Tag Archives: event derivative markets

Our prediction market luminaries signed Bobs petition -and the losers are InTrade, TradeSports and BetFair.

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I have re-read the American Enterprise Institute’s proposals to legalize real-money prediction markets in the United States of America.

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AEI advise the CFTC not to allow for-profit companies (like InTrade, TradeSports and BetFair) to operate socially valuable prediction markets &#8212-in a legal way, in the US.

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It&#8217-s a shame that our prediction market luminaries signed that piece of ****.

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Long live Steve Levitt and Koleman Strumpf.

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And long live the prediction markets on sports&#8230- &#8212-and on anything else.

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UPDATE: In the for-profit vs not-for profit debate, our prediction market luminaries, doctored by Bob, are on the wrong side of the issue.

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The American Enterprise Institutes proposals to legalize real-money prediction markets in the United States of America

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The Promise of Prediction Markets – by Kenneth J. Arrow, Robert Forsythe, Michael Gorham, Robert Hahn, Robin Hanson, John O. Ledyard, Saul Levmore, Robert Litan, Paul Milgrom, Forrest D. Nelson, George R. Neumann, Marco Ottaviani, Thomas C. Schelling, Robert J. Shiller, Vernon L. Smith, Erik Snowberg, Cass R. Sunstein, Paul C. Tetlock, Philip E. Tetlock, Hal R. Varian, Justin Wolfers, and Eric Zitzewitz – 2008-05-XX

#1. The Commodity Futures Trading Commission (CFTC), the federal regulatory agency that oversees futures market activity, should establish safe-harbor rules for selected small-stakes markets. One limited safe harbor is the no-action letter, in which the CFTC market oversight staff confirms in writing that it will not recommend enforcement action if the recipient acts in specified ways. The only prediction market to receive a no-action letter (in 1992) is the Iowa Electronic Markets, which is run by professors at the University of Iowa and which initially focused on presidential elections. Although such no-action letters reduce the chances of legal action under other state and federal laws, they may not be adequate. We would therefore urge the CFTC to explore other approaches to ensuring safe harbors, for example, formal rules or guidance approved by the commission. We suggest that three types of entities be eligible for safe harbor treatment. The first would be not-for-profit research institutions, including universities, colleges and think tanks wishing to operate exchanges similar to the Iowa Electronic Markets. The second would be government agencies seeking to do research similar to that of nongovernmental research institutions. The third group would consist of private businesses and not-for-profits that are not primarily engaged in research, which would only be allowed to operate internal prediction markets with their employees or contractors. In all cases, markets would be limited to small-stakes contracts. Although the definition of small stakes is somewhat arbitrary, we use the term to mean an exchange in which the total amount of capital deposited by any one participant may not exceed some modest sum, perhaps something like $2,000 per year. The exchanges themselves would be not-for-profit but would be allowed to charge modest fees to recoup administrative and regulatory costs. Brokers and paid advisers would be barred, reducing the risks that contracts would be sold to inappropriate or vulnerable customers or that customers would be charged fees above the amounts needed to maintain the markets. Exchanges would be self-regulated, leaving them with the responsibility to make reasonable efforts to keep markets free from fraud and manipulation. For its part, the CFTC should allow contracts that price any economically meaningful event. This definition could allow for contracts on political events, environmental risks, or economic indicators, such as those offered by the Iowa Electronic Markets, but would presumably not include contracts on the outcomes of sports events.

The contracts qualifying under this safe harbor would also create opportunities for more efficient risk allocation. Although the small-stakes nature of these markets would necessarily limit their usefulness for hedging risk, they could serve as proofs of concept for larger-scale markets that could be developed under alternative regulatory arrangements. The CFTC should allow researchers to experiment with several aspects of prediction markets – fee structures, incentives against manipulation, liquidity requirements and the like – with the goal of improving their design. Prediction markets are in an early stage, and if their promise is to be realized, researchers should be given flexibility to learn what kinds of design are most likely to produce accurate predictions. Of course, exchanges would need to inform their customers so that they are aware of the risks and benefits of participating in these markets.

#2. Congress should support the CFTC’s efforts to develop prediction markets. To the extent that the CFTC incurs costs in promoting innovation, Congress should provide the necessary funding. More fundamentally, Congress should explore alternative ways of securing a legal framework for prediction markets if the CFTC’s existing authority proves inadequate. In particular, Congress should specify that a no-action letter, or similar mechanism, preempts overlapping state and federal anti-gambling laws. Because Congress did not intend the CFTC to regulate gambling, it is important to design new regulations so that socially valuable prediction markets easily qualify for the safe harbor but gambling markets do not.

