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For comparison, InTrade:
– My first warning: June 4. + My second warning: June 4, later that day. + My third warning: June 5.
– Now, spot the timeline in the event derivative chart below.
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Take that, Mike R. 
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TAKEAWAY: If you are a UK-based or British trader on prediction markets, don’-t believe a single word of what UK-based or British bloggers say about US politics. Go to US-based or American blogs to get the information you need to inform your US bets.
If you followed that British blogger, you’-d be in the red today.
Get your information from sources close to the action —-not one ocean away.
Get your information from vibrant sources who use intelligently both the information technology and the wisdom of crowds to comprehend the news —-see my point #5 on yesterday’-s post.
Pay attention to what I’-m going to say in the coming weeks about “-prediction market journalism“-. Thanks.
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The topic of this post is:
Betting &- Information
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#1. Don’-t trade on the VP predictions markets.
I have stong reservations about those VP prediction markets. Only 2 men in the world know what is going to happen: Barack Obama, and John McCain.
You can’-t divine their final thoughts.
Politicians often lie about their intentions —-they also change mind, frequently.
The decision to name one VP nominee could be made in secret —-without any early warnings.
Surprise is a card that Barack Obama and John McCain could play. Don’-t bet against their final will.
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#2. Don’-t believe in “-vice presidential selection committees”-.
Last time, in 2000, a man named Dick Cheney was appointed to head George W. Bush’-s vice presidential selection committee.
He was supposed to scout around to find and assess good candidates.
Surprise, surprise, that fake committee ended up putting Dick Cheney on the Republican ticket —-and the rest is history (Iraq war, etc.).
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#3. Don’-t bet on Hillary Clinton as VP.
She does not have the slightest chance.
It’-s highly unlikely that Barack Obama selects her on the Democratic ticket.
Hillary Clinton as VP nominee (and as VP) would present many quasi insurmountable problems.
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#4. Don’-t listen to betting bloggers who tell you that Hillary Clinton has a chance to be on the Democratic ticket.
They are clueless.
Don’-t read clueless people. They are a waste of time.
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#5. Select well your primary, advanced indicators.
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#6. Choose your bets (and trades) carefully.
Just because an event derivative is cheap doesn’-t mean that it’-s a good bet.
Don’-t pluck down money on a bet unless you’-ve seriously researched the topic by yourself —-and possesses some expertise or experience in that field.
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FOLLOW-UP POST: 2 days after my ringing the alarm bell… THE FREE FALL
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InTrade
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Democratic Vice President Nominee
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Republican Vice President Nominee
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BetFair
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Next Vice President:
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Democratic Ticket
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Democratic Vice President Nominee
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Republican Vice President Nominee
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NewsFutures
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Barack Obama will pick a woman as running mate.
© NewsFutures
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Explainer On Prediction Markets
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Prediction markets produce dynamic, objective probabilistic predictions on the outcomes of future events by aggregating disparate pieces of information that traders bring when they agree on prices. Prediction markets are meta forecasting tools that feed on the advanced indicators (i.e., the primary sources of information). Garbage in, garbage out…- Intelligence in, intelligence out…-
A prediction market is a market for a contract that yields payments based on the outcome of a partially uncertain future event, such as an election. A contract pays $100 only if candidate X wins the election, and $0 otherwise. When the market price of an X contract is $60, the prediction market believes that candidate X has a 60% chance of winning the election. The price of this event derivative can be interpreted as the objective probability of the future outcome (i.e., its most statistically accurate forecast). A 60% probability means that, in a series of events each with a 60% probability, then 6 times out of 10, the favored outcome will occur- and 4 times out of 10, the unfavored outcome will occur.
Each prediction exchange organizes its own set of real-money and/or play-money markets, using either a CDA or a MSR mechanism.
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The Wikipedia entry on prediction markets does not seem to be well maintained.
Here are the warnings that welcome visitors. The first of the 2 warnings has been up since November 2007 —-that’-s 7 months ago!!!!!!
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And the definition opens on the big myth, create by IEM, and perpetuated by some scholars:
Prediction markets are speculative markets created for the purpose of making predictions.
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It’-s a big myth.
