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.

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

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.

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.

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

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

  1. Our prediction market luminaries signed Bob's petition -and the losers are InTrade, TradeSports and BetFair. | Midas Oracle .ORG said:

    […] Site Map The American Enterprise Institute’s proposals to legalize real-money prediction markets in the… […]

  2. WEB EXCLUSIVE: How the US prediction market scene will look like after the CFTC ruling on "event markets" | Midas Oracle .ORG said:

    […] have read many time the CFTC’s Concept Release on the Appropriate Regulatory Treatment of Event Contracts… notably what how they define “event markets”, how they are going to extend their […]

  3. Will the CFTC allow FOR-PROFIT prediction exchanges to deal with "event markets"? | Midas Oracle .ORG said:

    […] markets” (event derivative markets that can’t be used for hedging risks) be not for profit —as the Iowa Electronic Markets […]

  4. NOT-FOR PROFIT… or… FOR-PROFIT… That is the question. | Midas Oracle .ORG said:

    […] CFTC’s Concept Release on the Appropriate Regulatory Treatment of Event Contracts… notably how they define “event markets”, how they are going to extend their “exemption” to other IEM-like prediction exchanges, and how they framed their questions to the public. […]

  5. In the for-profit vs not-for profit debate, our prediction market luminaries, doctored by Bob, are on the wrong side of the issue. | Midas Oracle .ORG said:

    […] the American Enterprise Institute’s proposals to legalize real-money prediction markets in the United …,they advise the CFTC not to allow for-profit prediction market companies (like InTrade, TradeSports […]

  6. CALL TO ACTION: Let's fight so that the CFTC allows the FOR-PROFIT prediction exchanges to deal with "event markets". | Midas Oracle .ORG said:

    […] prediction exchanges… …while some others think that’s not the case… …even though a powerful American think tank is advocating that only not-for-profit prediction exchang…… …all that means that this issue is probably still up in the air… …and […]

  7. CLOCK IS RUNNING FAST: 17 days to go, if we want to counter AEI's push for not-for-profit prediction exchanges. | Midas Oracle .ORG said:

    […] CFTC’s Concept Release on the Appropriate Regulatory Treatment of Event Contracts… notably how they define “event markets”, how they are going to extend their “exemption” to other IEM-like prediction exchanges, and how they framed their questions to the public. […]

  8. The CFTC is going to close the comments in 16 days. We have 16 days left to convince the CFTC to accept FOR-PROFIT prediction exchanges, and counter the evil petition organized by the American Enterprise Institute (which has on its payroll Paul Wolfowitz, said:

    […] CFTC’s Concept Release on the Appropriate Regulatory Treatment of Event Contracts… notably how they define “event markets”, how they are going to extend their “exemption” to other IEM-like prediction exchanges, and how they framed their questions to the public. […]

  9. The CFTC is going to close the comments in 15 days. We have 15 days left to convince the CFTC to accept FOR-PROFIT prediction exchanges, and counter the evil petition organized by the American Enterprise Institute (which has on its payroll Paul Wolfowitz, said:

    […] CFTC’s Concept Release on the Appropriate Regulatory Treatment of Event Contracts… notably how they define “event markets”, how they are going to extend their […]

  10. The CFTC is going to close the comments in 14 days. We have 14 days left to convince the CFTC to accept FOR-PROFIT prediction exchanges, and counter the evil petition organized by the American Enterprise Institute (which has on its payroll Paul Wolfowitz, said:

    […] CFTC’s Concept Release on the Appropriate Regulatory Treatment of Event Contracts… notably how they define “event markets”, how they are going to extend their […]

  11. The CFTC is going to close the comments in 13 days. We have 13 days left to convince the CFTC to accept FOR-PROFIT prediction exchanges, and counter the evil petition organized by the American Enterprise Institute (which has on its payroll Paul Wolfowitz, said:

    […] CFTC’s Concept Release on the Appropriate Regulatory Treatment of Event Contracts… notably how they define “event markets”, how they are going to extend their […]

  12. The CFTC is going to close the comments in 12 days. We have 12 days left to convince the CFTC to accept FOR-PROFIT prediction exchanges, and counter the evil petition organized by the American Enterprise Institute (which has on its payroll Paul Wolfowitz, said:

