July 4th 2008
The Commodity Futures Trading Commission
Three Lafayette Centre
1155 21st Street NW
Washington, DC 20581
U.S.A.

Attention: Office of the Secretariat

RE: “Concept Release on the Appropriate Regulatory Treatment of Event Contracts”

To Whom it May Concern:

It is an honour for me as Chief Executive Officer of Intrade the Prediction Market Limited (“Intrade”) to provide price discovery information on thousands of event markets free of charge to notable institutions such as yourselves at the U.S. Commodity Futures Trading Commission, the U.S. Navy, the Federal Reserve Banks of New York, Richmond, and Chicago, the European Central Bank, the Bank of Japan, the American Enterprise Institute – Brookings Joint Centre, CATO Institute, and the Bank of England. We have similarly supplied our price discovery event market information to political organisations, students and staff at every Ivy League College, and students and staff at over 50 universities worldwide.

We estimate that over 300 global media businesses such as The New York Times, The Wall Street Journal, The Washington Post, The Financial Times, The Los Angles Times, Chicago Tribune, Economist, Bloomberg, Reuters, Forbes, Time, Fortune, CNN, CNBC, Fox, ABC and others have used Intrade event market information.

Investment firms on Wall Street, and the other major financial centres of the world, have solicited and been provided with Intrade price discovery event market information. The above lists are not exhaustive.

Further, Intrade provides free real-time transparent price discovery event market information to millions of people from the general public. While Intrade serves a global community and has registered members from 162 countries, our 82,000 plus membership are predominantly resident in the United States. The predictive probability information on event markets that we supply to the general public is both intuitive and readily and rapidly assimilated without the necessity for paid subscriptions or a financial education.

Intrade has been transparent and industrious, as have others, in nurturing the development of the event market industry. Intrade as a profit-maximizing business does of course expect to significantly benefit from its dedicated employment. However the benefits to society at large will be equivalently great from Intrade’s focus on event markets.

While U.S. institutions and society benefit from Intrade’s services it is perversely unclear as to whether Intrade, and indeed myself, are considered persona gratis by the United States. However, we are more optimistic than ever that Intrade as the de facto leader in the event market industry sector will soon have the ability to stand on a firm, transparent and appropriate regulatory footing thanks to the process that the CFTC has accelerated through their request for comments on how to regulate event markets.

Not since the Industrial Revolution have the risks and their commensurate opportunities of dealing with great uncertainty and rapid change that we all face been so high. Much of this change and uncertainty is technology driven, with most countries, organizations and households accepting, in theory at least, that they must change.

The recent implosion of credit markets is just one example of the great uncertainty and potential for events impacting citizens of the United States and farther afield.

To adapt to a changing world in an orderly and optimal manner requires access to information, robust decision-making processes and the courage and determination to grasp the opportunities that a dynamic world offers. The CFTC and indeed the United States itself has access to the information, the decisionmaking expertise, and a historical track record of determination and accomplishment.

But the relentless change that we all face will be best dealt with if we have the best information, in real time, to reduce uncertainty, risk and stress. Event market information can and has increased the quality and timeliness of decision-making. Event markets can act as a democratic mechanism that gives voice to the broadest range of event stakeholders and, in so doing, aggregates a peerless information set. By encouraging the aggregation, distribution, validation and appropriate use of the best event market information, society will benefit even more than it does today from event markets. To do otherwise than to encourage event market development would be a societal travesty.

The dynamic nature of the world that we live in, where the pace and systematic impact of change seem to be increasing, will be greatly aided if event markets are given a certain regulatory footing in the United States and other jurisdictions. This, coupled with the fact that markets excel in aggregating information and estimating the value of a product or the likelihood of an event occurring, testifies to the logic that the price discovery that event markets produce should now be encouraged by the CFTC.

The CFTC by clarifying the status of event markets now will be of great service to Americans. In this regard the CFTC has an important opportunity and one that the CFTC seem very positively biased to grasp in light of its statements, such as…
- The CFTC state on their website that they have “An Important Mission in the Ever-Changing World of Finance.”
- “The CFTC assures the economic utility of the futures markets by encouraging their competitiveness and efficiency.”
- “The CFTC is also mandated to enable futures markets to serve the important function of providing a means for price discovery and offsetting price risk.”

CFTC Acting Chairman Walt Lukken, when announcing the execution of a memorandum of understanding with the SEC on March 11, 2008, stated: “The regulatory structure that oversees the U.S. financial markets embrace innovation, growth and competition in the global marketplace, without compromising market integrity, customer protection and the public good.”

