My short thoughts on the CFTC announcement:

1. Nothing new..
2. No good. Sports prediction markets won’t be allowed by the CFTC (no matter), and, thus, the US-based event derivative exchanges will never be profitable. (Remember that HedgeStreet V1 went into bankruptcy, even though they were well funded.)
3. Going forward, we are going to see an opposition between people (like me) who favor prediction markets on all topics (including sports), and people who want the term “prediction markets” to define the socially valuable event derivative markets, only.
4. Speaking of differences of opinion, I was agreeably surprised by the liberalism of Joyce Berg of the Iowa Electronic Markets. “She said some guidance is definitely needed to make a distinction between these markets and gambling, but doesn’t want to see such markets regulated out of existence.” Great. Deep respect for Joyce Berg, after that.
5. Interesting people to listen to, with attention, in the coming weeks: Tom W Bell (who opposed CFTC regulation from the start), on one hand, and, on the other hand, Koleman Strumpf and Steve Levitt (who are both libertarian when it comes to gambling and betting). Event derivative trader Caveat Bettor will also be someone whom we expect comments from. [UPDATE: I forgot to add BetFair's Mark Davies in the list, and some others.]
6. Developing…

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UPDATE: See David Pennock’s comment, just below…

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Somewhat Related: 7 Charged With Illegal Trading on Nymex

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Just one point, Betfair have already hired a team of traders to bet into its own markets last year, and are increasing that. Andrew Black has insisted that these traders are betting without looking at who is betting on what. I can’t understand how if 98% of Betfair punters lose overall, how they are paying the hypothetical £25,000-£30,000 a year salaries of these traders. They not only have to break even, but also have to win at least £25k to £30k a year to justify the expense of actually employing them.

I have no idea how anyone could get a straight answer out of Betfair about this. They either mothball and as happened with this new case, not even bother announcing it, or they have a record of press statements which, to be frank, have mostly been the opposite of what has happened. Mark Davies went on Radio 5 at the end of 2007 claiming that they didn’t offer any markets on Davydenko or Arguello, when in fact Betfair had been offering loads on both, after the voided Davydenko v Arguello match. The Radio 5 presenter threw him an unexpected googly live on air, which Davies wasn’t prepared for, saying “well surely if you have deemed that one player (davydenko) is not someone that you see fit to run markets on, surely the other player involved in the suspicious match is also someone you don’t take bets on”. Davies stuttered, saw that it seemed completely logical, and said something very close to ‘erm,…. yes,…… we don’t offer markets on arguello either’. It simply wasn’t true.

Betfair are exploiting a total lack of regulation in sports markets to beat the clock, bet into its own pool, take a huge scoop out of the pool unannounced, change their bet matching software unannounced, etcetera. All this would be completely illegal in any financial market. I think sports markets deserve the same level of protection, and its time the FSA [the UK equivalent of SEC + CFTC] were compelled to step in to stop them.

This is all about Betfair’s share price. They still have a massive price/earnings ratio, and they are gambling that if they scoop an extra £15 million from the pool by placing their own robot on the markets, they can boost the value of the company by say £500 million. The people who buy these shares looking solely at the headline growth in profits are going to be gobsmacked in 2 or 3 years time that Betfair is being run as a pyramid scheme, and will wonder why company profits growth actually went into reverse in 2009, 2010 and 2011. The markets cannot sustain this level of front-running, clock-beating, trap bets, and attrition of the userbase. I just pray that the people tempted to buy Betfair shares are able to understand why the headline profits figure is going to be completely misleading for 2008.

UPDATE: One un-hired job candidate and one HammerSmith employee tell all about BetFair Malta’s combo market maker (trading algorithm + human market makers) operating on the multiples.

UBBER UPDATE: BetFair is as innocent as a lamb… but their P.R. people can’t tell you that at this time. Here’s why.

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UPDATE #2

Michael Robb’s e-mail to me:

Hi Chris,

Firstly I’d like to clarify that Betfair is a privately-owned, limited company and is not listed on the Stock Exchange. Therefore, there is no trading in its shares and so when Ed Murray says, “I just pray that the people tempted to buy Betfair shares…”, he is mistaken because people simply cannot buy shares in Betfair at this time.

