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How the CFTC try to define our prediction markets

Chris F. Masse — Wed, 18 Jun 2008 21:14:22 +0000

CFTC’s Concept Release on the Appropriate Regulatory Treatment of Event Contracts

II. Commodity Options and Futures and the Attributes of Event Contracts

The Commission, with some exceptions, has exclusive jurisdiction over two relevant types of derivative instruments —commodity options and commodity futures contracts.

Section 4c(b) of the Act gives the Commission plenary jurisdiction over commodity options, and provides that “[n]o person shall * * * enter into * * * any transaction involving any commodity regulated under this Act which is of the character of, or is commonly known to the trade as, an option * * * contrary to any rule, regulation or order of the Commission[.]”

Section 2(a)(1)(A) of the Act provides that the Commission shall have exclusive jurisdiction with respect to accounts, agreements, and transactions (including options) involving contracts of sale of a commodity for future delivery.

Event contracts, depending on their underlying interests, can be designed to exhibit the attributes of either options or futures contracts.

A significant number of event contracts are structured as all-or-nothing binary transactions commonly described as binary options. \8\ Binary event contracts typically pay out a fixed amount when an outcome either occurs or does not occur. The trading of such contracts can facilitate the discovery of information by assigning probabilities, through market-derived prices, to discrete eventualities. For example, a binary contract based on whether a particular person will run for the presidency in 2012, can pay a fixed $100 to its buyer if and only if that individual runs for the presidency in 2012. If the contract’s traders believe that the likelihood of the individual’s candidacy in 2012 is around 17 percent, the price of the contract will be around $17, and will approximate the market’s consensus expectation of the individual’s candidacy.

\8\ See, e.g., Intrade Prediction Markets, Current Events Contracts

In addition to binary event transactions, the term event contract has also been used to identify transactions, based on interests other than market prices, which resemble futures contracts. For instance, these types of event contracts can price consensus estimates of moving values, such as the number of hours the average U.S. resident spends in traffic or the share of votes that a particular candidate for political office may receive. Unlike binary transactions, and similar to any commodity futures contract, this type of contract creates continuous and ongoing obligations that are linked to moving measures or levels, as opposed to being dependent on the outcome of a single discrete occurrence.

III. The Commission’s Regulatory Purview

[...]

For the purpose of discussion and analysis, the types of event contracts that Commission staff has reviewed can be categorized, albeit imperfectly, as contracts that are based on narrow commercial measures and events, contracts based on certain environmental measures and events, and contracts based upon general measures and events.

Narrow commercial measures quantify and reflect the rate, value, or level of particularized commercial activity, such as a specific farmer’s crop yield.

Narrow commercial events, on the other hand, are events that might, in and of themselves, have commercial implications, such as changes in corporate officers or corporate asset purchases.

Environmental measures can be characterized as quantifications of weather phenomena, such as the volatility of precipitation or temperature levels, that do not predictably correlate to commodity market prices or other measures of broad economic or commercial activity.

By comparison, environmental events can include the formation of a specific type of storm, within an identifiable geographic region, the likelihood of which will not predictably correlate to commodity market prices or measures of broad economic or commercial activity.

General measures can be described as measures that are not commercial or environmental measures. As such, general measures do not quantify the rate, value, or level of any commercial or environmental activity and can, for example, include the number of hours that U.S. residents spend in traffic annually or the vote-share of a particular presidential candidate.

Similarly, general events, such as whether a Constitutional amendment will be adopted or whether two celebrities will decide to marry, can be described as events that do not reflect the occurrence of any commercial or environmental event. The category of general measures and events can be further divided into a multitude of subcategories, such as political or entertainment measures or events.

Since 1992, Commission-regulated exchanges have listed for trading a variety of commodity futures and options contracts with payout terms based on interests other than price-based interests. These contracts involve interests as diverse as regional insured property losses, the count of bankruptcies, temperature volatilities, corporate mergers, and corporate credit events. \12\

While not strictly price-based, the interests underlying these contracts have been viewed by Commission staff as having generally-accepted and predictable financial, commercial or economic consequences.

In other words, unlike the interests that event contracts cover, these underlying interests have been viewed as measures and occurrences that reasonably could be expected to correlate to market prices or other broad-based commercial or economic measures or activities.

\12\ For example, the Chicago Board of Trade’s catastrophe single event insurance option contracts (which are no longer listed) paid out a fixed amount if and only if insured property damage exceeded $10 billion for a specific region during a specified interval of time.

CFTC’s Concept Release on the Appropriate Regulatory Treatment of Event Contracts

Chris F. Masse — Tue, 17 Jun 2008 21:55:15 +0000

CFTC – (PDF file):

CFTC’s Concept Release on the Appropriate Regulatory Treatment of Event Contracts

SUMMARY:

The Commodity Futures Trading Commission (Commission or CFTC) is soliciting comment on the appropriate regulatory treatment of financial agreements offered by markets commonly referred to as event, prediction, or information markets. \1\ For ease of reference and to avoid classification issues, these financial agreements are referred to herein as event contracts. In general, event contracts are neither dependent on, nor do they necessarily relate to, market prices or broad-based measures of economic or commercial activity. \2\ Rather, event contracts may be based on eventualities and measures as varied as the world’s population in the year 2050, the results of political elections, or the outcome of particular entertainment events. \3\ The Commission’s staff has received a substantial number of requests for guidance on the propriety of trading various event contracts under the regulatory rubric of the Commodity Exchange Act (CEA or Act). Given the substantive and practical concerns that may arise from applying federal regulation to event contracts and markets, the Commission believes that it is appropriate to solicit and consider the public’s comments in advance of issuing any definitive guidance.

\1\ See Michael Gorham, Event Markets Campaign for Respect, Futures Industry Magazine (Jan./Feb. 2004); Justin Wolfers and Eric W. Zitzewitz, Prediction Markets, 18 J. Econ. Persp. 107 (Spring 2004); Robert W. Hahn and Paul C. Tetlock, Using Information Markets to Improve Public Decision Making, AEI-Brookings Joint Center for Regulatory Studies Working Paper 04-18 (March 2005); Hal R. Varian, Can Markets Be Used to Help People Make Nonmarket Decisions?, The New York Times (May 8, 2003).

\2\ The term event contract is not intended to encompass contracts that generate trading prices that predictably correlate with market prices or broad-based measures of economic or commercial activity, or contracts which substantially replicate other commodity derivatives contracts, such as binary options on exchange rates or the price of crude oil. The aforementioned contracts are unambiguously subject to CFTC regulation.

\3\ See, e.g., Retired claims list at the Foresight Exchange

DATES: Comments must be received by July 7, 2008.

ADDRESSES: Comments should be sent to the Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581, Attention: Office of the Secretariat. Comments may be sent by facsimile to 202.418.5521, or by e-mail to secretary@cftc.gov.

Reference should be made to the “Concept Release on the Appropriate Regulatory Treatment of Event Contracts.” Comments may also be submitted through the Federal eRuleMaking Portal at http://frwebgate.access.gpo.gov/cgi-bin/leaving.cgi?from=leavingFR.html&log=linklog&to=http://www.regulations.gov.

FOR FURTHER INFORMATION CONTACT: Bruce Fekrat, Special Counsel, Office of the Director (telephone 202.418.5578, e-mail bfekrat@cftc.gov), Division of Market Oversight, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

I. Introduction

A. Purpose of the Release

Since 2005, the Commission’s staff has received a substantial number of requests for guidance on the propriety of offering and trading financial agreements that may primarily function as information aggregation vehicles. These event contracts generally take the form of financial agreements linked to eventualities or measures that neither derive from, nor correlate with, market prices or broad economic or commercial measures. Event contracts have been based on a wide variety of interests including the results of presidential elections, the accomplishment of certain scientific advances, world population levels, the adoption of particular pieces of legislation, the outcome of corporate product sales, the declaration of war and the length of celebrity marriages. In response to the various requests for guidance, and to promote regulatory certainty, the Commission has commenced a comprehensive review of the Act’s applicability to event contracts and markets. To further its review, the Commission is issuing this release to solicit the expertise of interested persons, including CFTC-registered markets, exempt markets, over-the-counter derivatives dealers, capital market participants, legal practitioners, state and federal regulatory authorities, academicians and research institutions with respect to the practical and regulatory issues relevant to regulating event contracts and markets.