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UPDATE: A great rebuttal here&#8230- :-D

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THE MIDAS ORACLE TAKES:

– CALL TO ACTION: Let&#8217-s fight so that the CFTC allows the FOR-PROFIT prediction exchanges to deal with &#8220-event markets&#8221-.

– In the for-profit vs not-for-profit debate, our prediction market luminaries, doctored by Bob, are on the wrong side of the issue.

– COMMENTS TO THE CFTC: What to expect from Tom W. Bell and Jason Ruspini

– A young economist rebuts the American Enterprise Institute.

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BACKGROUND INFO:

– CFTC’s Concept Release on the Appropriate Regulatory Treatment of Event Contracts&#8230- notably how they define &#8220-event markets&#8221-, how they are going to extend their &#8220-exemption&#8221- to other IEM-like prediction exchanges, and how they framed their questions to the public. Here are the comments sent to the CFTC.

– The Arnold &amp- Porter lawyers explain the meaning of the CFTC&#8217-s concept release on &#8220-event markets&#8221-. &#8212- (PDF file)

– The Schulte &amp- Roth &amp- Zabel lawyers&#8217- takes. &#8212- (PDF file)

– The Sullivan &amp- Cromwell lawyers&#8217- takes. &#8212- (PDF file)

– What Vernon Smith told the CFTC.

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APPENDIX:

Paul Wolfowitz&#8217-s profile at the American Enterprise Institute

– How the neo-cons drove the United States of America into the unecessary Iraq war

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Prediction Markets within the Forecasting Community

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I have downloaded the final program schedule (PDF file) of the 28th International Symposium on Forecasting, and browsed thru all the paper abstracts that will be presented. Wow. There are dozens and dozens.. many one hundred or two&#8230- It took me a while to get to the bottom of that file.

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I saw 3 or 4 papers on prediction markets (or &#8220-betting markets&#8221-).

I spotted some names I know. :-D

Besides Andreas, who will be at Nice for the symposium?

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The field of prediction markets can be seen as a sub-set of the forecasting community. However, browsing the forecasting paper abstracts, I came up with the idea that we are competitors of all those guys / gals. We propose a process by which traders (like bees) go out there and gather all bits of information (sometimes coming from those forecasting experts), and a market mechanism delivers a collective verdict about what&#8217-s going to happen. One can set up a prediction market, and skips the reading of those forecasting experts&#8217- reports &#8212-let the incentivized traders do the work. In that perspective, the prediction market process is both more meta than the forecasting methods and also a competitor of them.

Why bother reading all those forecasting experts&#8217- reports when we can read the prediction markets?

Convenience, convenience, convenience.

Time is money. Let the incentivized traders do the time-consuming work.

And we get the honey. :-D

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InTrades sudden and puzzled interest in… alchemy…!!!

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Dr Arata&#8217-s experiment on cold fusion to be replicated in peer-reviewed scientific journal on/before 31 Dec 2009

This contract will settle (expire) at 100 ($10.00) if Dr Yoshiaki Arata&#8217-s Cold Fusion experiment is replicated in a peer-reviewed scientifc journal on/before 31 Dec 2008.

The contract will settle (expire) at 0 ($0.00) if Dr Yoshiaki Arata&#8217-s Cold Fusion experiment is NOT replicated in a peer-reviewed scientifc journal on/before 31 Dec 2008.

Details of the experiment can be found HERE.

Expiry will be based on publications in peer-reviewed scientific journals, as reported by three independent and reliable media sources.

Due to the nature of this contract please also see Contract Rule 1.7 Unforeseen Circumstances.

The Exchange reserves the right to invoke Contract Rule 1.8 (Time Protection) if deemed appropriate.

Any changes to the result after the contract has expired will not be taken into account – Exchange Rule 1.4

Please contact the exchange by emailing [email protected] if you have any questions regarding this contract before you place a trade.

Important:
Please contact the Exchange if you have any query or uncertainty (including how it may be settled) about this Contract, the Rule above or the Contract Rules before you trade.

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Wikipedia

Robin Hanson on recent developments

Robin Hanson created a &#8220-Cold Fusion&#8221- event derivative market in 1990.

Robin Hanson talked up cold fusion in his first prediction market paper.

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I&#8217-m skeptical.

Google News is mute.