The TradeSports and BetFair prediction markets were primarily created to satisfy the traders —-their predictions come as an interesting offspring.
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Via Ed, The Daily Mail:
The Daily Star reveals that some punters are set to earn more than half a million pounds after a total bet of ?971 was staked via BetFair on Nikki to win at 1000-1 shortly after she was voted out of the house. […]
Rumours of ‘-insider dealing’- on BetFair chat forums continue to surround the clued up gamblers who stand to win ?582,250. […]
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That “-Nikki”- was evicted, an later on re-instated in the game.
Hence, the questions about the traders who did bet on her, after her eviction. Did they “-know”- something that the other traders didn’-t?
On the other hand, it’-s a constitutional right for Joe A. Doe to bet ?971 on a loser. Many do that every day at the horse race track. We should not accuse people of insider trading (or corruption) without any evidence.
BetFair employs many specialists in their “-integrity team”- to deal with such occurrences.
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While Robin Hanson was busy signing Bob’-s petitions and blablabling on philosophy, Jason Ruspini answered the questions.
Jason Ruspini (”-The Brain”-) has established himself as one of the experts in the field of prediction markets. Listen up.
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1-2) These markets could have insider trading restrictions and forced settlement w/ new contract set.
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3-4) The CFTC/NFA could monitor a “large trader” list and have special reporting requirements for them. If trading seemed unreasonable given the objective outlook for a candidate, they could begin an investigation.
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5) Don’t void or unwind the market, just settle the contracts at the price immediately before the event and then start a new set of contracts as soon as possible.
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The only problem there is what happens when a price manipulation precedes an event such that the manipulated outcome locks-in the “manipulated” prices. The arrangements in 3-4) would go a long way towards addressing that scenario. Failing that, contracts could be worded in such a way to allow for freezing funds and unwinding trades in that sort of situation. Also, it would be difficult for a trader to set-off a feedback loop in a liquid binary market even if they were very large.
I would like to ask the U.S. contributors to Midas Oracle what they would make of a prediction market for the 2012 Democratic nomination where one contender was backed heavily, at any price, despite losing every single primary heavily for months.
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The Democratic nomination is only a once every four years event, but similar things to this happen regularly on tennis markets in the last 12 months.
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The questions are
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(1) What if Hillary Clinton herself wagered millions of dollars that she would not be the next Democratic candidate?
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(2) What if someone had the power to knock Hillary Clinton out of the race somehow had wagered millions on her not being the 2012 candidate? An example where this could happen would be the tournament where a spectator knifed Monica Seles during that tennis match in the early 90s. She would then not be able to win that tournament, but what if there is a financial incentive for people to injure participants, like with Seles? Or if someone assassinated Clinton? Should that market be paid out?
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(3) Should people be able to bet in near unlimited size on prediction markets, who weren’t regular bettors/traders? If it is a brand new account waging a quarter of a million dollars on a tennis player to lose, should that account have been restricted before placing that bet?
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(4) Should there be circumstances where a multi-million pound gamble is paid out on Obama 2012, if over a period of a number of months, someone had backed him heavily to win the nomination, even though he was losing every single primary?
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(5) If someone knifed Maria Sharapova, as happened with Monica Seles, you could make the argument that bets on that tournament should be void, if the knifeman has bet heavily on Sharapova not to win it, and because of her being knifed, she then doesn’t make the final and win. However, you could then reach a situation where someone injures a player deliberately, expecting that a prediction market would be voided, which they could also benefit from financially. A situation like this occurred in England in the seasons 1995/1996 and 1996/1997, where floodlights at soccer games were deliberately sabotaged, forcing abandonment of the matches concerned, as a result of the saboteurs not liking the half time scoreline. There is an incentive for someone to bet heavily against a Seles or a Sharapova, and then seriously wound or assault them to alter the outcome of a sports prediction market, but there is also an incentive to try to get a prediction market voided. The knifeman benefits from ensuring that Sharapova or Seles cannot win the tournament, but the saboteur benefits from the market being voided. The answer to the first one is probably to void the market due to foul play, removing the financial incentive to knife a female tennis player, but the chance to get a void market will provide a financial incentive to try to get the event abandoned,………. how should the arbiters of a prediction market put the right safeguards in place to remove financial moral hazard from the market?