Broadly speaking, the Commission must determine:

1. Whether event contracts are within the Commission’s jurisdiction and if so, why (or why not)?

2. If event contracts are within the Commission’s jurisdiction, should there be exemptions or exclusions applied to them and if so, why (or why not)?

3. How should the Commission address the potential gaming aspects of some event contracts and the possible pre-emption of state gaming laws?

The Commission urges interested persons to provide detailed and comprehensive comments that will assist the Commission in conducting its review and analysis of the Commission’s regulatory purview over event contracts, the interests that may appropriately underlie Commission-regulated transactions, and the appropriate regulatory treatment of markets that may offer event contracts.

B. CFTC Experience With Event Contracts

The Iowa Electronic Markets (IEM), an electronic trading facility that functions as an experimental and academic program, is one of the better known and oft discussed real-money event markets currently in operation. \4\

The IEM operates in part pursuant to a 1993 no-action letter issued by Commission staff which, without asserting jurisdiction or describing the potential parameters of the Commission’s regulatory purview over the market, allows the IEM to list various event contracts subject to certain conditions and limitations for covered contracts. \5\

\4\ The IEM is run by the University of Iowa Departments of Accounting and Economics and the University’s College of Business Administration.

\5\ CFTC Staff Letter No. 93-66 [1992-1994 Transfer Binder] Comm. Fut. L. Rep. (CCH) ] 25,785 (June 18, 1993). This no-action letter superseded the operative terms of a more limited letter issued to the IEM in 1992. The 1993 letter’s relief extends to IEM contracts based on political elections, economic indicators, and certain currency exchange rates. The letter requires that the IEM limit access to any one submarket to between 1,000 and 2,000 traders. The letter also sets the maximum amount that any single participant can risk in any one submarket at five hundred dollars. The letter makes clear that relief is premised on, among other factors, the IEM’s representations concerning the market’s specific manner of operation and academic purpose, and the assurance that the IEM will not receive any profit or other form of compensation from its activities.

The IEM continues to be most recognized for its presidential election contracts. The IEM offers a vote share contract and a winner-take-all contract for the 2008 U.S. presidential election cycle.

Its vote share contract is ultimately associated with the candidates that will be nominated by each party. Each vote share contract has a maximum value of $1 and a contract payout that is directly based on the percentage of the popular vote received by each of the two major party candidates. For instance, a contract for a candidate who receives 40% of the popular votes cast for both candidates will be worth $.40 at settlement.

In contrast, the IEM’s 2008 presidential election winner-take-all contract will have a value of either $1 or $0 at settlement. The IEM’s winner-take-all-contract is also associated with a specific candidate, but instead of having a payout that is tied to a particular percentage of the popular vote received by each candidate, the contract will distribute a fixed payout of $1 to its holder if and only if the candidate referenced by the contract receives a greater percentage of the popular vote cast.

Although the IEM’s presidential election contracts are imperfect vehicles for the discovery of information, there is some consensus on the question of whether the IEM’s contracts can function capably as predictive tools. \6\ Indeed, trading data generated by some IEM presidential election contracts arguably have produced better predictive indicators than data obtained from professional polling organizations. \7\

\6\ See, e.g., Michael Abramowicz, Information Markets, Administrative Decision Making, and Predictive Cost-Benefit Analysis, 71 U. Chi. L. Rev. 933, 950 (2004).

\7\ See Cass R. Sunstein, Group Judgments: Statistical Means, Deliberation, and Information Markets, 80 N.Y.U. L. Rev. 962, 1029-31 (June 2005).

II. Commodity Options and Futures and the Attributes of Event Contracts

The Commission, with some exceptions, has exclusive jurisdiction over two relevant types of derivative instruments —commodity options and commodity futures contracts.

Event contracts, depending on their underlying interests, can be designed to exhibit the attributes of either options or futures contracts.

\8\ See, e.g., Intrade Prediction Markets, Current Events Contracts

III. The Commission’s Regulatory Purview

As discussed above, with some limited exceptions, the regulatory purview of the Act extends to and includes transactions that are either structured as options or futures when such transactions involve interests that constitute commodities under the Act.

Section 1a(4) of the Act defines commodity in two distinct ways. First, Section 1a(4) specifically enumerates certain articles or goods as commodities. \9\

Second, Section 1a(4) defines the term commodity as including those articles or goods, and services, rights or interests, “in which contracts for future delivery are presently or in the future dealt in.” Therefore, an underlying interest that is not enumerated in Section 1a(4) may be a statutory commodity under the Act if it reasonably can underlie a futures contract on a forward looking basis. \10\

\9\ 7 U.S.C. 1a(4). Section 1a(4) of the Act enumerates the following commodities: wheat, cotton, rice, corn, oats, barley, rye, flaxseed, grain sorghums, mill feeds, butter, eggs, Solanum tuberosum (Irish potatoes), wool, wool tops, fats and oils (including lard, tallow, cottonseed oil, peanut oil, soybean oil, and all other fats and oils), cottonseed meal, cottonseed, peanuts, soybeans, soybean meal, livestock, livestock products, and frozen concentrated orange juice.

\10\ See United States v. Valencia, No. H-03-024, 2003 WL 23174749 at *8 (S.D. Tex Aug. 25, 2003) (noting that the determination of whether West Coast natural gas is “a commodity in which contracts for future delivery are presently or in the future dealt in,” is a fact question, and that “there is no evidence that West Coast gas could not in the future be traded on a futures exchange.”).

In addition to Section 1a(4), Section 1a(13) of the Act identifies certain interests as excluded commodities and thereby gives further shape to the statutory definition of commodity. \11\ The Section 1a(13) definition of excluded commodity is composed of four subsections. The third subsection defines the term to include any economic or commercial index that is based on prices, rates, values, or levels not within the control of any party to the relevant contract. The fourth subsection of Section 1a(13) provides that an excluded commodity includes an occurrence, extent of an occurrence, or contingency associated with a financial or economic consequence that is not within the control of the parties to the relevant transaction.

\11\ 7 U.S.C. 1a(13). Section 1a(13) of the Act provides that:

The term “excluded commodity” means–

(i) an interest rate, exchange rate, currency, security, security index, credit risk or measure, debt or equity instrument, index or measure of inflation, or other macroeconomic index or measure;

(ii) any other rate, differential, index, or measure of economic or commercial risk, return, or value that is–

(I) not based in substantial part on the value of a narrow group of commodities not described in clause (i); or

(II) based solely on one or more commodities that have no cash market;

(iii) any economic or commercial index based on prices, rates, values, or levels that are not within the control of any party to the relevant contract, agreement, or transaction; or

(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.

Narrow commercial measures quantify and reflect the rate, value, or level of particularized commercial activity, such as a specific farmer’s crop yield.

Narrow commercial events, on the other hand, are events that might, in and of themselves, have commercial implications, such as changes in corporate officers or corporate asset purchases.

IV. Further Statutory Background

Federal regulations were initially applied to commodity derivatives trading in 1921. \13\ At that time, Congress acknowledged that commodity futures markets could benefit commerce by facilitating the hedging of commercial risks and the discovery of reliable commodity prices. \14\ The Grain Futures Act of 1922, the forerunner to the CEA, consequently was enacted to promote the financial vitality of futures trading by limiting price manipulations and other disturbances that were prevalent at the time and widely perceived to result from excessive speculation. \15\

\13\ See, e.g., Hearing on Futures Trading Before the House Committee on Agriculture, 66th Cong., 3rd Sess. 1043 (1921); Hearings on H.R. 5676 Before the Senate Committee on Agriculture and Forestry, 67th Cong., 1st Sess. 452 (1921); Hearings on Futures Trading Before the House Committee on Agriculture, 67th Cong. 1st Sess. 7-9 (1921); 61 Cong. Rec. 4761 (1921) (remarks of Senator Capper, the sponsor of the Senate bill which became the Futures Trading Act of 1921 (later restyled as the Grain Futures Act of 1922 when found to be unconstitutional for its use of taxation to penalize off-exchange futures trading)).

\14\ See S. Rep. No. 871 (August 23, 1922). The Congressional record is replete with discussion of the commercial importance of commodity futures trading. The record suggests that commercial interests must be able to look to properly functioning commodity futures markets for market information and products that facilitate the making of marketing, financing, and distribution decisions. S. Rep. No. 93-1131, at 12 (1974). The Congressional record also indicates that an initial purpose behind regulating commodity futures trading was to secure fair and orderly markets for producers and other commercial participants who used the markets for price basing and hedging. Hearings on S. 2485, S. 2578, S. 2837 and H.R. 1311 before the Senate Committee on Agriculture and Forestry, 93d Cong., 2d Sess. at 234 (1974); see also 80 Cong. Rec. 10739 (April 11, 1974).