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Price for Dr Yoshiaki Arataa€™s Cold Fusion Experiment at intrade.com

Previous blog posts by Chris F. Masse:

  • VIDEO: The financial markets hacker who will impress Jason Ruspini
  • VIDEO: WeatherBill caught on tape
  • You, the Midas Oracle readers, are a bunch of lazy bastards…!!!… — Take that, loafers…!!!…
  • Prediction Markets within the Forecasting Community
  • Devoting the whole NBC Nightly News bulletin to Tim Russert’s passing was worst than beaming out porn.
  • COLD FUSION: The purpose of this post is to give you the scientific explainer link I forgot to publish (at inception) in my previous post.
  • Forecasting Election Outcomes

The term event markets sucks -and the uncritical thinkers using this crappy term suck too.

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Google: &#8220-event markets&#8221- &#8212- Funny enough, the first link is to the Futures Industry Association, which promoted the term&#8230- and the second to CFM, which advises not to use that term (see the bottom of the CFM frontpage). :-D

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Just because 2 or 3 bureaucrats at the CFTC have decided to use that term does not mean that that term makes sense. It does not. &#8220-Event derivative markets&#8221- or &#8220-prediction markets&#8221- are better terms. It&#8217-s with great displeasure that I saw our own Mike Giberson (supposedly, a libertarian, and supposedly, a wannabe academic) followed the step of the CFTC like an obedient little poodle. :-D

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Just because somebody in power says something stupid that makes no sense at all does not mean that you should swallow it and direct it straight to your stomach.

Use your brain to perform critical reasoning.

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The best research papers on prediction markets

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As seen by Andreas Graefe&#8230-

IIF’s SIG on Prediction Markets

Research Papers

Basics

Several studies explain the concept of prediction markets and provide useful summaries of the method, e.g.

– Spann, M. &amp- Skiera, B. (2003). Internet-based Virtual Stock Markets for Business Forecasting, Management Science, 49, 1310-1326. [Full text]
– Wolfers, J. &amp- Zitzewitz, E. (2006). Prediction Markets in Theory and Practice, New Palgrave Dictionary of Economics and the Law (in press). [Full text]
– Wolfers, J. &amp- Zitzewitz, E. (2004). Prediction Markets, Journal of Economic Perspectives, 18, 107-126. [Full text]
– An overview and classification of 152 studies on prediction markets, published between 1991 and 2006, is provided by
Tziralis, G. &amp- Tatsiopoulos (2007). Prediction Markets: An Extended Literature Review, Journal of Prediction Markets, 1, 75-91. [Full text]

Evidence on the accuracy of prediction markets

This section summarizes research that analyzes the relative performance of prediction markets and other forecasting methods.

Markets vs. polls (election forecasting)

– Berg, J., Nelson, F. &amp- Rietz, T. (2008). Prediction Market Accuracy in the Long Run, International Journal of Forecasting, 24, 283-298. [full text]
– Erikson R. S. &amp- Wlezien C. (2007). Are Political Markets Really Superior to Polls as Election Predictors? Public Opinion Quarterly, forthcoming. [full text]
– Stix, G. (2008): When Markets Beat the Polls, Scientific American Magazine, March 2008. [Abstract]

Markets vs. unaided experts and groups

– Pennock, D. M., Lawrence, S., Giles, C.L. &amp- Nielsen, F.A. (2000). The Power of Play: Efficiency and Forecast Accuracy in Web Market Games, Technical Report 2000-168, NEC Research Institute. [full text]
– For predicting Oscar Award winners, Pennock et al. (2000) compared prices of the Hollywood Stock exchange to expert judgments of five movie columnists. On the day the experts revealed their forecasts, only one of them was better than the market predictions. From the day after, the market outperformed all experts as well as the expert consensus.
– Servan-Schreiber, E. J., Wolfers, J., Pennock, D. M. &amp- Galebach, B. (2004). Prediction Markets: Does Money Matter? Electronic Markets, 14, 243-251. [full text]
– For predicting the results of NFL games, Servan-Schreiber et al. (2004) compared the forecasts of two markets to those of 1,947 self-selected individuals. At the end of the season, the markets ranked 6th and 8th compared to the individuals. The human average – which would be the outcome of a classical survey – ranked 39th.

