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A second look at HedgeStreet’s comment to the CFTC about “event markets”

Chris F. Masse July 6th, 2008

Other than the ISDA (which is an association of operators who do not trade on regulated derivative exchanges), HedgeStreet (a non-intermediated DCM) was the first representative of the regulated derivative exchange community to submit a comment to the CFTC. — (PDF file)

HedgeStreet are saying that:

The political elections qualify as “excluded commodities” (as opposed to “exempted commodities”). The reason for that is that electing a Republican president can have some economic consequences for some industries (e.g., the oil industry, the health services industry, etc.), while electing a Democratic president can have opposite economic consequences, or economic consequences for other industries. Hence, the risk, and thus, the need for hedging those risks. And, so, the role of the CFTC is to guard against manipulations, etc.
If the political elections qualify as “excluded commodities”, then, logically, the prediction markets on political elections should be offered by Designated Contact Makers (DCMs), like HedgeStreet —and not by ECMs or by event derivative exchanges crowned with a “no-action” letter by the CFTC.

Besides the point #2 made by Vernon Smith in his comment back in May 2008, that is the strongest point made to the CFTC —as of today, Sunday, July 6th, 2008. (Jason Ruspini bought it, too.) I can’t imagine that the CFTC will ignore this point.

However, HedgeStreet are not saying that:

The topics other than political elections are “excluded commodities”, too.
They are “exempt commodities”.
They should be offered by DCMs.
They should be offered by ECMs or by event derivative exchanges crowned with a “no-action” letter by the CFTC.

They just say nothing.

See, HedgeStreet make a point that the CFTC should allow them to offer prediction markets on political elections to retail traders, but do not discuss the status of all the other prediction markets —and you’ve have seen that, in their concept release, the CFTC have mentioned many examples other than political elections.

What I’m trying to do this Sunday is to analyze their silence. Would that mean that HedgeStreet wouldn’t mind a dual decision by the CFTC —as long the first part of this dual decision consists in granting (maybe, non exclusively) to the DCMs the right to offer prediction markets on political elections?

In other words, if the CFTC makes HedgeStreet happy, can they, also, satisfy (even partially) the other people? (Some people are petitioning for the right to offer all kinds of prediction markets, but they would like to do that thru a ECM or a “no-action” letter.)

UPDATE: See also the CME Group’s comment to the CFTC. - (PDF file)

Tags: CFTC, event contracts, event derivative markets, event markets, HedgeStreet, Jason Ruspini, laws, prediction exchanges, prediction markets, Regulations

The Chicago Mercantile Exchange is not a friend of the prediction markets. Nor is the ISDA.

Chris F. Masse July 2nd, 2008

Will the Chicago Mercantile Exchange write to the CFTC?

… asks Google’s Bo Cowgill.

That could be… However, I’m not holding my breath. Here’s why. The CME (along side the CBOE and ISDA) represents forces that does not push for the kind of financial innovations we are pushing here, on Midas Oracle. We are pulling for Web-based, de-intermediated, low-cost, event derivative exchanges. The financial dinosaurs (like the CME) do not.

Take a look at the CME’s 2003 letter to the CFTC about HedgeStreet’s application as a DCM. - (PDF file) - Here are the titles of the first 2 sections:

HedgeStreet’s Proposal is Materially Deficient.
The [HedgeStreet] Application Violates the CEA.

No need to go further. … You have computed that the CME was (in 2003) no friend of HedgeStreet —and, thus, of our prediction markets. (For those who are just surfacing from an Afghan cave, yes, the CFTC did approve HedgeStreet’s application, finally, and told the CME to go fugging themselves.) So, I’m not holding my breath for a CME comment to the CFTC’s concept release on “event markets”. Saying that the CME is talking for the prediction market community is like saying the Ayatollah Khamenei was talking for priests, ministers, and rabbis.

As for the ISDA, they represent big institutional traders… who do not use exchanges ( !! ). What they say to the CFTC (PDF file), basically, is to be careful not to hurt the framework of the whole landscape. Well, thanks ISDA, but the CFTC knew that already.

As I said, 2 prediction market organizations will, each, submit their comment to the CFTC. I don’t expect that to be a deep read, with regards to derivative regulations. However, their industrial strategy might transpire, and that might be interesting for curious people like me.

The 3 interesting takes about the “event markets” are from:

the CFTC —if you are able to sense what their true opinion is.
Jason Ruspini —(PDF file).
Tom W. Bell —upcoming.

The future of US-based, non-sports, non-hedgeable prediction markets depends on those 3 poles of thought.

In the coming weeks, you’ll see many intellectual interactions between them.

The real question is: Will Jason Ruspini and/or Tom W. Bell have a proven impact on the CFTC process? I wish that, but both of them do stray away from the CFTC’s strict framework.