\15\ E.g., 61 Cong. Rec. 4761-4763 (1921) (remarks of Senator Capper); 61 Cong. Rec. 1379 (1921) (remarks of Rep. Bland); 61 Cong. Rec. 1313-1314 (remarks of Rep. Tincher, the sponsor of the House bill which became the 1921 Act); 61 Cong. Rec. 1376 (1921) (remarks of Rep. Gensman).

In identifying the national public interests that render federal regulation necessary, the Act focuses on the commercial benefits that well-functioning derivatives markets can provide by broadly expressing their critical functions. Customarily, hedging and price basing have been identified as two critical functions of the commodity derivatives markets. \16\ For instance, Section 3 of the Act, as amended by the Commodity Futures Modernization Act of 2000 (CFMA), \17\ finds that transactions subject to the CEA are affected with the national public interest because they provide a means for “managing and assuming price risks.” Section 3 of the Act also identifies price discovery and price dissemination as separate public interests warranting Federal regulation. \18\

\16\ Hedging occurs when positions acquired are economically appropriate to the reduction of risks in the conduct and management of a commercial enterprise. See, e.g., 17 CFR 1.3(z) (definition of bona fide hedging). Price basing, a function of price discovery and dissemination, can occur when commercial entities enter into transactions in a particular commodity based upon commodity futures prices for that or a related commodity, oftentimes at a differential.

\17\ Appendix E, section 108, Pub. L. 106-554, 114 Stat. 2763.

\18\ The hedging and price basing purposes of commodity futures trading are emphasized in other provisions of the Act as well. See, e.g., 7 U.S.C. 6a, 6b, and 6c. As a matter of background, the provision in the Grain Futures Act that was the forerunner of current CEA Section 3 provided that:

Transactions in grain involving the sale thereof for future delivery as commonly conducted on boards of trade and known as “futures” are affected with a national public interest; that such transactions are carried on in large volume by the public generally and by persons engaged in the business of buying and selling grain and the products and by-products thereof in interstate commerce; that the prices involved in such transactions are generally quoted and disseminated throughout the United States and in foreign countries as a basis for determining the prices to the producer and the consumer of grain and the products and by-products thereof and to facilitate the movements thereof in interstate commerce; that such transactions are utilized by shippers, dealers, millers, and others engaged in handling grain and the products and by-products thereof in interstate commerce as a means of hedging themselves against possible loss through fluctuations in price; that the transactions and prices of grain on such boards of trade are susceptible to speculation, manipulation, or control, which are detrimental to the producer or the consumer and the persons handling grain and products and by-products thereof in interstate commerce, and that such fluctuations in prices are an obstruction to and a burden upon interstate commerce in grain and the products and by-products thereof and render regulation imperative for the protection of such commerce and the national public interest therein.

Grain Futures Act, ch. 369, 42 Stat. 998 (Sept. 21, 1922). In 1936, Congress restyled the Grain Futures Act as the Commodity Exchange Act and amended this provision to substitute the word “commodity” for “grain.” Pub. L. 74-675, section 2, 49 Stat. 1491 (June 15, 1936).

Although repealed by the CFMA, former Section 5(g) \19\ of the Act may be relevant to analyzing the findings and purposes discussed in Section 3 of the Act. Former Section 5(g) provided that the Commission could not designate a board of trade as a contract market unless the board of trade demonstrated that transactions for future delivery in the commodity for which designation as a contract market was sought “will not be contrary to the public interest.” \20\ The public interest test of Section 5(g) included an “economic purpose” test, subject to a final test of the public interest. \21\ The economic purpose test applied under former Section 5(g) was used to prohibit the trading of certain contracts. Notably, the economic purpose test regarding contracts appropriate for trading on a futures exchange was not necessarily congruent with the scope of the Commission’s jurisdiction. Accordingly, while futures contracts that failed the economic purpose test were prohibited from trading on futures exchanges and thus illegal because of the on-exchange trading requirement, they (and any instrument with identical terms) remained futures contracts, fully subject to the Commission’s jurisdiction.

\19\ 7 U.S.C. 7(g), as amended by the Commodity Futures Trading Commission Act of 1974, Pub. L. 93-463, 88 Stat. 1389 (1974). In 1992, Section 5(g) was redesignated Section 5(7) of the Act. See Futures Trading Practices Act of 1992, Pub. L. 102-546, 106 Stat. 3590 (1992). The CFMA repealed all of former Section 5 of the Act, including Section 5(g) (redesignated as Section 5(7)), and replaced it with current Section 5. Section 5 was radically restructured by the CFMA to provide for designation criteria and core principles with which a DCM must comply. Appendix E of Pub. L. 106-554, 114 Stat. 2763 (2000).

\20\ The House Committee on Agriculture stressed that contracts that could be expected to be used almost entirely for speculation would be against the public interest. H.R. Rep. No. 975, 93 Cong., 2d Sess. 29 (1974).

\21\ See H.R. Rep. No. 1383, 93d Cong., 2d Sess. 36 (1974).

By enacting the CFMA, Congress sought “to promote innovation for futures and derivatives and to reduce systemic risk by enhancing legal certainty in the markets for certain futures and derivatives transactions[.]” \22\ As demonstrated by the IEM, innovative event markets have the capacity to facilitate the discovery of information, and thereby provide potential benefits to the public. Subject to certain exceptions, Section 4(c)(1) of the Act gives the Commission the authority to “promote responsible economic or financial innovation and fair competition” by exempting any transaction or class of transactions from any of the provisions of the Act, including the requirement that they trade on Commission-regulated markets, where the Commission determines that such action would be consistent with the public interest. Pursuant to Section 4(c), Congress gave to “the Commission a means of providing certainty and stability to existing and emerging markets so that financial innovation and market development can proceed in an effective and competitive manner.” \23\ Under Section 4(c), the Commission has the discretion to grant an exemption to certain classes of transactions without having to make a determination that such transactions are subject to the Act in the first instance. \24\ Notably, the Commission can use its Section 4(c) exemptive authority not only on a case-by-case, or product-by-product basis, but may also use the authority to establish a set of regulatory provisions applicable to a defined class of products.

\22\ House Report No. 106-711(III) September 6, 2000.

\23\ House Conference Report 102-978, 1992 U.S.C.C.A.N. 3179, 3213.

\24\ With respect to the exercise of this discretion, the House-Senate Conference Committee responsible for the review of Section 4(c) stated that:

The Conferees do not intend that the exercise of exemptive authority by the Commission would require any determination beforehand that the agreement, instrument, or transaction for which an exemption is sought is subject to the Act. Rather, this provision provides flexibility for the Commission to provide legal certainty to novel instruments where the determination as to jurisdiction is not straightforward. 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.

Conf. Report at 3214-3215. Although Section 4(c) only speaks to futures contracts, Section 4c(b) of the Act, the Commission’s plenary authority to regulate transactions that involve commodity options, provides the Commission with comparable exemptive authority for options.

V. Issues for Comment

A. Request for Comment

The following questions consider the Commission’s regulatory purview over event contracts, the interests that may appropriately underlie Commission-regulated transactions, and the appropriate regulatory treatment of event contracts. The Commission encourages comments on the specific questions posed, as well as the broad range of issues raised in this concept release. In providing comments, please describe your relevant experience and discuss in detail the facts and legal provisions that support your conclusions. Furthermore, please consider the Commission’s mandate to protect commodity futures and options markets and customers, and ensure the integrity of the commodity derivatives marketplace, as well as the expected effects of any Commission action on competition, efficiency, innovation and the financial integrity of transactions. Any recommendation with respect to the regulatory treatment of event contracts and markets should be consistent with and supported by the Act, practical, and amenable to effective and efficient implementation.

B. Public Interest

1. What public interests are served by event contracts that are designed and will principally be traded for information aggregation purposes and not for commercial risk management or pricing purposes?

2. How are these interests consistent with the public interest goals embodied in the Act?

3. What calculations, analyses, variables, and factors could be used to objectively determine the social value of information to the general public that may be discovered through trading in event contracts? Should this be a factor in determining whether the Commission plays a role in regulating these markets?