Markets vs. other forecasting methods

– Chen, K. Y., Plott, C. R. (2002). Information Aggregation Mechanisms: Concept, Design and Implementation for a Sales Forecasting Problem, Social Science Working Paper No.1131, California Institute of Technology, Pasadena. [full text]
– For forecasting sales figures, Chen and Plott (2002) reported on an internal market at Hewlett-Packard that beat the official forecasts of the company in 6 out of 8 events.
– Jones Jr., R. J. (2008). The state of presidential election forecasting – The 2004 experience, International Journal of Forecasting, 24, 308-319. [Abstract]
– Jones (2008) analyzed the forecasts of IEM&#8217-s vote-share market for the 2004 election and compared them to traditional polls, a Delphi expert survey, regression models and a combination of all four approaches, the Pollyvote. He concludes that in comparison with most methods of forecasting the popular vote, the IEM was the superior performer.Spann, M. &amp- Skiera, B. (2003). Internet-based Virtual Stock Markets for Business Forecasting, Management Science, 49, 1310-1326. [Full text]
– Spann and Skiera (2003) compared forecast accuracy of an internal market at a large German mobile phone operator. They found that the market forecasts outperformed were more accurate than four extrapolation models (arithmetic mean, geometric mean, linear trend and exponential trend).

Corporate Markets

– Chen, K.-Y. &amp- Plott, C. R. (2002). Information Aggregation Mechanisms: Concept, Design and Implementation for a Sales Forecasting Problem. Social Science Working Paper No.1131, California Institute of Technology, Pasadena. [Full text]
– Cowgill, B., Wolfers, J. &amp- Zitzewitz, E. (2008). Using prediction markets to Track Information Flows: Evidence from Google, working paper. [Full text]
– Ortner, G. (1997). Forecasting Markets – An Industrial Application: Part I, working paper, TU Vienna. [Full text]
– Spann, M. &amp- Skiera, B. (2003). Internet-based Virtual Stock Markets for Business Forecasting, Management Science, 49, 1310-1326. [Full text]

Decision Markets

– Hanson, R. (1999). Decision Markets, IEEE Intelligent Systems, 14, 16-19.

Manipulation

– [Except] Hansen et al. (1998), most empirical studies report that manipulative attacks on result accuracy have not been successful historically (Rhode and Strumpf 2006), in the laboratory (Hanson et al. 2006), and in the field (Camerer 1998).
– Camerer, C. (1998): Can Asset Markets Be Manipulated? A Field Experiment with Racetrack Betting, Journal of Political Economy, 106(3), 457-482. [Abstract]
– Hansen, J., Schmidt, C. &amp- Strobel, M. (2004). Manipulation in Political Stock Markets – Preconditions and Evidence, Applied Economics Letters, 11, 459-463. [Abstract]
– Hanson, R., Oprea, R. &amp- Porter, D. (2006). Information Aggregation and Manipulation in an Experimental Market, Journal of Economic Behavior &amp- Organization, 60, 449-459. [full text]
– Rhode, P. W., and Strumpf, K. S. (2006). Manipulating Political Stock Markets: A Field Experiment and a Century of Observational Data, Working Paper, University of North Carolina(2006). [full text]

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More research papers on prediction markets

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How to run enterprise prediction markets… legally

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Private Prediction Markets and the Law – (PDF file) – by Tom W. Bell – 2008-05-18

Abstract

This paper analyses the legality of private prediction markets under U.S. law, describing both the legal risks they raise and how to manage those risks. As the label &#8220-private&#8221- suggests, such markets offer trading not to the public but rather only to members of a particular firm. The use of private prediction markets has grown in recent years because they can efficiently collect and quantify information that firms find useful in making management decisions. Along with that considerable benefit, however, comes a particularly worrisome cost: the risk that running a private prediction market might violate U.S. state or federal laws. The ends and means of private prediction markets differ materially from those of futures, securities, or gambling markets. Laws written for those latter three institutions nonetheless threaten to limit or even outlaw private prediction markets, as the paper details. The paper also details, however, how certain legal strategies can protect private prediction markets from violating U.S. laws or suffering crushing regulatory burdens. The paper concludes with a legal forecast, describing the likely form of potential CFTC regulations and a strategy designed to ensure the success of private prediction markets under U.S. law.

Conclusion

This paper has described the legal risks facing private prediction markets under U.S. law and how firms that want to runs such markets should respond. To minimize the risk of CFTC regulation, firms should institute mechanisms to ensure that their private prediction markets do not support significant hedging functions and make clear, both in the documentation supporting their markets and in their markets&#8217- structures, that they offer trading not in binary option contracts but rather in conditional negotiable notes. Publicly-traded firms subject to U.S. law can minimize the risks of illegal insider trading by either making public all prices and claims traded on their prediction market or by:
• Keeping trading by traditional insiders separate from trading by others-
• Broadening safeguards against illegal insider trading to cover all traders-
• Treating the market&#8217-s claims and prices as trade secrets- and
• Seeding the market with decoy claims and prices.

