Just a short thought. As you all know, libertarian and law professor Tom Bell (hey, sorry, Tom “W” Bell) favors a (state or federal) legislation for the US-based real-money prediction exchanges. And as you all know, he dislikes the CFTC route. Don’t repeat that to Jason Ruspini or Paul Tetlock, but I fully understand his views [*]. Would it be a good idea for Tom Bell to join the American Gaming Association’s subtile quest for online gambling legislation? After all, a betting exchange is all about… betting (and speculating).
What those two CFTC fanatics completely forget in their computation: NO SPORTS PREDICTION MARKETS = NO PROFITABILITY FOR A RETAIL, REAL-MONEY PREDICTION EXCHANGE (BETTING EXCHANGE).
Plus, that kind of legislation would have the happy backing (I suppose) of BetFair. — $$$
One glitch could be the US horseracing associations —although in many countries, BetFair has managed to win them over. (Australia is a problem, these days, if I understand well.)
[*] I find it completely silly that he restrict his proposal to science, technology, and public policy prediction markets, though.
The sets of profitable and (subjectively) interesting things overlap but are not identical for most readers of this blog. Not all profitable things are interesting (e.g. a house-cleaning service business). Not all interesting things are profitable.
Election markets are both. Of course, sports markets will be more profitable overall for the foreseeable future.
My open question on prediction markets at this point is simply why Hedgestreet has not yet launched election contracts. This has replaced more general questions of US legality and regulation for me.
A retail, real-money prediction exchange (betting exchange) that would float political event derivative contracts, only, would not be profitable.
HedgeStreet (a retail, betting exchange floating financial event derivatives) is not yet profitable.
Financial + Political Event Derivatives = Not Profitable
It’s sports prediction markets that attract traders en masse. Sports prediction markets = Killer ap, regarding illegal bookmakers, Las Vegas bookmakers, and pari-mutuel betting operators.
Profitability = Sustainability of the “interest”.
If HedgeStreet were to organize prediction markets on US politics, that would be great, OF COURSE. Leave them till the end of the first quarter 2008.
I’ve always been a fan of legalizing online gaming. I’m not a big fan of creating a new federal regulatory structure to do so, however.
You can extrapolate little from the example of Hedgestreet.
I agree that the profitability of an election event derivatives exchange would be less than that of a sports&election event derivatives exchange.
All exchanges in the US happen to be regulated.
“I’ve always been a fan of legalizing online gaming. I’m not a big fan of creating a new federal regulatory structure to do so, however.”
It’s a respectable opinion. However, as a tactics, I suggested that you teamed up with AGA. Just a suggestion from somebody who is totally foreign to US laws and regulations.
“All exchanges in the US happen to be regulated.” What I really like with TradeSports-InTrade and BetFair is that they can create just any kind of event derivatives. Anything. Any contract that can cross your fertile mind can be created. Al Gore winning an Oscar. Al Gore winning a Nobel Prize. Al Gore sleeping with Britney Spears. Al Gore president in ’09. Anything.
Financial innovation pushed at the extreme.
Just to challenge a little the conventional wisdom that commercial prediction market exchanges need sports to make money: in my paper on Tradesports/Intrade’s binary Dow options, I note that only 54% of Tradesport’s volume comes from sports. 35% is financial contracts, 7% politics/current events, and 4% is entertainment.
This suggests that a real-money exchange like Intrade could probably survive without sports (obviously, it would prefer not to have to). Take away the financial contracts too though, and things don’t look so good.
(Of course, a caveat to this market share-based analysis is that ignores possible economies of scope. For instance, it may be that running sports markets attracts the “dumb money” that you need for the financial and politics prediction markets to work.)
For the data see:
http://faculty-gsb.stanford.edu/zitzewitz/Research/IntradayVol.pdf (Table 1)