As you say, however, Betfair is trialling an improved bet matching process. This work is ongoing and will affect a limited but growing number of markets.

Previously we would only attempt to match customer bet requests against unmatched bets of the opposing bet type (backs vs. lays) on the same runner in the same market. That part of the bet matching process remains unchanged. Where there is no opposing bet to match on the same selection, rather than just leaving a customer’s bet request unmatched, we will now attempt to match the bet request against unmatched bets on other runners.

For example in addition to matching back bets against lay bets we can from time to time match customer back bet requests across all selections, or customer lay bet requests across all selections. The effect of this change is that customer bet requests will stand a greater chance of being matched.

There will be circumstances where a customer bet request could be matched by either process. In this case priority will always be given to matching in the traditional way, back vs. lay, and the process for matching those bets is identical to the way this was done previously. Where a market is turned in-play and bets are subject to an in-play delay this also remains unaltered. Bets will only become available to be matched once the in-play delay has expired: backs vs. lays first followed by matching across selections where no other match was possible.

If you have any questions on how this change will affect you or your readers the Q&A session, as you mentioned, will take place on the Betfair forum this Wednesday evening (19th March) between 6pm and 7pm (UK Time).

I hope this helps. Please let me know if you have any further questions.

Kind regards,

Michael

[Michael Robb works at BetFair, as you all know.]

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Bet on It! – (page two – page three + a crappy listing of exchanges) – by Spectrum’s Steven Cherry

[...] Last year, a poorly worded contract by Tradesports caused a ruckus when some bettors lost money. Trade­sports had set up a market to predict whether North Korea would test a long-range ­missile—which was defined as sending a missile beyond the country’s airspace. Those who bought that contract, which expired on 31 July 2006, thought they had won when a North Korean missile flew 442 kilometers (275 miles) into the Sea of Japan (East Sea). However, the contract also specified that the source of the confirming information had to be the U.S. Department of Defense, which declined to release any specifics about the test. Despite a White House statement that confirmed the missile “went out about 275 miles,” Tradesports awarded the contract to those who bet against a successful test. [...]

More Information:

Event derivative trader “Vancheeswaran”:

[...] Bryan Whitman (Bryan.Whitman@osd.mil) explicitly stated in print, in press conferences, and by email that North Korea fired multiple missiles into the Sea of Japan. For instance, “North Korea fired a long-range Taepodong-2 missile and six short- and medium-range Scud and Nodong missiles. All landed in the Sea of Japan without incident.”

National Security Advisor Stephen Hadley, in a press conference at the White House, stated that the missiles “went out about 275 miles” into the Sea of Japan.
http://www.whitehouse.gov/news/releases/2006/07/20060704-1.html

There are many other examples of the U.S. military and government (not just the press) confirming that the missiles were launched and approximately where they landed. [...]

Q: Briefly, what is Intrade?
A: InTrade is a marketplace, just like eBay or the NYSE, that provides innovative markets to trade, and the best darn predictive information on uncertain future events bar none!

InTrade is a prediction exchange (betting exchange) that organizes the trading of event derivatives. It specializes in non-sports prediction markets. (For sports prediction markets, see its sister site, TradeSports.)

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John Delaney:

A: [...] We listed a market on whether the U.S. Government would formally report that North Korea tested a missile in a certain manner. While the media reported that North Koreans did test a missile, it was not confirmed in an official U.S. Government release as was required in the market rules, so we settled the market according to the strict interpretation of the rules and not the understood intention of the market. This was understandably a real issue for some of our members and also for Intrade. It was a bad situation for everyone, really. We have learned from it.

The North Korea Missile prediction market has been the biggest scandal in this young industry.

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Event derivative trader “Vancheeswaran”:

BULLSHIT.

Bryan Whitman (Bryan.Whitman@osd.mil) explicitly stated in print, in press conferences, and by email that North Korea fired multiple missiles into the Sea of Japan.

For instance, “North Korea fired a long-range Taepodong-2 missile and six short- and medium-range Scud and Nodong missiles. All landed in the Sea of Japan without incident.”

National Security Advisor Stephen Hadley, in a press conference at the White House, stated that the missiles “went out about 275 miles” into the Sea of Japan.
http://www.whitehouse.gov/news/releases/2006/07/20060704-1.html

There are many other examples of the U.S. military and government (not just the press) confirming that the missiles were launched and approximately where they landed.

