Sports Risk Index would allow you to hedge risks on sport prediction markets.

The patent.

The latest developments. (audio)

I am skeptical, since the US Congress has just outlawed movie prediction markets, but I wish good luck to Chris Rabelais et al. Maybe the political scene will be different next year, who knows.

UPDATE: As you’ve understood, I was talking about CFTC-approved real-money prediction markets, here.

Jason Trost on BetFair: They havent innovated much, and theyre too pricey.

Jason Trost:

  • Slow innovation: Aside from a few cosmetic tweaks, reliability improvements and the Starting Price feature, Betfair hasn’t innovated much over the last few years. For a company that boasts several hundred developers, it should be able to release more major new features. Betfair gets very little traffic from organic search and has no social features apart from a forum.
  • Outdated tech platform: Betfair’s website can be quite slow at times. If you look under the hood, there’s a tangled web of javascript libraries, iframes, caching servers and images. Over the years, it has grown into a technical server farm behemoth that is difficult to upgrade and maintain.
  • Tax on top traders: About a year ago Betfair introduced a “Premium Charge” on their most successful traders, taxing their profits up to 20%. This runs contrary to typical volume rebate schemes where the more one trades, the smaller the transaction costs one incurs. The company claims the tax is to offset the cost of bringing new punters to the platform, but appears to outsiders as a clear move to increase revenue taking advantage of Betfair’s position as a monopoly.
  • Expensive transaction costs: Betfair takes 5% of traders’ winnings. If a trader bets ?100 and wins ?1000, Betfair will charge ?50 for the transaction. This is very expensive in a world of $8 online stock executions. As betting exchanges become more financial in nature, these transaction costs will shrink substantially.
  • Market Size and Competition: As Greg Wood from the Guardian wrote recently, horse racing liquidity has hit a ceiling. Will Betfair be able to maintain the revenue growth? With high costs and a smaller profit margin than Paddy Power, Betfair has found itself in a bit of “grow or die” situation. It will need to find ways to entice more customers to join its platform and spend their betting dollars with them. Betfair is looking to new sports – particularly football – and overseas markets like the US, China and India as opportunities for growth.
  • Headcount: Betfair has a tech team close to 500 people. While there is strength in numbers at times, the most successful tech projects in history started with small, nimble teams. The more tech people involved on a product, the less agile a company can be. Adapting to changing tech trends can be a crucial ingredient to remaining competitive in today’s internet startup world.

If prediction markets are such a powerful tool, then why arent we able to use them to solve [INSERT YOUR FAVORITE WORLD PROBLEM HERE]?

Justin Wolfers is asked the question, but I would have a different answer than his.

The reason prediction markets are not widely used in business is that their many boosters (Robin Hanson, James Surowiecki, Justin Wolfers, etc.) have exaggerated their usefulness. Just because they are objective in their wisdom does not mean that they are very useful.

Objectivity is over-rated. This is a painful lesson for the handful of young startups who swallowed the prediction market myth. Next step: the dead pool.

David Pennock wants you to believe that InTrade needs Robin Hansons automated market maker.

&#8220-Our market maker automatically adjusts its level of liquidity depending on trading volume. Prices start off very responsive and, as volume increases, liquidity grows, obviating the need to somehow guess the &#8216-right&#8217- level before trading even starts.&#8221-

Liberal politicians (sucking up to the Hollywood lobby) have managed to destroy one promising financial innovation applied to the movie business.

Cantor Fitzgerald abandoning box-office futures despite regulatory approval.

CNBC: The End of the Box Office Futures Business

The Wrap

CFTC Takes Jurisdiction Over Prediction Markets.

First, a hearty congratulations to Robert Swagger and Trend Exchange. Along with the Cantor Exchange folks, they have run quite a gauntlet, and although there remains a tremendous obstacle in the form of the Lincoln amendment, I consider these exchanges to have already accomplished a great deal.

In its approval of Trend Exchange and preceding statements, the CFTC has confirmed a very broad definition of &#8220-commodity&#8221- that includes &#8220-event&#8221- contracts. The old debate about whether or not the CFTC has jurisdiction over &#8220-prediction markets&#8221- has been decided for now. Yet, there is considerable dissent within the Commission. Commissioners Chilton and Sommers have expressed disapproval that the Commission did not first address the general questions raised in the 2008 Concept Release. To this point, given the very broad definition of &#8220-commodity,&#8221- it now seems that Intrade and online sports exchanges could be in violation of the Commodity Exchange Act. The Commission does not consider an &#8220-economic purpose test&#8221- in the contract review process, and there is no statutory basis for such a test being used in jurisdictional determinations. Perhaps as a matter of practice, in accordance with the spirit of the Act, the Commission is considering such a test for jurisdicitional questions as I suggested in my Concept Release comments (surprisingly cited by the MPAA group). Otherwise, it seems inconsistent that exchange-traded sports bets, for example, would not also be considered commodities and be subject to the Act.

As a whole, the Commission has apparently decided to defer such questions and focus on specific techniques for ensuring that the new contracts fulfill the Act from the standpoints of manipulation and fair trading. To these ends, the CFTC will require, &#8220-entities and individuals who control a film’s marketing budget, release date or opening screen number to provide the Exchange with information regarding such decisions whenever that entity or individual holds a position of 1,000 or more contracts.&#8221- Additionally, the Commission will require a &#8220-firewall&#8221- within studios and distributors, and has restricted certain employees from trading altogether. These are procedures that I had recommended for event contracts, but they are relatively novel mechanisms in the commodities world. Whether or not the CFTC would agree to support special trading restrictions was the pivotal question in whether the contracts would be approved. I applaud the principled, politically independent thinking of the Commission and the can-do attitude of the Market Oversight Division &#8212- though some headline risk has been assumed here if something should eventually fall through the cracks.

The value of prediction market journalism, which doesnt produce any scoop, is zero.

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Felix Salmon (in a piece about the ROI of web publishing):

As real-money prediction markets become legal in the US, there’s surely going to be a lot of money in writing about them and driving rich readers to them.

Total bullshit.

Carlos Graterol [*] and Ben Shannon both tried to popularize their prediction market blog (featuring InTrade 95% of the time), and they never managed to take off. The fact that InTrade needs websites to drive people to its betting operation does not mean that readers will appreciate prediction market journalism.

Prediction market journalism (which sums up news and probabilities harvested from newspaper sites and from InTrade) does not produce any scoops. You need scoops to draw readers into your blog. No scoops, no readers.

[*] He is a smart and sociable young man with a bright future.