Although the skill-based trading emphasized on private prediction markets should in theory remove them from the scope of gambling regulations, a prudent firm could help to ensure that result by:
• Forbidding traders from investing their own funds in the market- and
• Requiring its agents to participate in its market.

As should perhaps go without saying (but as hereby will not), any firm implementing these legal strategies should back them up with ample record-keeping. Each person who trades on a firm&#8217-s market should, for instance, receive clear notification that the market does not deal in CFTC- or SEC-regulated instruments, and that it does not offering services subject to oversight by any state gambling commission. Better yet, traders should be required to access the market only through a click-through agreement in which, among other things, they consent to that stipulation. So go only a few of the provisions that ought to appear in such an agreement- any reasonably competent attorney will think of many worthwhile provisions to add.

Private prediction markets will almost certainly escape the legal uncertainty that now clouds their prospects in the U.S. Even if no legislator, judge, or regulator ever notices them, private prediction markets will come to win de facto legality simply by merit of their widespread use and acceptance. With reflection —perhaps aided by papers such as this one— and practical experience, attorneys will learn how to structure private prediction markets to accommodate the laws that rightfully apply to them and to dodge the effect of laws written for other, materially different markets. There remains some risk, granted, that the CFTC will crush private prediction markets under new regulations. With luck though —and perhaps also with some persuasion— the CFTC will instead allow prediction markets to choose from among several different tiers of regulations. And even in the worse-case scenario, private prediction markets will not disappear- they will simply flee the U.S. for other, freer homes.

DIY enterprise prediction markets as revelators of institutional lies

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Adam Siegel of Inkling Markets:

Mike,

The context of that discussion was talking about allowing people to create their own markets vs. having them only be run by a central entity or only through recommendations by a consulting firm.

We were also talking about the insights you may get by running prediction markets that are not readily apparent in the market results.

The original point was, by allowing people to ask as many questions as possible, the questions may be a signal themselves pointing to something that you didn’t previously know about. If someone asks a question about the probability of a risk factor occurring that you never even considered before, for example. That would never have been uncovered, otherwise, because the “prediction market administrators” wouldn’t even have known to ask.

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BetFairs brand-new bet matching logic

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BetFair:

Betfair Customer Services 06 Jun 15:55

We held a forum Q&amp-A session in March in which we announced that we were working on an improved version of bet matching. This would allow us to match bets across selections, and to match those bets at better prices than requested where possible, as we do now when matching back bets against lay bets on the same selection. We wanted to provide customers with an update on our progress towards this.

An example of how this would work in practice:

You submit a bet request to back Roger Federer at 1.7, but there are no unmatched lay bets on Federer at 1.7 or higher to match your bet. However, we do have an unmatched customer request to back his opponent at 2.2 already on the system. The way matching works currently there are two possible outcomes:

1. your bet will remain unmatched, or
2. another customer will subsequently lay your bet, and it will be matched at 1.7, the price you requested.

With the improved bet matching process we would match your request to back Federer against the customer looking to back his opponent at 2.2, and provide an improvement to the price you requested. Your bet would be matched at the best possible price that is a valid increment on Betfair’s odds ladder, in this case 1.83.

As we mentioned during the Q&amp-A, doing the necessary calculations for an individual bet on a market with only two selections is relatively simple. However bet matching has to work efficiently in much more complex situations: i.e. in markets with many runners, where bets may be partially matched, and matched against bets at more than one price. We also understand that customers would expect no deterioration in the overall performance of bet matching as a result of us adding this functionality. It’s taken us a little longer than we originally hoped to find a solution that meets all those objectives. However we’ve coded a new version of bet matching, and our performance tests on the new process indicate that it will match backs against lays and bets across selections more efficiently than the existing bet matching process.

We are now into the final few weeks of testing, and expect to be ready to introduce this improvement to the site in early July. Again as we mentioned in the Q&amp-A it was a higher priority for us to find a way to provide price improvements for customers than to resolve issues around the withdrawal of non-runners, so we don’t intend to match bets across selections in horse racing markets in the near future. We’d therefore expect most situations where we would match across selections to occur in the busiest 2- and 3-runner markets, including football and tennis. It’s a busy month ahead for both those sports, and as we believe it’s prudent not to introduce this change at peak times we’ve taken the decision to wait until Euro 2008 and Wimbledon are completed. If Wimbledon is completed on schedule, and assuming remaining testing goes to plan, we expect to make this change to the site on Monday 7th July. We will confirm this nearer the time, but wanted to give customers advance notice as we’ve previously promised.

Thank you for your continued feedback.

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More Old Info:

– Michael Robb

– Tony Clare

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