John Delaney is completely misrepresenting what happened, just as he did at the time of the launches.

Adam Siegel (of Inkling) interviews their #1 event derivative trader:

7) What is one feature Inkling doesn’t have you would like to see?

Hmmm…. A good exchange rate to US dollars? (Ha ha ha). I’d like to see a tighter system for market cash-out. I dig the user-made-market thing, but it gets old real fast when the manager doesn’t cash out a market for a week or more after it’s closed. On a similar note, I’d love to see people think through their closing times a little better. If the time of an event being predicted is known, the market should probably close just before that event starts, or part way through. A month earlier is usually pointless, and a day later after the basketball game or whatever is over is just free money for sleazy after-the-fact traitors like m… er… nice weather recently, isn’t it?

Public DYI prediction markets can work well only if we trust the people who will expire them. One suggestion would be to create a reputation system for the Inkling event derivative managers.

Previous: Adam Siegel interviews first “Million Inkle Trader”. – by Mike Giberson (who did cut out the most interesting part in his interview )

Trade Exchange Network Membership Information
Dear vancheeswaran,
The site administrators have removed your access rights:
Violation of T&Cs
powered by eve community<http://eve.groupee.com/landing/goto.php?a=community>

Hummm… Quite vague. Do they dislike the truth, at Intrade-TradeSports? Here are two recent comments from Vancheeswaran.

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#1

INTRADE-TRADESPORTS: John Delaney LIED in his Freakonomics interview.

That’s what tries to demonstrate event derivative trader “Vancheeswaran” in a comment on the Freakonomics blog post featuring a complacent interview of InTrade-TradeSports’ John Delaney.

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InTrade-TradeSports’ John Delaney:

We listed a market on whether the U.S. Government would formally report that North Korea tested a missile in a certain manner. While the media reported that North Koreans did test a missile, it was not confirmed in an official U.S. Government release as was required in the market rules, so we settled the market according to the strict interpretation of the rules and not the understood intention of the market. This was understandably a real issue for some of our members and also for Intrade. It was a bad situation for everyone, really. We have learned from it.

Event derivative trader “Vancheeswaran”:

BULLSHIT.

Bryan Whitman (Bryan.Whitman@osd.mil) explicitly stated in print, in press conferences, and by email that North Korea fired multiple missiles into the Sea of Japan.

For instance, “North Korea fired a long-range Taepodong-2 missile and six short- and medium-range Scud and Nodong missiles. All landed in the Sea of Japan without incident.”

National Security Advisor Stephen Hadley, in a press conference at the White House, stated that the missiles “went out about 275 miles” into the Sea of Japan.
http://www.whitehouse.gov/news/releases/2006/07/20060704-1.html

There are many other examples of the U.S. military and government (not just the press) confirming that the missiles were launched and approximately where they landed.

John Delaney is completely misrepresenting what happened, just as he did at the time of the launches.

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#2

Vancheeswaran:

EVERYONE is *supposed* get back any trading fees they paid to go into positions they held from before the fee change. I have no idea when/how that’s supposed to happen, whether it was supposed to have been done on the day of the changeover or if it’s supposed to be done at the time the new fee is assessed.

But this is not the point; don’t let it distract you from the real issue.

The point is that when any trader goes into a position they MUST know what their costs are going to be to exit the position, or they do NOT know what their position is really worth. By charging higher fees than originally agreed by members when they went into positions (including those who were promised ZERO fees on their pre-season positions), Tradesports is doing two things:

First, they are stealing money from members. Tradesports could decide to charge a 20% commission and it may be stupid but it would not be theft, IF people knew when they went into trades that 20% was what they were going to face. If I go in under the expectation that my fee will be .10 (or zero) and I’m suddenly charged 4%, that is theft.

Second, they are putting all current and potential members on notice that NOTHING TRADESPORTS SAYS CAN BE TRUSTED TO NOT BE CHANGED WITH RETROACTIVE EFFECT. This is not hysteria, it’s common sense. It would be stupid of any of us to think this is a one-time event (it’s happened at least once before within the past year). How can anyone intelligently go into a long-term position now when it’s been made clear that our positions could be devalued by a management decision at any time?