C. Jurisdictional Determinations

4. What characteristics or traits are common to or should be used to identify event contracts and event markets?

5. How do these characteristics and traits differ from those of commodity futures and options contracts that customarily have been regulated by the Commission? How are they similar?

6. Are there criteria based on the provisions of the Act that could be used to make jurisdictional determinations with respect to event contracts and markets?

7. Given the purposes and history of the Act, would it be appropriate for the Commission to apply a test premised on commercial risk management or pricing functions to demarcate the Commission’s jurisdiction over particular contracts? If so, what factors could be used to make such a determination?

8. Given the purposes and history of the Act, would it be appropriate for the Commission to apply any test premised on the economic purpose of certain types of transactions to demarcate the Commission’s jurisdiction over particular contracts? If so, what factors could be used to make such a determination?

9. What calculations, analyses, variables and factors would be appropriate in determining whether the impact of an occurrence or contingency will result in a financial, commercial or economic consequence that is identified in Section 1a(13) of the Act?

10. What calculations, analyses, variables, and factors would be appropriate in determining whether an economic or commercial index that is based on prices, rates, values, or levels should or should not qualify as an excluded commodity under Section 1a(13) of the Act?

11. What identifiable factors, statutorily based or otherwise, limit the events and measures that may underlie event contracts when such contracts are treated as Commission-regulated transactions?

12. What objective and readily identifiable factors, statutorily based or otherwise, could be used to distinguish event contracts that could appropriately be traded under Commission oversight from transactions that may be viewed as the functional equivalent of gambling?

13. The Commission notes that Section 12(e) of the Act generally provides that the CEA supersedes and preempts other laws, including state and local gaming and bucket shop laws, with respect to transactions executed on or subject to the rules of a Commission-regulated market, or with respect to transactions exempted from the Act pursuant to the Commission’s exemptive authority under Section 4(c) of the Act. What are the implications of possibly preempting state gaming laws with respect to event contracts and markets that are treated as Commission-regulated or exempted transactions?

14. Should certain underlying events or measures –such as those based on assassinations or terrorist activities– be prohibited altogether due to the social perception and impact of such events? What statutory or other legal basis would support this treatment?

15. Are there event contracts, such as political event contracts, that should be prohibited from trading under the Act, or that deserve separate treatment or consideration, due to the nature and importance of their outcomes? What statutory or other legal basis would support this treatment?

D. Legal Implementation

16. Is it appropriate for the Commission to direct certain or all event contracts onto markets that are regulated differently from and perhaps less stringently than DCMs? For example, it may be warranted or necessary to treat event markets that aggregate information solely for academic or research purposes, event markets set-up for internal corporate purposes, or event markets that offer exceedingly low notional value contracts to traders differently than markets that possess the attributes of traditional DCMs.

17. Is it appropriate for the Commission to use the Section 4(c) exemptive authority of the Act for implementing a regulatory scheme for event contracts and markets? In this regard, the Commission notes that it has the discretion to grant an exemption under Section 4(c) to certain classes of transactions without having to make a determination as to whether such transactions are subject to the Act in the first instance.

18. Is the issuance of staff no-action relief, such as the relief issued to the IEM, an appropriate or preferable means for establishing regulatory certainty for event contracts and markets? Is a policy statement appropriate or preferable?

19. What are the benefits and drawbacks of permitting certain event markets to operate pursuant to Commission established conditions that are similar to the conditions under which the IEM operates?

E. Market Participants

20. Would it be appropriate to allow market participants, and in particular, retail customers, to trade on Commission-regulated event markets with the knowledge that the Commission may not be able to effectively monitor the measures or events that underlie certain event contracts?

21. What unique protections and prophylactic measures are appropriate or necessary for the protection of retail users of event contracts and markets?

22. What are the implications of permitting the intermediation of event contracts, including intermediation on behalf of retail market participants, both with respect to trade execution and clearing?

23. Are there any types of trader or intermediary conduct, peculiar to event contracts and markets, that should be prohibited or monitored closely by regulators?

24. What other factors could impact the Commission’s ability, given its limited resources, to properly oversee or monitor trading in event contracts?

Issued in Washington, DC, on May 1, 2008 by the Commission.

David A. Stawick,

Secretary of the Commission.

[FR Doc. E8-9981 Filed 5-6-08; 8:45 am]

BILLING CODE 6351-01-P
Last Updated: May 7, 2008

THE MIDAS ORACLE TAKES:

- CALL TO ACTION: Let’s fight so that the CFTC allows the FOR-PROFIT prediction exchanges to deal with “event markets”.

- 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:

- How the CFTC 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. Here are the comments sent to the CFTC.

- The Arnold & Porter lawyers explain the meaning of the CFTC’s concept release on “event markets”. — (PDF file)

- The Schulte & Roth & Zabel lawyers’ takes. — (PDF file)

- The Sullivan & Cromwell lawyers’ takes. — (PDF file)

- What Vernon Smith told the CFTC.

- The American Enterprise Instituteâ€™s proposals to legalize the real-money prediction markets in the United States of America

APPENDIX:

Paul Wolfowitz’s profile at the American Enterprise Institute

- How the neo-cons drove the United States of America into the unecessary Iraq war

If the British legal betting companies offer bets on the sport, it is because there is demand for bets on the sport —and if that demand were not offered in a regulated environment, it would be filled in an unregulated one (like what we see with TradeSports-InTrade and MatchBook in the US market).

Chris F. Masse — Mon, 28 Apr 2008 21:19:49 +0000

Mark Davies of BetFair (PDF file):

International Leaders in Sport conference, Auckland, New Zealand. April 3-4th 2008.
Keynote speech, April 4th. Mark Davies, Betfair.

“New Understandings in Sports Betting”

Minister, ladies and gentlemen… Thank you very much for your kind invitation to speak to you today. I have once before been asked by sport to address it, as a member of the bookmaking industry, and it was apparent when I got there that they expected me to tell them that sport was their business, and making money out of it was ours. I can tell you that those who spoke to me afterwards said that they left the conference surprised to hear that a bookmaking operation could hold views so different from what they expected. I hope to be able to break down a few perceptions today.

A number of perceptions have grown in recent years in relation to betting and sport which I believe are completely false and misleading, the first of which is that sport suddenly has a new problem as a result of sports betting on the internet.

Betfair is at the forefront of this debate for one very good reason. When we launched the business back in 2000, we did so under the bold slogan “revolutionizing betting”. By that, we meant not just that we planned to revolutionise the experience for the customer, by allowing him better choice, better value, and – for the first time – control over what he did; but, crucially, that we were going to transform the way that betting worked with regulators, both in the sport and government sphere.

The basis of our model was the business that the founding team had come from, in the main, which was the business of finance. I used to trade bonds at JPMorgan, and I can tell you that what our customers do is exactly the same as what I used to do in my previous life, with the single exception that where I had to pore over balance sheets and income statements, they pore over form and team-sheets. It could be argued – indeed, it has been – that they will therefore know a great deal more about the underlying mechanics of their markets than I ever knew of mine; but the principles are exactly the same. You express a view of value about a given outcome or a given currently-traded market price about an outcome. The extent to which this is true was really brought home to me when I was asked to speak at the Swiss Futures and Options Association’s annual gathering at Birkenstock – you can see I get all the good gigs – which was attended by all the leading exchanges of the world: The Chicago Board of Trade; the Swedish stock exchange, whose platform powers another eleven stock exchanges worldwide, the London Clearing House and representatives of the LSE, Nasdaq, and many more. My presence there was an irritation to many: what place had a sports betting exchange at such an event, people wanted to know. But by the end, they were so ready to accept that what happens in the sports betting world and what happens in their world is actually identical that they wanted to know why we weren’t taxed on the same basis.

So we came to the sports betting market saying this: why is it so opaque? And by that, we didn’t mean just, “why is it not clear what the customer is charged?” but “why doesn’t anyone know who is betting? The City had gone through the Big Bang in 1987: the sports betting market was continuing to exist as it had done for most of its legal history: with the power in the hands of a few, and everyone else ignorant of what was going on.

We sought to change that, and at first, people welcomed it. But the more successful we became as a company, the more people – led to a large extent by our commercial competitors – started to change their tune, for a very simple reason: that with transparency came issues which people had never been able to see clearly, and so had always wanted to believe didn’t really exist.

Before I go on, I want to give you a couple of analogies.