The above statements, in addition to the Concept Release by the CFTC, are very encouraging. It is specifically this price discovery and risk management mandate that justify the CFTC’s embrace of event markets, should justification be needed.

Intrade has listed 211,607 individual event markets and aggregated and distributed predictive event market information on subjects such as Arctic Oil Drilling, Climate Change, Commodities, Company Earnings, Constitutional Referenda, Currencies, Disease Outbreaks, Earthquakes, Economic Numbers, Entertainment Awards and Earnings, Indices, Euro Adoption, Federal Reserve Announcements, Gas Prices, Gasoline Tax, Geo Political Events, Homeland Security in the U.S., Mergers & Acquisitions, Social Security Reform and U.S. Taxes. This list is far from exhaustive.

No other platform has listed more event markets than Intrade. To the best of our knowledge and belief the event market leadership position that is often ascribed to Intrade is wholly justified from a review of the breadth of the event markets listed and information we have aggregated and distributed. Information, as noted above, that is used by governmental agencies, businesses, academics, and the general public to reduce uncertainty and in so doing increase the speed and quality of decisions being made.

While the obvious benefits to the general public in terms of price discovery and decision-making of some Intrade event markets will be more obvious than others, we can make robust arguments that all have the potential to serve the dual purpose of price discovery and a mechanism for offsetting price risk.

The CFTC by clarifying its position on event markets will give all event market stakeholders valuable direction on market and participant eligibility. Whether used at the federal government level or by the individual citizen, event markets provide a magnificent opportunity to use price discovery information in managing economic risk. Here are just a few examples from the 211,607 event markets we have listed.

Intrade has listed markets on the probability of the Homeland Security alert level being above or below a certain level at a certain date. “The United States spends roughly $100 billion per year on homeland security” according to the White House. The costs of migrating from a threat level of “Guarded” to a threat level of “Elevated” have very significant costs for the government, business, and society. By utilizing event market price discovery information on the probability that the alert level will be at a certain threshold on a given date, the economic consequences of the threat level can be managed in a more insightful way.

Jason Ruspini has suggested markets to Intrade on whether the marginal personal income tax rate for single U.S. filers will be equal to or greater than a range of specified percentages for tax years 2009, 2010 and 2011. Having spoken directly to a number of tax paying citizens from the United States, the transparency of this information undoubtedly serves a public good. Is there a Unites States resident taxpayer who will read this comment who is not interested in the taxes she or he will pay next year?

On a more macro level, Intrade has listed a market on whether the cold fusion experiment of Dr. Yoshiaki Arata will be replicated in a peer-reviewed scientific journal before 31 December 2009. The possible impact of such a development to our energy needs little hyperbolae. The fact that President Bush requested $25 billion for the U.S. Department of Energy’s 2009 Budget speaks to the importance of maximum transparency in such matters. It may also be interesting to note that $493 million of the $25 billion was allocated to Fusion Energy Services. Does transparency to such price discovery information serve positively the United States and others? Absolutely!

Professor Koleman Strumpf suggested that Intrade list a market on whether Blu-Ray Disc sales will outnumber HD-DVD disc sales in the United States in 2008. If an organisation’s employees or profits are potentially influenced by the outcome of this event, as were Toshiba’s, the main supporter of HDDVD, then access to such information is both valuable and gives opportunity for welfare maximisation.

Intrade has also listed, at the request of University of Westminster Business School, markets on whether the number of violent crimes committed in 2010 will be lower than those committed in 2007. Intrade has additionally listed at the request of a United States resident member of our platform a market on the impact of U.S. Government debt if a non-Democrat is elected president of the United States in 2008.

Professor Eric Zitzewitz, Professor Robin Hanson, Professor Justin Wolfers and others at the forefront of event market academia have all suggested event markets to Intrade in the past that have been listed and which provided event market information both for academic study and business and general public use.

Imagine if you were a resident of a state such as Florida that is frequently exposed to severe storms and how crucial information on the likelihood of a storm hitting your state can be if your business, family and friends are likely to be impacted by such an occurrence. Intrade lists event markets on such
eventualities.

The event markets listed on Intrade provide price discovery information on whether an earthquake measuring 9.0 or more on the Richter Scale will happen anywhere in the world in 2008; whether Avian Flu H5N1 is confirmed in the United States in 2008; whether the U.S. carries out an overt attack on North Korea; or even whether Robert Mugabe departs his presidency in 2008. These significant events are highly relevant to millions of people in the United States and elsewhere.