If you support Tradesports and want it to thrive, you’ve got to urge them away from this tin-pot dictatorship decision. There is nothing fundamentally wrong with the new fee structure in and of itself, and there is nothing fundamentally wrong with Tradesports changing rules and fees at their discretion, as long as all changes are forward-looking.

But changing bets IN ANY WAY after they have been placed is absolutely unacceptable here or in any other venue. It’s up to ALL members to speak up and let Tradesports know.

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Are these two comments from prediction market trader Vancheeswaran the reason why John Delaney of InTrade-TradeSports has banned him from expressing his views of the forum? Irish wannabe dictator John Delaney should get a crash course about free speech in America. That’s a cardinal principle. His American clients (who pay his salary) value that highly.

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InTrade-TradeSports’ John Delaney:

We listed a market on whether the U.S. Government would formally report that North Korea tested a missile in a certain manner. While the media reported that North Koreans did test a missile, it was not confirmed in an official U.S. Government release as was required in the market rules, so we settled the market according to the strict interpretation of the rules and not the understood intention of the market. This was understandably a real issue for some of our members and also for Intrade. It was a bad situation for everyone, really. We have learned from it.

Event derivative trader “Vancheeswaran”:

BULLSHIT.

Bryan Whitman (Bryan.Whitman@osd.mil) explicitly stated in print, in press conferences, and by email that North Korea fired multiple missiles into the Sea of Japan.

For instance, “North Korea fired a long-range Taepodong-2 missile and six short- and medium-range Scud and Nodong missiles. All landed in the Sea of Japan without incident.”

National Security Advisor Stephen Hadley, in a press conference at the White House, stated that the missiles “went out about 275 miles” into the Sea of Japan.
http://www.whitehouse.gov/news/releases/2006/07/20060704-1.html

There are many other examples of the U.S. military and government (not just the press) confirming that the missiles were launched and approximately where they landed.

John Delaney is completely misrepresenting what happened, just as he did at the time of the launches.

As I wrote last week, I will have my say on this Freakonomics interview. Stay tuned, folks.

Because I am a masochist, I think Tradesports should have contract groups relating to controversies surrounding management decisions at Tradesports. These would serve as a nice hedge for people who get screwed over by controversial decisions or are worried that the outcome of a pending decision might screw them over. Also (and I can’t believe this wasn’t done already), there should be contracts to boost the predictive power of the outcome of decisions. These can be structured as follows:
(suppose Tradesports is pondering a decision over whether or not to increase fees to an outrageous 1 dollar per contract)
Contract X: Will tradesports implement the change?
Contract A: Will tradesports implement the change and will volume drop below a paltry 5 contracts per day?
Contract B: Will tradesports decide not to implement the change and subsequently will volume drop below 5 contracts per day?
If these contracts are implemented, and if X is trading at 40, with A trading at 39 and B trading at 20, tradesports will see that if they implement the change, the likelihood of volume dropping below 5 contracts per day is 39/40 = 97%, and that if they don’t implement the chance the likelihood of volume dropping below 5 contracts per day is 20 / (100 – 40) = 33%. Thus Tradesports could predict that their decision would be the difference between a 97% likelihood of volume dropping off the face of the earth, and a 33% likelihood.

[I] just thought it would be interesting to have a prediction market on whether or not tradesports will admit they are wrong about retroactive fees changes / north korea contract specifications and consequences for traders / etc …
Also I thought it would be interesting to have contracts like:
Contract X: Tradesports pays both sides in North Korea contract.
Contract Y: Tradesports pays both sides in North Korea contract AND collects $___ in fees from all customers over the following year.
Contract Z: Tradesports does not pay both sides in North Korea contract, but STILL manages to collect $___ in fees from all customers over the following year.
Using the respective prices of contracts X, Y, and Z, tradesports could subsequently analyze the predicted economic consequences of providing lousy customer service.

Very funny.

[...] Tradesports claims to be just like NYSE or LSE, but anyone pulling this crap in a legitimate exchange would find themselves in jail.

Previous: TradeSports Cost of Service 3 + TradeSports Cost of Service 4

[...] Changing bets after they have been accepted is a cardinal sin for any bookmaker, broker, exchange, clearinghouse or anyone else and TradeSports cannot be allowed to get away with it.