The first is perhaps a little high-brow. In his philosophical work Being and Nothingness, the French author Jean-Paul Sartre debates whether anything actually happens if we aren’t there to see it. The example he gives is of a tree falling in a forest. How can we know, he says, that the tree actually fell, unless we saw it happen? Just by virtue of seeing it lying down rather than standing up, he says, we assume it has fallen over. It is an absurdist argument which exists to enable philosophical theorising; but everyone would accept that in reality, you don’t need to witness something to be able to acknowledge that it has happened.

The second analogy is rather closer to home. As I understand it, the speed limit in this country is 100km/h. I would imagine that it was long-suspected that people broke this limit, particularly on the main highway. People observing cars drive past would have had a perception of this, but no evidence for it. Then, one day, someone came up with the idea of a speed camera, and a number were installed. The following week, a number of cars would have been recorded as speeding. Would anyone seriously suggest that what caused the cars to speed was the camera? It is self-evident that the camera did nothing but produce the proof of an existing fact.

The reason for these analogies is this: in recent years, there has been a growing clamour from the media and from sport that there is more corruption today than there ever was, and the cause of it is betting. In same cases, they even claim that the cause of it is Betfair, on the grounds that you will find very few corruption stories in the last seven years that do not mention Betfair, which has led some to argue that if the words ‘Betfair’ and ‘corruption’ appear in the same paragraph, that must somehow be evidence of the fact that Betfair is the cause, and corruption the effect.

Betfair takes a very different view. Our view is that we are the speed camera, showing you something that you never knew was there. We are shining a light into the darkness, and people give us a hard time for having a torch.

Why do we think that? Because the level of transparency which Betfair has brought to the sports industry is unprecedented. Every single bet placed on Betfair is recorded, to the second. Every click of your mouse; every movement of funds in and out of your account – we know where it has come from, and we know where it is going. As I mentioned, we brought financial markets best practice to the sports betting market. We came into a world that was entirely opaque, and made it entirely transparent. If there was anything hiding in the murk, it can now be seen.

An interesting example of this came in August last year, when a match at the Poland Open in Sopot between Nikolai Davydenko and Martin Arguello-Vasallo raised eyebrows, when Arguello won by default after Davydenko withdrew while leading. You cannot fail to have read about this: not an article about tennis and the ATP now appears without mentioning it. It was all over the press not just for days, but for weeks; and it continues to be brought up, as the ATP’s investigation into what happens continues.

Now, there are a number of things to note about this incident. The first is how it came to light. As I mentioned, we are fully aware of all the betting details on Betfair; but what I didn’t mention is that everyone looking at the site can see bets betting placed, and can see the prices moving in a free market. The 40 or 50,000 pairs of our customers’ eyes that we have on our markets at any one time can all see exactly what is happening to the odds. And our forum allows sports punters to discuss what they can see.

Davydenko’s lawyer criticised Betfair for having sought publicity from the incident but the reality is that we were called by the media, not the other way around; and the reason for that was that what was happening was in the public domain. Everyone on our site could see that the World Number 4 had started at $1.20 and moved out by the end of the first set to $2.28, even though he won it with no apparent difficulty, and was paying $3.75 after losing the opening game of the second set on his serve. And well before he actually pulled out through injury, hundreds of people on our forum were speculating that he must be about to pull out.

I cast no aspersions here: it is entirely possible that the player was carrying an injury and some group of people were aware of the fact. There is no consistent rule across sports, as things stand, against insider trading- the rights and wrongs of which can be debated later perhaps, but it might be worth me mentioning as an aside that we don’t make the rules; we just help to enforce them once they have been made. So I am not suggesting that the match was corrupt. We, as a company, made a decision to void the bets on it, because we felt that the betting itself was not fair. It was clear to us that the betting was leading events, and not the other way around. But I would also mention here that another fallacy of this position was that it served us to do so. A number of people commented at the time that it is all very easy for a bookie to void bets when a result is going against him. But this misunderstands the whole business proposition we have: we are set up like a stock exchange, matching up supply and demand, and taking a cut in the middle. This means that we have no exposure to the result, or, to put it another way, we don’t care who wins. We make money if the event happens, regardless of the outcome, and we make no money if the event is voided. It is also worth mentioning, as an aside, that while many were crying foul about the movement in prices, we also, of course, had full access to the information as to who was betting. The complete audit trail created by our systems and our Know Your Customer checks mean that we know exactly who was behind the bets.

So, we voided the market, at a cost to us. But what happened next is perhaps the most striking of all. One after another, big players around the world came out and said that they had been approached to throw matches. One after the other, they said that they knew of players who had, or had themselves, been offered money by people who wanted them to rig the result. In several instances, these offers were made before the advent of internet-based sports betting.

Now, for me, the big question is, Why did it take a company that stands for transparency to make a stand before anyone mentioned that there was a problem? If we had not voided the bets on the match, would tennis be better or worse off? Is it helpful to know if you have a problem, or would you rather remain ignorant of it until it kills you?

The answer, with some in sport, would appear to be the latter. One sporting body, unconnected with this case, which we approached with a view to signing an information-sharing agreement, actually told us directly that they didn’t want information because they were frightened about the level of corruption it would reveal. Time and again, since the Poland Open, we have been told (although not by the ATP, I should add, who were among the first to embrace the information-sharing agreements we have pioneered) that we are causing sport a problem that didn’t previously exist. And yet, the evidence is there for all to see: we made our stand after people had been approached. Once we made our stand, people started to come out and talk about things. And yet a sizeable number of people want to return to where we were before we blew the whistle.

The reality of this point of view is that it is childish. Corruption is something that no-one here wants to see, and every one of us wishes didn’t exist. But it does exist. And, we cannot, like children confronted by a monster, hope that if we close our eyes, the monster will disappear. Even less can we credibly say that all the time we were sitting with our eyes shut, the monster that stood before us wasn’t there, and that it was only the person that told us to open our eyes that put it there.

The nature of sport is that it produces clear-cut results, and where there are clear-cut results, there is money to be made speculating on the outcome. This, again, is a basic truth. You may not like the fact that for some people, this is the sport; and I accept that for many, in a perfect world we would simply have no betting at all. Some sports bodies still struggle to accept just how great the demand for betting is. For example, I went to talk to the IOC about betting about eighteen months ago, and they, in line with many others I have met (to be fair to them) were totally incredulous that anyone would want to bet on who would win the 100metres in Beijing. Again, I accept that this is not the Olympic ideal, but it is a fact that they do, and rather than close our eyes to the fact, we should work with it. Because the reality, strange as it may seem, is that for many people, having a bet on the 100metres final retains their interest. If that hundred metres final comprises six Americans, a Jamaican and a Cuban, there will be plenty of people won’t give a monkey’s who wins it, unless they have had a bet to make them feel involved.

Again, I accept that this is not what sports bodies might want in a perfect world. But we don’t live in a perfect world. And if you want to live in the real world, you have to accept that there are plenty of people with strong opinions who want to express them through a bet. Plenty of people don’t accept this. Just this week, the coach of the Brisbane Lions AFL team, Leigh Matthews, showed that he is among those who don’t. Described as “certainly neither a wowser nor a saint, and having no intention of ever becoming either”, Matthews is a four-time premiership coach and was named Player of the 20th Century. He told a press conference just a few days ago that the Australian Football League should sever all ties with the bookmaking industry. Let me quote him: “The one thing that really annoys me is any thought that whatever we do as a game has something to do with people betting on it. I hate that,” he said. “I would prefer that nobody bet on the AFL. Then all innuendo would not exist. It’s one of the unfortunate progressions in the evolution of the world that betting agencies now bet on everything. I think that’s really unhealthy, really unsavoury and really unfortunate.”

As I say, I can understand this view in the ideal: he would rather no-one bet on the sport. But what I do not accept is that betting companies offering bets on the sport is what makes people bet on it. If the legal betting companies offer bets on the sport, it is because there is demand for bets on the sport – and if that demand were not offered in a regulated environment, it would be filled in an unregulated one. So while I do not argue with Matthews’ picture of the ideal, I struggle with the argument that he follows it up with. Again, let me quote him directly: “I think [the AFL] should say to the betting companies `you want to bet on the footy, fine, but don’t include us. Don’t ask us to have rules and regulations that pander to people who might want to bet on a game.”