Answer these questions below this present post or here.
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The recommendation for safe-harbor of a group of influential economists to the CFTC aims squarely at the 4(c)3(K)* clause of the Commodity Exchange Act. The CFTC may approve a public interest exemption under 4(c) provided that the affected contracts are traded only between “-appropriate persons”-. 4(c)3(k) is the only qualification that would accommodate “-retail”- trading in the style of IEM, allowing, “-Such other persons that the Commission determines to be appropriate in light of their financial or other qualifications, or the applicability of appropriate regulatory protections.”- Regarding “-other qualifications”-, the economists recommend:
“-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.
Regarding the applicability of regulatory protections, the economists recommend that such markets should be limited to small-stakes, low-fee contracts. This limitation addresses consumer protection because the CFTC is typically much less interested in non-levered transactions, and there is little chance of being able to manipulate a market with a small-stakes account. Possibly, consumer protection measures could completely satisfy 4(c)3(K).
The safe-harbor proposal looks like an expedient option that would avoid the problems of treating event markets as excluded commodities (or exempt commodities), which were touched on last time. One problem the CFTC faces is selecting a principle that would include only markets that pass an economic purpose test within their jurisdiction, and the safe-harbor proposal avoids this problem. Although there doesn’-t seem to be anything in the CEA to indicate that an exempted market could possibly lie outside the agency’-s jurisdiction, Congress has determined – significantly – that, “-Rather than making a finding as to whether a product is or is not a futures contract, the Commission in appropriate cases may proceed directly to issuing an exemption.”-
Arguably, if someone were to set-up non-profit small-stakes exchanges similar to the ones the economists describe, they would not need CFTC safe-harbor anyway – especially if they restrict trading to States where the predominant factor test applies. Safe-harbor would, however, allow for exchange profits.
I believe that a combined approach would work best. Treating event markets as excluded commodities would not contradict granting some exchanges public interest safe-harbors, which would especially be appropriate if they wanted to host markets like research science claims, where a trader might be in control of the outcome. Exchanges seeking to host larger stake markets useful for hedging could do so with a trading prohibition for people who might be in control of the outcome. From the CFTC’-s perspective, the safe-harbor would be a less complicated option with regard to their jurisdictional scope. Ultimately, statutory clarification is needed.
* This section is listed as USC Title 7, Chapter 1 6(c) here.
Cross-Posted from RM&-P
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Measured Enthusiasm for Prediction Markets – (PDF file) – by Jason Ruspini.
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My thoughts:
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Jason Ruspini on the regulation of US event derivative markets:
CFTC-like regulation would save these markets from having to navigate national and state gambling laws, but would come at the cost of flexibility. Some contracts would not be approved for political reasons even if they had demonstrable hedging utility and “economic purpose”.
Insofar as event markets are within the CFTC’-s jurisdiction, they would likely be approved as “-excluded commodities”-. Here is the relevant part of the definition within the Commodity Exchange Act:
(iv) an occurrence, extent of an occurrence, or contingency (other than a change in the price, rate, value, or level of a commodity not described in clause (i))
that is—
(I) beyond the control of the parties to the relevant contract, agreement, or transaction- and
(II) associated with a financial, commercial, or economic consequence.
With the putative terrorism and assassination markets, by their nature, it is impossible to reliably identify who might manipulate an outcome. It could be argued then that such contracts do not involve commodities and lie outside the jurisdiction of the CFTC.* The counterargument is that such markets are actually “-exempt commodities”-, defined broadly in the CEA as “-all non-agricultural, non-excluded commodities”-. This is something for the CFTC to clarify: are event markets “-excluded commodities”-, “-exempt commodities”-, or might they fall into either category depending on their specifics? Examples of exempt commodities are energy products, metals and quasi-currencies like energy, bandwidth and carbon credits. In practice then, if not by law, exempt commodities have involved something deliverable in units other than cash, although specific contracts might also be cash-settled.
