Prediction markets are about lowering transaction costs. That’s how sports come in.
Chris F. Masse June 12th, 2008
I found John Blank’s letter to the CFTC (discovered by Mike Giberson) as interesting as Vernon Smith’s one.
Here’s the PDF file —in case you missed it.
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I would like to focus on John Blank’s 3-point introduction. In short, he describes a modern world where both the derivative exchanges and the CFTC have to adapt to an Internet-empowered population of citizens who will want to access the Web-based derivative markets. As I understand him, he says that the whole derivative industry is going the prediction market industry way, that is with:
- Web-based trading (no pits);
- simplified structures of derivatives.
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Behind all this is the reduction of the derivative trading costs. And, in my view, that goes hand in hand with the existence of generalist prediction exchanges that are allowed to have the widest offerings possible (including sport event derivatives). Indeed, prediction exchanges that would be confined to some topics only (politics, current news, finance) would have higher transaction costs, which does not seem to be the right direction of history.
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Finally, let me say again that I strongly disapprove the use of the term “event markets” —which would seem to mean that there is selling and buying of “events”. Sounds stupid. Our industry is imposing its “prediction markets” keyword to the media, and to BetFair in the U.K.. I don’t think it’s a good idea to surrender to a bunch of bureaucrats in Chicago. Let’s impose our views on them.
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“Prediction markets” is the right keyword in the brand-new world described by John Blank —a world where more and more people (”retail users”, as the CFTC labels them 
) will access the derivative markets, and, of particular interest to us, the event derivative markets. Indeed, it’s easier to explain to people what we mean when we say that:
- It’s about a prediction traded on a market.
- This prediction is bought or sold at a price determined by the market mechanisms.
- This market generates a probablistic prediction, expressed in percentage, about the likelihood of the outcome of an event.
Simple but not simplistic, as Einstein would like it.
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UPDATE: Sean Park’s comment, just below this post, makes me think about the term “outcome derivative markets”… Would it be better than “event derivative markets”? I’ll have to think about that…
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- Analysis (Industry) , Analysis (Meta) , Finance , Regulations
- Comments(3)
Personally my preferred nomenclature is ‘outcome markets’ - markets in outcomes
- which imho accurately describes all derivatives markets irrespective of the
underlying. Agree that event markets is not an ideal term, but think prediction
markets can cause unnecessary confusion as to what they can (and cannot)
deliver. That said I’m not sure it’s worth getting too worked up about.
Keep up the good work with Midas Oracle.
@Sean: “Outcome derivative markets”… I will have to think about that…
[...] markets are somewhat predictive. You don’t define specifically our event derivative markets if you call them “predictive [...]