For me, this view is absurd. It is essential that there are rules in place, and essential that there is a mechanism for those rules to be upheld. The AFL’s own experience of having named information of who is betting on its sport has been that it has been able to help players with addictions, and drive out a problem which could, unchecked, lead to corruption. Having no rules or no means of enforcing them is precisely what leads to problems – not just here but in any walk of life. And yet Matthews’ criticism was taken up by the press. They argue that when people were caught breaking the AFL’s rules preventing players betting as a direct result of the agreement the AFL signed, the sport was shown in a poor light. It wasn’t the fact that rules were being broken that was troubling, but the fact that it had become apparent. It should, wrote one commentator, be all about perception, rather than reality. In other words, it would be better to sweep things under the carpet.

I think, in contrast, that we should accept that the demand of people to be able to bet on a clear-cut result is a fundamental reality, and in itself is not a problem. The trouble is that where there is money to be made, there are also people who would seek to corrupt. Sadly, this, too, is a basic reality of the world we live in. So we must protect against corruption, which means having rules and regulations in place, and a proper means of policing them.

The idea that corruption must be rooted out is uncontentious. The question is simply how we do it. In my view, agreement on this is hindered because many people think that betting causes corruption. But betting in itself is not corrupt. Corrupt betting is corrupt, but corrupt betting is not really betting at all, by definition: it is merely getting guaranteed financial reward through securing a fixed outcome, which isn’t the same as backing your analysis of a given contest and speculating on the chances of a particular outcome at all. In other words, the key part of the phrase ‘corrupt betting’ is not the betting part, but the adjective that precedes it: or to put it another way, corruption is corruption, through whatever channel it happens to manifest itself.

This is an important point, because the first thing that must be done if the battle against corruption is to be won is to work out who is on whose side here, and what tools we have to fight with. At the moment, the perception exists in sport that betting is the cause, rather than on occasions (and by no means on all occasions) a facilitator, and the inevitable next step in sport’s logic is to blame the betting companies for their problems. And this means that we have a fundamental issue, because the betting companies – by which I mean the legal, regulated, and co-operative betting companies – are actually a tool in the fight.

You can accept that betting for betting’s sake is not in itself the problem, and that 99% of people who make money out of the sporting result, through betting on it, would never consider affecting that result to suit. But that still leaves us with an issue: using the money being generated by that 99% of people to make money out of a corruptly fixed result clearly is a problem. But here we must consider what added ingredient is needed to allow someone to do that – to turn betting from a pastime into a facilitator for corruption. Put simply, “How do you corrupt?”

If you or I decide we want to rig the outcome of a horserace, or a rugby match, or any other sporting event, it isn’t immediately apparent how we would do it sitting here. We can very easily have a bet right here, and right now, on almost any sporting event taking place in the world at the moment; but what we can’t do, sitting here, by ourselves, is affect the outcome. For that, we need the collaboration of the people involved.

Now, there’s a story about Winston Churchill which goes something like this. Winston Churchill, apparently a few the worse for wear – as was his wont – allegedly once approached a lady and asked her if she would be prepared to sleep with him for Â£1million. She thought about it for a moment, and said she would. He then asked her if she would be prepared to sleep with him for a tenner, and she was horrified. “What do you think I am?” she exclaimed. “Madam,” he replied, “we have established what you are. We are now just negotiating the price.”

As was true of Winston and his target, so is true of sportsmen and corruptors. When I talk to people about corruption in sport, and protest at the idea that internet betting in particular has increased corruption just because the sums of money involved are that much greater, I think of that story about Winston Churchill. Because as far as I am concerned, either you can be corrupted, or you can’t. If you can’t bribe a sportsman or a group of sportsmen to rig a result, then you can’t get a result fixed. And what that means is that the heart of the problem in the issue of corruption in sport is not betting, but is sportsmen willing to be bought.

I realise that pointing the finger at sport, from what appears to be the betting side of the fence, might seem somewhat inflammatory. But the most important point I want to make is that when we consider whose side of the fence is whose, we are currently getting it absolutely wrong. The betting industry doesn’t want bad apples as customers any more than the sports industry wants bad apples participating; and just as more than 99% of your participants are clean, so are more than 99% of ours. Our less than 1% can do the buying; your less than 1% can deliver the goods. The challenge for us both is to rid ourselves of the 1%, and the best way to do that is to work together.

Put another way, the simple fact of the matter is this: if we are to draw a line – not to say dig a bloody great big trench – between sport and corruption, as obviously we must, then the first and most important thing is to understand that the legal betting industry is on the same side of that line as the sports industry. And I say this not just because it serves our purpose for sport to be clean, although it does: if people don’t have confidence in the fairness of the result, they will not bet. I say it because we were set up as a business philosophically because we are lovers of sport. And, having set up something which was designed, in part, to bring complete transparency to the market; and then having set out our stall to share information with sports to help them deal with problems that exist, it has been extremely frustrating to find ourselves attacked as if we are the cause of the problems. If ever there was a case of shooting the messenger, this is it.

In fact, the finger pointing from sport to betting, and to Betfair in particular, has been so great that there are calls around the world for betting to pay sport, because sport now has to deal with integrity issues which betting has caused. Let me say straight up that Betfair has never been against paying sport on the basis of a commercial agreement which recognises that sport is putting on a show and Betfair is benefitting from that. This is not the same as saying that sport ‘owns’ the product, but it simply recognises that there ought to be a symbiotic relationship between the two industries. And we are not suddenly coming to this party under pressure: I spoke at the Sport Accord conference in Madrid in 2003 and told the 80 or so delegates there from sports bodies all round the world that the two things they should expect from a bookmaker in the 21st century were information about what betting was taking place on their matches, to allow them to police their sport better; and a financial contribution to acknowledge that they were putting on the show. But I do have a fundamental problem with betting being asked to pay to ‘clean up’ something that exists whether they are there are not. The integrity of sport is the domain of sport, whether Betfair, or Ladbrokes, or any other betting company in the world exists or not.

In fact, I would go further than that. Imagine a world where bookmaking is illegal. Take Betfair, and Ladbrokes, and William Hill, and everyone else you care to mention, and close them all down. What happens to sport’s problem then? Does it go away, stay the same, or get bigger? Clearly, it gets bigger – and if you doubt that, let me give you two reasons why.

The first is best exemplified by Hansie Cronje. No-one in New Zealand will be unaware of the scandals that affected the world of cricket in the late 1990s – an era, incidentally, which preceded internet betting, and in which cricket was not alone in experiencing problems: floodlights went off in top-flight UK football matches for reasons which at first were not apparent. Talk to the ICC about those times in cricket and they will readily acknowledge that their problems came from the Indian sub-continent, where – no surprises – bookmaking is illegal. And the source of floodlight failures, too, was eventually traced to Far Eastern illegal betting syndicates, but only because someone was eventually caught red-handed with his hands more or less on the switch.

The second reason is this: tell me why betting was legalised and regulated in the first place, if it wasn’t that it existed illegally and unregulated, and if, being illegal and unregulated, it was not seen to be causing problems which could not be dealt with? The whole basis of regulation is that regulating makes it more difficult to corrupt.

Betfair took the level of regulation a significant step further. I have already talked about our audit trail, but what I didn’t mention was that any sports regulatory body in the world can have the information gathered by that audit trail from us, free of charge. In fact, we can deliver it, via our Bet Monitor technology, in real time – as Stewards not so very far away in Victoria will tell you. In other words, we are providing, without any obligation, information which would otherwise be unknown about betting that is taking place all over the world – information which makes it easier to know what is happening, not harder. And it seems to me that asking the legal, regulated betting market to pay to clean up problems of integrity in sport is like approaching a High Street pharmacy and asking it to pay for the fight against cocaine-smuggling on the grounds that their business is in drugs. The difference between the legal, regulated market and the illegal market is the difference between chalk and cheese. And asking Betfair, or any other well-regulated, well-run global brand, to pay for problems which are seen to originate in the murky world of unregulated, illegal, bookmaking seems to me to be entirely missing the point.

To illustrate my point a little further, here’s the page from Wikipedia on match-fixing. You will see if you look at it more closely that it claims that cheating on sport started with the Ancient Olympics, and with battles between gladiators. When I once mentioned this on a radio interview, I was taken to task over it by a journalist from a British national newspaper, the Guardian, who accused me of being disingenuous. The amount of match-fixing today, he said, was of a completely different proportion, and the sums of money involved were much greater.