President Bush stated in an address on global climate change that: “This is a challenge that requires a 100 percent effort; ours, and the rest of the world’s.” It seems to us impossible to make a “100 percent effort” to address the challenge of climate change without using event markets to aggregate information, such as that provided by Intrade’s market on whether 2008 will be one of the warmest years ever recorded.

All of the markets cited above give information on the probability of the event occurring. Some of the information aggregated and distributed by Intrade has been more predictive than other. The predictive accuracy of Intrade’s event markets and event markets generally have been cited and studied extensively by academics and others including, but not limited to Professor Robin Hanson, Professor Charles Noussair, Professor David Paton, Professor Leighton Vaughan Williams, Dr. David Pennock, Professor Eric Zitzewitz, Professor Mark Perry, Professor Erik Snowberg, Professor Marco Ottaviani, Professor Justin Wolfers, Professor Koleman Strumpf, and Professor Paul Tetlock.

Nearly all leading academics, not known for their attraction to unanimity, have publicly supported event markets. A great majority of these academics have been supplied with Intrade market data in the past, a service that Intrade intends to continue, for all study leads to an increase in transparency and understanding of event markets. It seems that the leading event market academics make no distinction between the benefits derived from academic owned markets like Iowa Electronic Markets and commercial market platforms like Intrade.

Yet many academics, with some notable exceptions, do temper their policy prescription to suggest a “safe harbor” for academic sites where research might be more generally available. As noted above Intrade has gladly supplied its event market data, typically free of charge to most of the leading prediction market academics and their students, and we are committed to encouraging the future study of event markets by continuing to supply our event market data free of charge or at very deep discounts. The academics that study event markets do a great service in developing our understanding of the strengths and weaknesses of event markets. Some commentators suggest that market liquidity and breadth typically benefit all event market stakeholders. Thus far commercial platforms like Intrade seem to be providing the greatest depth and breadth in event markets.

As Intrade has been a staunch supporter of event market academic study, and supplies greater depth and liquidity in its event markets than any other platform, it seems strange not to be a preferred purveyor. Perhaps the predominant reason many academics have held back from advocating and treating all event markets alike is a sense that initiatives to clarify or unwind the legislation restraining the optimal development of event markets is unlikely to be achievable. It seems many academics and commentators suggest a slow bureaucratic and pragmatic caution rather than focus on the optimal result. While the optimal result may be more challenging to achieve, for consistency, for better price discovery for the benefit of all, as well as for the development of Intrade, we encourage CFTC to apply common goals, objectives and standards for all participants.

While some evidence and event markets have highlighted that event markets do not always provide robust predictive information, the preponderance of the research suggests that event markets have both the ability and track record of providing the best available information upon which decisions may be based or optimised. Of course the uncertain regulatory status of event markets constrains the development of liquidity, price discovery and by logical extension societal benefits.

Intrade has received testimonials from numerous U.S. regulated businesses and private citizens which state they would like to trade on certain event markets but are unable due to the regulatory uncertainty. Therefore, unless and until event markets are given a certain status they will not develop to their full potential.

Based on the above and comments by many others, some of whom have been mentioned by name in this comment, the price discovery mandate that the CFTC has can only be served if event markets are embraced.

In terms of offsetting price risk and the opportunity for hedging, the overwhelming majority of markets listed by Intrade can easily be seen to have underlying economic implications and risks. For example, U.S. tax rate changes, a negative geopolitical event, an increase in the threat level to homeland security and the associated costs of a higher threat level, or indeed Social Security reform all have massive economic justifications across society.

As with the CFTC’s price discovery mandate, it is impossible for us to imagine how risks can be optimally assessed and managed without the status of event markets being clarified.

The CFTC are also sensitive to retaining the competitiveness of futures markets and retaining “competition in the global marketplace”. There has been much written about the United States losing its edge in global financial markets. Often cited is that burdensome and inflexible regulations, most notably the Sarbanes-Oxley legislation passed by Congress in 2002, are driving business to London, Hong Kong, Frankfurt and elsewhere. In this regard, the CFTC has an opportunity to be a world first and embrace event markets. In so doing the CFTC will ensure the United States’ leadership position is encouraged for the important and growing event market industry.

The greatest challenge in bringing about an appropriate and successful embrace of event markets by the CFTC is unlikely to be identifying and agreeing that the public good will be served, or that risks may be better managed. The challenge for the CFTC may well be the uncertainties relating to legal and jurisdiction issues. In these matters there are experts far better versed than Intrade to opine.