DEVELOPING…

Tags: CFTC, Chicago Mercantile Exchange, CME, event contracts, event derivative markets, event markets, for-profit prediction exchanges, International Swaps and Derivatives Association, ISDA, Jason Ruspini, laws, not-for-profit prediction exchanges, prediction exchanges, prediction markets, Regulations, Tom W. Bell

COMMENTS TO THE CFTC: What should be expected, next.

Chris F. Masse July 2nd, 2008

Two prediction market organizations will submit, each, a comment. I suppose that what they will tell the CFTC will say more about their industrial strategy than about the right state of the US regulations on event derivative markets, but I could be damn wrong.

Tom W. Bell is working on a comment to the CFTC (that’s public information). Once it is published, the next thing to do is a comparative analysis of Bell versus Ruspini. With that question in mind: Which of these 2 luminaries will have the best impact on the CFTC?

I can’t wait.

Tags: CFTC, event contracts, event derivative markets, event markets, Jason Ruspini, laws, prediction exchanges, prediction markets, Regulations, Tom W. Bell

COMMENTS TO THE CFTC: What to expect from Tom W. Bell and Jason Ruspini

Chris F. Masse June 25th, 2008

For those who are just surfacing from an Afghan cave: Tom W. Bell is a law professor at Chapman University (in California) and Jason Ruspini is a Wall Street professional (in New York).

It seems that both will, independently of each other, write to the CFTC about the legalization of the “event markets” (here are the comments to the CFTC) —a bad term for the “non-hedgeable event derivative markets” (which is also, probably, a term that is quite awful to your ears ). What to expect from them? (WARNING: This is highly speculative.)

TOM W. BELL

He will state the libertarian point of view —laissez faire, laissez aller. - [DISCLOSURE: I am a mid-core libertarian myself, so I like that.]
Overall, he will try to put up a basket of legal hacks —to establish that the real-money prediction markets should be as free as possible.
In particular, he will try to make the point that “event markets” should be covered by the laws governing “notes” —not by the laws governing “contracts”.
By doing so, he will tell the CFTC to go fugging themselves —since the CFTC is allegedly about “contracts”, not about “notes”.

JASON RUSPINI

He will state that all the real-money prediction markets should be covered by the CFTC.
He will navigate within the legal framework that the CFTC has established in their “concept release”. - [See this document from the Arnold & Porter lawyers, if you wanna know what's a "concept release", in the mind of the CFTC regulators. - PDF file.]
He will be very careful not to offense those bureaucrats.

TOM W. BELL vs JASON RUSPINI

It’s great that the libertarian point of view is elaborated and disseminated to these bureaucrats. However, the CFTC is an agency, not the US Supreme Court Of Justice —and the fact that Tom W. Bell is right does not mean that he will prevail.
Jason Ruspini’s approach is extremely reasonable: he adopts the enemy’s point of view, and, from within, tries to maneuver the regulatory barriers to create as much room as possible. Also, Jason Ruspini will address only the CFTC questions which he grasps well. (Contrast that with some who spread themselves too thin, and answer all the CFTC questions, even those where they have no expertise or experience. Their answers are, and, will be totally ignored. It’s not what you say that is important; it’s what you say in relation with who you are to say that.) I’m pulling for Jason Ruspini’s approach.

TAKEAWAY

If Jason Ruspini does not fuck it up, he has the potentiality to influence positively the CFTC, and to become one of the great leaders of the field of prediction markets. Let’s wish for that. Our field needs courageous men (and women) with the right political compass and the sense of pragmatism.

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.

- A young economist rebuts the American Enterprise Institute.

BACKGROUND INFO:

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

Tags: CFTC, event contracts, event derivative markets, event markets, for-profit prediction exchanges, Jason Ruspini, laws, not-for-profit prediction exchanges, prediction exchanges, prediction markets, Regulations, Tom W. Bell

JASON RUSPINI’S CROCKERY: The Brain states forcefully that they are not “event futures”, but “binary options”. Still, as soon as he premieres prediction markets on tax rates at InTrade, he calls them “tax futures” —of course.

Chris F. Masse May 27th, 2008

Measured Enthusiasm for Prediction Markets - (PDF file) - by Jason Ruspini.

My thoughts:

Peter McCluskey thinks they are “futures”.
PAM was only extremely marginally about “terrorism and assassination futures”.
Even though they don’t do much more than discounting known information, “prediction markets” is not a misnomer, since the term means that each prediction (in the form of an event derivative contract) is traded on a market.
“Decision-aid markets”, not “decision markets” —I’d leave that last denomination for Robin Hanson’s original idea, when the decision applies automatically, after the trading.
And what was Justin Wolfers’ reasoning? Might we know? (And why did you swallow it?)
Which are the manipulation papers making “unrealistic assumptions”? Names, please.
Tax futures are great. But, who else in the world, other than mister Ruspini, believes that they can be fiscal hedging vehicles? (Not doubtful. Just asking. External links, please.)