Even aside from my story about Winston Churchill, I would take issue with that. First of all, on what empirical grounds can anyone justifiably claim that there is more match-fixing today than there was before? Isn’t the perception that there is simply born of the fact that we can see it better today than we could a decade ago? Are there more diseases these days, or do we just diagnose them better?

To go back to my earlier analogy, are there more speeding cars, or are we now in a position to clock them? Did people start taking drugs to improve their sporting performances the week after drugs testing came in, or were they taking them before we had tests, and just doing so undetected? Was Jacques Rogge, the President of the IOC, justified when he commented during the Athens Olympic that, “Each positive test is a blessing for us because it’s eliminating the cheats and protecting the clean athletes. The more we find, the better.” I would say absolutely he was.

In truth, the basic fact is that it is simply not possible to make any judgment whatsoever on what the level of corruption in sport was before we had a means of tracking it, just as it is impossible to know how many athletes in the past used performance-enhancers to bring them medals. We might think that in a bye-gone era, the world was a nobler place; and on the whole, we might be right. But if the Chicago White Sox were throwing the World Series in 1919, and Liverpool and Manchester United were colluding over a result in 1915 – on that occasion, not for a betting return, incidentally, but to ensure survival in the top division at the expense of Chelsea, who consequently went down – and if these are scandals we happen to know about because someone happened to sing about them, then how can we possibly make a judgment about the bigger picture?

The challenge now is to take the attitude that Jacques Rogge has to drugs testing and apply it to betting, not being fearful of instances we find to occur, but to be confident that transparency is rooting out the corruption and tipping the risk/reward ratio dramatically in favour of the regulator and away from the corruptor. For that, we first need to draw on another of Mr. Rogge’s pronouncements in Greece. “You have 10,500 athletes in the Olympic village,” he told the world’s press. “You do not have 10,500 saints. You will always have cheats.” We have to acknowledge that the only people who can corrupt sport are the players, and we have to educate those players about how they will be caught and how they will lose their livelihoods and their reputations when they are. And to do that, we first need to educate sport about how they can do the catching: the only way to know whether players are corrupted is to have the names of the people behind the bets, and then use forensic analysis to make the often easy links between the bettors and the participants. Any attempts to look at the betting quantum and make judgments on it are absolutely doomed to failure, and the only people who will gain anything from doing so are the media. So sport needs to put itself in a position where it has access to named information, wherever it can get it. If it is not doing that, it is not using the tools available. I find it amazing that any sporting body would turn down named information from a betting operator willing to provide it with no strings attached, and yet, from the top down, there are plenty who do.

Don’t get me wrong. I am not trying to suggest that sport is riddled with corruption. I am an optimist, and I hope and expect, like everyone here, that 99.9% of sport is played for the Corinthian ideal of winning. But it is clear that sports – perhaps because they are being told so by the media – now feel that they have a problem which they feel they didn’t have before. The immediate reaction is to point the finger, rather than take steps to do something to tighten regulation in a manner which perhaps should have happened years ago, and it is not difficult to see why this has happened. It is easy enough to make what appears at first a logical jump: betting has increased; corruption has become apparent; therefore betting is causing corruption. It’s like saying, “it’s raining, and I don’t have an umbrella, therefore I will inevitably get wet”.

But what if it’s pointed out that there is no reason for you to go outside? Suddenly, the argument falls apart. And what if you understand that the increase in betting has moved in parallel with the increase in transparency? Suddenly, the logic doesn’t hold there either. But that growth in transparency of betting has led people to believe that there has been a growth of corruption, and the result is that sport is setting itself against the very people it should be working with. Again, I can understand how this is happening. Many in sports regulation genuinely don’t see that this problem is not new, like a patient diagnosed with cancer who insists that he felt fine yesterday and still feels fine today. But understanding why we are where we are doesn’t mean we should continue to plough the same furrow. We have to get out of it before we dig it so deep that we’ll never be able to do so. As a first step, that means understanding that transparency is not to be feared, and the people who bring it should not be resisted and looked at suspiciously. And second – away from words and onto concrete actions – it means sport starting to use the tools provided for them by betting operators who want to work in partnership, which would make it easier to combat the problems facing them than any other measure. Use the audit trail, link betting to names, and root corruption out of sport.

Understanding this, and acting on it, would allow sport to make the most of the commercial advantages that the betting market brings. I am not talking specifically about betting companies paying them directly for commercial agreements, although that is precisely what Betfair is doing voluntarily in Australia with the AFL, NRL, and cricket among others; we have done it with British greyhounds, and Irish horseracing; and we have committed to doing it elsewhere. I am also not talking about sponsorships coming from the betting companies, although it is interesting to note that just last week, Reinhard Rauball, the President of the Bundesliga in Germany, affirmed that the ban on foreign gambling advertisements would cost German football between â‚¬100 million and â‚¬300 million every year in lost revenues. I understand that even if we got to the point where regulators and betting operators were working in partnership to stop corruption, many sports would prefer to keep at arms length from betting companies in other areas, and I fully respect that. Rather, I am referring to the notion that betting plays a significant role in helping sports to internationalise their marketplaces, and ultimately, we now all compete in the global village.

In other words, although sports today recognize that they need to embrace a modern, global audience, they spend a lot of time working against the very sorts of organizations which might help it to achieve one.

Let me give you an example. There is a racing newsletter published in Australia called BetAngel. It is dedicated to a whole new audience who, since the arrival of Betfair, trade the sports markets as if they were the financial markets. Their March edition began with the words, “Wind back nearly eight years ago, when Betfair started and I joined them, I had no idea what Cheltenham was all about” – before going on, for eleven pages, to lay out the best strategies for punting on Britain’s premier Jumps Racing festival. In a similar vein, Betfair this year had e-mails from all over the world eulogising about the up-to-the-minute coverage and ideas being distributed far and wide by Betfair Radio on that same Cheltenham Festival – from Cyprus, Belgium, India, Singapore and – yes – New Zealand. The extent to which we are broadening the appeal of British horseracing is incontestable if you look at our international audience and the 85 or so countries from which we list customers. By virtue of the mechanism by which we pay to British racing a percentage of the profits which we achieve on British racing, it is fair to say that today money is coming in from the four corners of the earth which just a few years ago was staying firmly put.

Betfair is committed to paying sports bodies a percentage of the profits achieved on betting on events run under their jurisdiction. But if the betting markets continue to be seen as a problem, then they cannot at the same time be seen as an opportunity, and sports worldwide cannot make the most of that commitment. In contrast, if we could get sports administrators to realise that we do not threaten their integrity in a regulated and open environment; if we could get them to work with us, on commercial terms, and not against us; if we could get them to understand that the utopian world of no betting on sport is exactly that – utopian – and that the sensible thing is to work with the regulated market to ensure maximum transparency and minimum outlets for those would corrupt; if we could do all these things, then it wouldn’t be a question of sport putting on the show and the betting industry benefitting. It would be a question of sport broadening and maintaining its audience; of sharing in the first derivative market which stems from it – the betting market; and of the two industries working together to ensure that every tool is used to keep both the underlying commodity and the derivative market clean.

So I am here today to try to give you a new understanding of sports betting. I want you to understand that as far as we at Betfair are concerned, the regulated betting industry today is not some backwater of corruption in smoke-filled rooms, but a modern leisure industry which engages its customers and allows them to get involved on a participatory level that enhances their enjoyment; that it is an industry which harnesses those customers, and wants to do so in partnership with sport rather than at the expense of sport; that what sport today should expect from a modern bookmaking operator, as I told Sport Accord back in 2003, is a financial return which recognises that sport is putting on the show and seeks to demonstrate the good faith that leads to partnerships that leads to everyone growing the cake; and – entirely unconnected with any commercial agreement – they should expect information on what betting is taking place on their product, and – and I cannot over-emphasize this enough – by whom, in order to allow it to fulfil its role of policing the sport.

There are plenty of issues facing sport today, as there always will be. But feeling it has to fight betting should simply not be one of them. Sport has to fight corruption, using every tool it can; and the betting companies, who also, like the sports bodies, have brand names to defend; and, in a way that sports do not, more often than not have market values and share prices to protect, have to fight it too. So in conclusion, let me say it one more time: the legal and regulated betting companies around the world want to work with sport, not against it. But they need sports to recognise that it isn’t betting that causes problems, but corruption. I hope we can fight it together.

Thank you.

Mark Davies of BetFair

Mark Davies (Managing Director of Corporate Affairs of BetFair)

The best text that I have ever read about sports betting.

