Weather Bill = a sophisticated way to take client orders, very precisely. Customers get what they really want. Weather Bill offers a highly customized hedging service. (Instead of going for re-insurance money, they pass the risks to some hedge funds via a CFTC-acknowledged EBOT, but that’-s a back-office detail.)
HEDGESTREET CASE: HedgeStreet is a hedging/speculating service. (Note that they are regulated by the CFTC, not just acknowledged.) Let’-s do a thought experiment. HedgeStreet (just like BetFair did recently) becomes a bookmaker, in addition to being an exchange. They adopt a WeatherBill-like user interface to take very precise client orders —-as opposed to asking traders to fill in ask-and-bid orders and making use of an automated market makers (as HedgeStreet did, if I am correct). Of course, you would have two different user interfaces: one for the speculators and one for the hedgers. Then, do you see an algorithm/mechanism that would balance the two? And whom would they pass the risk to (if any)? And is there a way to have a mix exchange–-bookmaker business model while satisfying the CFTC at the same time?
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My point is that there is room for innovation, out there. BetFair has shown that you can go retail —-providing that you cater to a population of sophisticated bettors. The fact that they now offer multiples show that the betting exchange business model has some limits. Sticking with it like a fundamentalist prevents you to servicing fully your customers.
As always, innovation is the key to customer satisfaction —-and to profitability, mister Jason Ruspini.
Addendum: [*] Robin Hanson actually devised two versions of Market Scoring Rule. His combinatorial version might render this blog post totally pointless. Alas, no prediction exchange (betting exchange) is using his combinatorial Market Scoring Rule.