It is a good bet then that the CFTC would classify event markets as excluded commodities. Additionally, invoking the “-beyond the control”- clause would be a very antiseptic way for the agency to repudiate markets based on terrorist events and the like, although they would risk losing the ability to punish similar markets that do not meet all criteria. Putting that issue aside for a moment and considering only the CFTC’-s approval process, this treatment would bring up two problems with markets that the agency might want to regulate. Each of these problems has a solution.
First, wouldn’-t election and policy markets also be disqualified by the clause? After all, a candidate could throw an election for profit, or perhaps more likely, engage in some sort of “-point shaving”-. Remember, these are not securities and thus not subject to insider-trading laws. The CEA, however, includes a section 13(f) prohibiting members of exchanges from trading on material nonpublic information obtained through their exchange duties. It is feasible to create similar trading restrictions at the regulatory level, by disallowing candidates, their staffs and proxies from trading.
Such trading prohibitions would reasonably ensure that no trader would be in control of the outcome of the contract. The CFTC could levy a special trading fee (much less than 1% notional) on such contracts to offset the relative work they might entail. The framework for such an arrangement could possibly be clarified on the CFTC’-s next reauthorization. In a sense, it was unfortunate that their request for comments on event markets came so late in their recent reauthorization process. From another perspective, they ostensibly have until 2013 to exercise innovative, progressive policy.
Now, what if someone not barred from trading possesses damning information, photos, etc, on a candidate? By deciding whether or not to release that information, are they then “-in control”- of the contract’-s outcome? It’-s doubtful. Even though they might influence the contract’-s outcome, they are not “-in control”- of it. The situation is similar to whether or not a trader, who might be aware of a new oil find or simply has a large account, is in control of that non-”-excluded”- commodity price. In general, the rules should be designed to elicit as much information as possible, falling short of allowing traders to decide a 0 or 100 settlement.
The second issue is the implicit assassination option in candidates’- contract prices.** This issue could be easily dealt with, as Intrade does with their updated rules. Clearly this would be necessary with CFTC-regulated contracts, or else an unknown might be in control of their outcomes. The CFTC rule might work as follows. Upon a death, all contracts would be immediately cash-settled at their last price before the event. As soon as possible, an updated set of contracts would then begin trading so that no trader is able to profit or lose from the jump in prices. This process would be similar to traders simply rolling into a new contract maturity. It would be disruptive, but nothing to complain about compared to the tragedy of the situation. Small modifications to the rule could address scenarios where a candidate is incapacitated for some time during which their candidacy is uncertain.
A more challenging scenario is the possibility of a manipulation preceding the event such that the forced settlement locks-in profits, presumably just as market power is exhausted. Regulations could provide for an investigation of such situations, and the relevant transactions and profits shouldn’-t be too hard to find with that level of scrutiny.
This framework addresses several of the questions posed in the CFTC’-s concept release. That document and comments elsewhere seem to indicate a reluctance to expand jurisdiction to the point where sports markets and gaming might be included. Officials now and then harken back to the pre-CFMA economic purpose test, but that test could be effectively reconstituted for event markets with a policy decision such that those markets will only be approved as excluded commodities, subject to their specific “-economic consequence”- clause. In itself, that policy would not impinge on the agency’-s ability to prosecute unauthorized exchanges in similar markets (and hopefully they will treat Intrade with some degree of amnesty given the ambiguous and arbitrary law of this country). While this policy would leave the door open even for regulated sports-based hedging markets, the CFTC could leave the prosecution of online sports and gaming exchanges to the DOJ and state authorities for now. The burden of the duty to prosecute illegally operating exchanges might be smaller than feared, and, again, the agency could levy a special fee on such regulated markets to offset demands on its resources.
These opinions perhaps pose more questions than they answer. The Commodity Exchange Act is broad enough to encompass jurisdiction over event markets. The CFTC seems unsettled that the language is too broad, but there are ways for them to calibrate their jurisdiction at the policy level.
* A market in research science claims would follow the same logic in terms of jurisdiction. Even without a no-action letter or public interest exemption, the chances seem very good that such an exchange could operate without interference if they stayed with small claims, did not advertise and did not accept trades from States where the predominant factor test does not apply.
** Let me condemn Hillary Clinton’-s recent remarks as sinister and irresponsible.
Cross-Posted from RM&-P