It’s that kind of speech that the US Congress should hear.

The Winston Churchill joke was lame.

Took me like one hour to read it in full, but every sentence was worth my effort.

All the issues he raised were known to me, but it was fine to see them all gathered in one place.

I’m still persuaded that the Winston Churchill joke was lame.

CME Group = Chicago Mercantile Exchange + Chicago Board Of Trade

Chris F. Masse — Sat, 19 Jan 2008 16:19:18 +0000

New website: CME Group

–> On Thursday, they sent out an e-mail to everybody saying that the two legacy websites will be closed just after the launch of the new website —that is, this Saturday, January 19, 2008.

–> Then, on Friday, they back-pedaled. The two legacy websites will remain on the Web for two short weeks. They call it a “grace period”.

–> Definitions of “grace” on the Web:

- (Christian theology) a state of sanctification by God; the state of one who under such divine influence; “the conception of grace developed …
- elegance and beauty of movement or expression
- seemliness: a sense of propriety and consideration for others
- a disposition to kindness and compassion; “the victor’s grace in treating the vanquished”
- (Greek mythology) one of three sisters who were the givers of beauty and charm; a favorite subject for sculptors
- a short prayer of thanks before a meal
- decorate: make more attractive by adding ornament, colour, etc.; “Decorate the room for the party”; “beautify yourself for the special day”
- (Christian theology) the free and unmerited favor or beneficence of God; “God’s grace is manifested in the salvation of sinners”; “there but for the grace of God go I”
- deck: be beautiful to look at; “Flowers adorned the tables everywhere”
–> wordnet.princeton.edu/perl/webwn

Network Effects = Network Externalities

Chris F. Masse — Tue, 23 Oct 2007 20:08:14 +0000

Wikipedia:

A network effect is a characteristic that causes a good or service to have a value to a potential customer which depends on the number of other customers who own the good or are users of the service. In other words, the number of prior adopters is a term in the value available to the next adopter.

One consequence of a network effect is that the purchase of a good by one individual indirectly benefits others who own the good â€” for example by purchasing a telephone a person makes other telephones more useful. This type of side-effect in a transaction is known as an externality in economics, and externalities arising from network effects are known as network externalities. The resulting bandwagon effect is an example of a positive feedback loop. [...]

Network effect business examples

Financial exchanges

Stock exchanges and derivatives exchanges feature a network effect. Market liquidity is a major determinant of transaction cost in the sale or purchase of a security, as a bid-ask spread exists between the price at which a purchase can be done versus the price at which the sale of the same security can be done. [*] As the number of buyers and sellers on an exchange increases, liquidity increases, and transaction costs decrease. This then attracts a larger number of buyers and sellers to the exchange.

The network advantage of financial exchanges is apparent in the difficulty that startup exchanges have in dislodging a dominant exchange. For example, the Chicago Board of Trade has retained overwhelming dominance of trading in US Treasury Bond futures despite the startup of Eurex US trading of identical futures contracts. Similarly, the Chicago Mercantile Exchange has maintained a dominance in trading of Eurobond interest rate futures despite a challenge from Euronext.Liffe. [...]

[*] Niall O’Connor should report on bid-ask spreads, not just on dollar value of matched bets, when comparing BetFair with its competitors.

CME Group = A new entity representing the July 2007 merger of the Chicago Mercantile Exchange (CME) and the Chicago Board of Trade (CBOT).

Chris F. Masse — Sat, 14 Jul 2007 09:49:14 +0000

CME Group

Commodities
Manage price risk with the widest range of commodity derivatives of any U.S. exchange â€“ on grains, livestock, oilseeds, dairy, lumber, and other products. NYMEX Softsâ„¢ are also offered on the CME GlobexÂ® trading platform.
Energy & Metals
Manage price risk for NYMEX energy products and NYMEX/COMEX metals products on the CME GlobexÂ® trading platform, the industry’s leading platform for futures and options trading. CME Group also offers trading in standard and mini-sized precious metals products.
Equities
Take part in the world’s leading equity index marketplace, offering futures and options products on key benchmark indexes. These index baskets provide easy and efficient access to small-, medium- and large-cap companies in the U.S., Europe and Asia.
Foreign Exchange
CME is the largest regulated marketplace in the world for trading foreign exchange (FX) â€“ with daily liquidity of over $80 billion. CME offers extensive coverage of this marketplace, with 41 futures contracts and 31 options contracts on more than 19 currencies.
Interest Rates
Manage risk effectively across the entire yield curve with highly liquid CME Group Interest Rate products â€“ futures and options on Eurodollars, U.S. Treasuries, swaps and other dollar-related instruments.
Real Estate
Participate in the real estate market (the largest domestic asset class â€“ $26.6 trillion) without having to buy and sell properties. CME Group offers products on the U.S. residential and commercial real estate markets.
TRAKRS
TRAKRS are exchange-traded, non-traditional futures contracts that provide market exposure to various TRAKRS Indexes â€“ a series of market-based indexes of stocks, bonds, currencies, commodities and other financial instruments.
Weather
CME Group is the only regulated exchange offering risk management products for the weather market. CME currently lists weather contracts based on aggregate temperatures on 35 cities around the world, as well as hurricane, snowfall and frost indexes.

CBOT to merge with the Chicago Mercantile Exchange on/before 31st Dec 2007

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Static chart:

CNBC ALERT: HedgeStreet’s Russell Andersson – 2:50pm ET – Tuesday, June 5, 2007

Chris F. Masse — Tue, 05 Jun 2007 17:48:02 +0000

CNBC – (& CNBC Europe, I believe) – Topic: Corporate Mergers & Acquisitions

HedgeStreet “Binary Options” contracts on corporate mergers and acquisitions:

- NYSE & ISE
- Microsoft & Yahoo!
- Hershey & Cadbury
- Deutsche Borse & ISE
- News Corp & Dow Jones
- Sirius Satellite & XM Satellite Radio
- Nasdaq & PHLX (the Philadelphia Stock Exchange)

Previous: Mergers & Acquisitions prediction markets at InTrade-TradeSports

InTrade-TradeSports:

- XM and Sirius Satellite Merger
- Chicago Board of Trade (CBOT) Merger
- NYSE and ISE Merger
- Microsoft and Yahoo Merger
- Hershey and Cadbury Merger
- Deutsche Borse and ISE Merger
- News Corp and Dow Jones Merger
- NASDAQ and Philadelphia Stock Exchange Merger

Click on â€œFinancialâ€ on the left menu.

Ben Bernanke predicts that the economy will rebound later this year (2007).

Chris F. Masse — Tue, 05 Jun 2007 14:53:35 +0000

Crossing Wall Street:

[...] That’s good to hear. Of course, in February he was expecting 2.5% to 3% growth this year — not the 0.6% we have.

More importantly, however, is what the market says. The markets’ odds for a Fed rate cut has dropped to 29% from 83% since the beginning of May. There’s now a 41% chance of a rate increase.

The Bloomberg article cited above:

Options on Federal Fund futures at the Chicago Board of Trade indicate a 41 percent chance the central bank will lift its target rate for overnight loans between banks to 5.5 percent from the current 5.25 percent, according to data compiled by Bloomberg.

41%???? –> 59% that it will not happen, right??

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Static charts from BetFair. Click on them for updates.

FOMC – June 2007 – No change:

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ECB – June 2007 – +0.25%:

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MPC – June 2007 – No change:

Mergers & Acquisitions prediction markets at InTrade-TradeSports

Chris F. Masse — Sat, 02 Jun 2007 07:54:56 +0000

InTrade-TradeSports:

- XM and Sirius Satellite Merger
- Chicago Board of Trade (CBOT) Merger
- NYSE and ISE Merger
- Microsoft and Yahoo Merger
- Hershey and Cadbury Merger
- Deutsche Borse and ISE Merger
- News Corp and Dow Jones Merger
- NASDAQ and Philadelphia Stock Exchange Merger

Click on “Financial” on the left menu.

Which buyer of the Chicago Board of Trade do you think would be better for the marketplace?

Chris F. Masse — Sat, 12 May 2007 21:23:34 +0000

Futures:

- Chicago Mercantile Exchange; the cultures are closer. So is the name. 39.13 %
- InterContinental Exchange (ICE): bigger bucks for the shareholders (for now) 13.04 %
- Why does the CBOT need to be bought? It’s doing fine as is. 43.48 %
- A player to be named later. 4.35 %