    […] CFTC’s Concept Release on the Appropriate Regulatory Treatment of Event Contracts… notably how they define “event markets”, how they are going to extend their […]

  13. COMMENTS TO THE CFTC: What to expect from Tom W. Bell and Jason Ruspini | Midas Oracle .ORG said:

    […] seems that both will, independently of each other, write to the CFTC about the legalization of the “event markets” —a bad term for the “non-hedgeable event derivative markets” (which is also, […]

  14. The CFTC is going to close the comments in 12 days. We have 12 days left to convince the CFTC to accept FOR-PROFIT prediction exchanges, and counter the evil petition organized by the American Enterprise Institute (which has on its payroll Paul Wolfowitz, said:

    […] CFTC’s Concept Release on the Appropriate Regulatory Treatment of Event Contracts… notably how they define “event markets”, how they are going to extend their […]

  15. Jason Ruspini will answer SOME of these CFTC questions. - 12 days left, Jason. | Midas Oracle .ORG said:

    […] CFTC’s Concept Release on the Appropriate Regulatory Treatment of Event Contracts… notably how they define “event markets”, how they are going to extend their […]

  16. The CFTC is going to close the comments in 11 days. We have 11 days left to convince the CFTC to accept FOR-PROFIT prediction exchanges, and counter the evil petition organized by the American Enterprise Institute (which has on its payroll Paul Wolfowitz, said:

    […] CFTC’s Concept Release on the Appropriate Regulatory Treatment of Event Contracts… notably how they define “event markets”, how they are going to extend their […]

  17. The CFTC is going to close the comments in 10 days. We have 10 days left to convince the CFTC to accept FOR-PROFIT prediction exchanges (e.g., InTrade USA or BetFair USA), and counter the puritan and sterile petition organized by the American Enterprise I said:

    […] – The American Enterprise Institute’s proposals to legalize the real-money prediction markets in the… […]

  18. The CFTC is going to close the comments in 9 days. We have 9 days left to convince the CFTC to accept FOR-PROFIT prediction exchanges (e.g., InTrade USA or BetFair USA), and counter the puritan and sterile petition organized by the American Enterprise Ins said:

    […] – The American Enterprise Institute’s proposals to legalize the real-money prediction markets in the… […]

  19. A letter to the CFTC about for-profit prediction market exchanges | Midas Oracle .ORG said:

    […] exchanges as well as restricting fees charged by such exchanges to “modest” ones (link). This is what I […]

  20. The CFTC is going to close the comments in 6 days. We have 6 days left to convince the CFTC to accept FOR-PROFIT prediction exchanges (e.g., InTrade USA or BetFair USA), and counter the puritan and sterile petition organized by the American Enterprise Ins said:

    […] – The American Enterprise Institute’s proposals to legalize the real-money prediction markets in the… […]

  21. Horizon 2015: A long-term strategic perspective for the real-money prediction markets | Midas Oracle .ORG said:

    […] prediction market academics (with some “notable exceptions“) are all ready to feed on InTrade trading data, but […]

  22. The Best Resources On Prediction Markets | Midas Oracle .NET said:

    […] The Promise of Prediction Markets – (PDF file) – (MO excerpts) – by American Enterprise Institute – […]

  23. What InTrade CEO John Delaney told the CFTC about "event markets" (prediction markets) | Midas Oracle .ORG said:

    […] Yet many academics, with some notable exceptions, do temper their policy prescription to suggest a “safe harbor” for academic sites where research might be more generally available. As noted above Intrade has gladly supplied its event market data, typically free of charge to most of the leading prediction market academics and their students, and we are committed to encouraging the future study of event markets by continuing to supply our event market data free of charge or at very deep discounts. The academics that study event markets do a great service in developing our understanding of the strengths and weaknesses of event markets. Some commentators suggest that market liquidity and breadth typically benefit all event market stakeholders. Thus far commercial platforms like Intrade seem to be providing the greatest depth and breadth in event markets. […]

  24. Gary Gensler will head the Commodity Futures Trading Commission in 2009. | Midas Oracle .ORG said:

    […] – American Enterprise Institute’s proposals to legalize the real-money prediction markets in the Uni… […]

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