Why Robin Hanson is right to freak out about the upcoming CFTC ruling on “event markets” (prediction markets)
Chris F. Masse July 23rd, 2008
Robin Hanson is trembling in his pants:
Coming soon after speculators were blamed for rising commodity prices, I fear this is bad news for hopes for legal prediction markets anytime soon.
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The CFTC decisions are politically sensible in 4 areas:
- The CFTC will never allow real-money prediction markets on sports. That’s too close to gambling, for some critics. (Some ventures have approached the CFTC with the idea for new financial instruments with sport hedging capability. We will see what the CFTC makes of that in the near future.)
- The CFTC will never allow real-money prediction markets on politics that will allow economic agents to hedge against the future economic consequences of the election of one particular presidential candidate. Hedging on “Obama as 2009 US president” is too sensitive. I expect the CFTC to send HedgeStreet and the CME Group packing. The CFTC won’t classify political elections as “excluded commodities”, as those DCMs asked. (But it could be that the CFTC will find another way to allow DCMs to offer prediction markets on political elections. That could be.)
- The CFTC will never allow real-money prediction markets on terrorism. The CFTC will tell Tom W. Bell to get lost in his Orange county.
- The CFTC will never allow insider trading on public, real-money prediction markets. Robin Hanson has long argued that insider trading enhances the accuracy of the marked-based predictions. The CFTC will never rule in such a way. Plus, insider trading is a very touchy issue for the event derivative traders, who hate to get skimmed by people in the know. Rightfully, BetFair make their possible to enforce fair trading on their prediction markets.
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- Analysis (Industry) , Regulations
- Comments(1)
With political markets, I am much much more optimistic than “never”. With reasonable trading restrictions and other rules in place, there is little argument that political markets are not excluded commodities, and that some could not be self-certified.
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The CFTC generally does not regulate against insider trading, as opposed to manipulation. The insider trading rules Hedgestreet and I propose are mainly to conform to the definition of excluded commodity by avoiding outcome manipulation. CME argues that such rules are unnecessary, citing the role of the Fed in determining interest rate policy. I tend to think that is a special case.