Jason Ruspini on the regulation of US event derivative markets:

CFTC-like regulation would save these markets from having to navigate national and state gambling laws, but would come at the cost of flexibility. Some contracts would not be approved for political reasons even if they had demonstrable hedging utility and “economic purpose”.

Tags: accuracy, event derivative markets, event futures markets, Finance, InTrade, Jason Ruspini, prediction markets, Regulations, tax futures

Collective Error = Average Individual Error - Prediction Diversity

Chris F. Masse April 19th, 2008

-
The Brain has a comment on Scott Page’s presentation [PPT file] about his book, The Difference:

One question is whether there is a way to usefully systematize that principle by trader selection or via something other than a strict market such as an (incentivised) weighted average system like HP’s BRAIN. The latter type of system will work better in some domains but in general might be less robust because it constantly runs the danger of being overfit to past trader correlations (or apparent expertise, risk appetites, etc). In general, trader self-selection and self-weighting might be more accurate. If you have some metric of “fundamental” trader similarity like proximity, org chart relations, demographic data - as opposed to past trading correlations only, that might work better in terms of expert-selection/expert-weighting.

Tags: collective intelligence, Jason Ruspini, Scott Page, The Difference, wisdom of crowds

How have Jason Ruspini’s tax futures markets at InTrade-TradeSports fared, so far?

Chris F. Masse April 3rd, 2008

The most liquid of the Jason Ruspini-created contracts:

I would like to talk a bit about the Internet marketing of these prediction markets, in the rest of this present post.

As you all know, Jason Ruspini published a blog post on his (semi-abandoned) blog (spot the comments), was interviewed by Bloomberg, and then went to BNN (a Canadian business TV nobody would have ever heard about, otherwise).

In passing, I want to thank Fabian John of Tom Next (a German web forum on financial event derivative trading) for uploading the video to YouTube.

Spot the referral stats at the bottom of the screen shot below:

My Internet marketing thoughts:

The Club For Growth blog sent about 20% (22 clicks from CFG out of a total of 108) of all people who watched that video —even though the Club For Growth blog is much, much, much more popular than Midas Oracle (which drills a narrow vertical). This is consistent with what Jakob Nielsen has always said, namely that the Internet is in fact a collection of verticals. (See: Diversity is Power for Specialized Sites. “Small websites [like Midas Oracle] get less traffic than big ones, but they can still dominate their niches. For each question users ask, the Web delivers a different set of sites to provide the answers.”)
I think that the difference between the total viewership (277 views) and the referral numbers (108 clicks) is due to the fact that most Midas Oracle feed subscribers watched that Jason Ruspini video from within their feed reader (like Google Reader), and never had to “click” on the link to watch the video from within the YouTube page.
The above is a very interesting piece of Internet marketing wisdom, which prediction market firms (like InTrade-TradeSports, BetFair-TradeFair, Betdaq, NewsFutures, HSX, etc.) should mind —especially in light of the focus on prediction market journalism I talked you about yesterday

Funny enough, John Delaney of InTrade stole the YouTube video (uploaded there by Fabian John of Tom Next), erased the mention of my (dirty) name (put up there by Fab who thought I would like this egotistic plug), and re-posted the video on the InTrade section at YouTube.

That Chris Masse-free copy of the Jason Ruspini video hasn’t attracted many eyeballs, as the stats show:

If you wish, you may watch again the Jason Ruspini video from within your feed reader:

Tax rate prediction markets - YouTube

Related: Bloomberg

Previously: Tax Futures, “In Real Life” - by Jason Ruspini

Tags: BBN, event derivative markets, event derivatives, event futures, InTrade, Jason Ruspini, prediction markets, tax futures, tax futures markets, tax prediction markets, YouTube

Jason Ruspini was an imprudent and cocky predictor, but, in the end, he is a honest man.

Chris F. Masse March 14th, 2008

Jason Ruspini went overboard on BBN TV, claiming his tax futures markets will become InTrade’s most popular ones in 2009, but he managed to control well his descent to Earth:

[Y]es they have lost a lot of steam and that statement seems overconfident at this point, - or has always [been] for that matter. There was no real follow-through to the apparent trend of the first week or so. Lack of news flow is the main culprit. [...]

Tags: Jason Ruspini, tax futures, tax prediction markets, tax rate futures, tax rate prediction markets

Folks, when you have something important to say, write up a full post, not a comment.

Chris F. Masse March 2nd, 2008

Folks, very few people read the Midas Oracle comments. Publish your important thoughts as posts, where you can be seen by thousands.

Jason Ruspini (whom I nickname “The Brain“, sometimes, and “Avida Dollars“, at other times) has left 4 interesting comments, which I’m sure people will not notice unless I highlight them.

Right-click these 4 links, open them in another browser tab, and scroll down to spot Jason’s comments:

I can’t spend my life highlighting people’s comments. When you have something important to say, write up a post.

Tags: Avida Dollars, Jason Ruspini, The Brain