The financial events of the last six months in which virtually the entire world financial system stopped functioning to a greater or lesser extent has highlighted what can happen when many of the world’s largest financial institutions make concurrent similar mistakes. Such systemic contagion has led commentators to suggest a more fundamental approach to how and what we regulate. Where event markets are concerned we are hopeful that this is the case and that the level of regulation is such that the evolving stage of the event market industry is not stifled.

We are proud to be at the forefront of the development of the event market industry. We are determined to continue providing the best information on relevant event markets to the widest audience. We wish to solidify our regulatory position in the U.S. and elsewhere. We strongly encourage the CFTC to clarify the situation with regard to event markets for the benefit of all, even if there are costs to Intrade. We are highly optimistic that the CFTC will grasp this opportunity to benefit all society and we wish to serve our own most important role in an industry niche that we have been privileged to help shape.

Respectfully Submitted on behalf of the entire Intrade Team by
John Delaney
Chief Executive Officer

CC to Fax 202.418.5521 and e-mail: secretary@cftc.gov.

1. “Intrade … isn’t just an entertaining Web site. It is the latest iteration of one of the most important economic developments of modern times.” David Leonhardt, Economics Reporter, The New York Times, February 14, 2007

2. Costs of regulation are high in the U.S., “that’s a key reason the leading commercial prediction market, Intrade, is based in Ireland” Prof Paul Tetlock, Wall Street Journal, May 11th 2007

3. “On Dec. 11, 2003, Intrade’s contract on Saddam Hussein’s capture suddenly began to move. … Two days later, Saddam was in custody.” Bill Saporito, Time Magazine, October 24, 2005

4. “At FORTUNE we often write about the latest hot company, but it’s rare that we get a chance to introduce you to an entirely new market… Intrade is the only efficient market system around for investing in, well, almost anything” Andy Serwer, Managing Editor, Fortune, August 8, 2005

5. 78% of traffic to Intrade.com in the period 1 January to 30 June was from the U.S.

6. “Intrade futures market ~ the greatest time-saving invention of this century.” John Tierney The New York Times

7. The Uncertainty Stress Scale: its development and psychometric properties. Can J Nurs Res. 1994 Fall;26(3):15-30, PMID: 7889446

8. As of June 30 2008

9. For many people, Intrade is the king of the prediction markets.” Stephen Dubner, Freakonomics, The New York Times July 5 2007

10. http://www.whitehouse.gov/homeland/book/sect5.pdf.

11. http://feedroom.businessweek.com/?fr_story=5a3aa8086dbd52b35ae21c7f5abe94f85fa0a8ab&rf=sitemap.

12. http://www.energy.gov/news/5920.htm

13. “Want straight answers on what will happen in politics and current events? Answers without partisan bias or wishful thinking? You can’t do much better than the prices at Intrade.” Professor Robin Hanson, Professor of Economics, George Mason University

14. “My forecast? Prediction markets will become ever more important to business and public policy. And Intrade are running the most interesting markets around.” Professor Justin Wolfers

15. http://www.whitehouse.gov/news/releases/2001/06/20010611-2.html

16. “Analysts can debate about a recession as much as they want, but talk is cheap. It’s great to have [Intrade] futures trade where people put money behind their beliefs!” Professor Mark J. Perry, University of Michigan-Flint

17. http://www.international-economy.com/TIE_Sp07_Baker.pdf and http://knowledge.emory.edu/article.cfm?articleid=1015

18. “Regulatory Underkill,” Arthur Levitt Jr., Wall Street Journal, March 21, 2008

-

NEXT: More from John Delaney about regulations

-

July 6th, 2008

Commodity Futures Trading Commission
Three Lafayette Centre
1155 21st St. NW
Washington D.C. 20581

Attention:
Office of the Secretariat- secretary@cftc.gov

Reference:
Concept Release on the Appropriate Regulatory Treatment of Event Contracts
73 FR 25669

-

Just a technical note, before I give you my thoughts. In the following, I call “prediction market” the specific market where one particular event derivative is traded. (For instance, the “Barack Obama will be elected US President in November 2008″ prediction market.) And I call “prediction exchange” the general marketplace where many prediction markets (on political elections and other events) are traded. (Hence, I call HedgeStreet a “prediction exchange”).

Please, allow me to give you my thoughts on the subject of real-money prediction exchanges:

-

ABOUT THE INFORMATION AGGREGATION MECHANISM, FORECASTING, THE LIQUIDITY OF THE SOCIALLY VALUABLE PREDICTION MARKETS, THE DEVELOPMENT OF A US-BASED PREDICTION MARKET INDUSTRY, AND THE PROTECTION OF RETAIL TRADERS

-

The information aggregation mechanism functions well only if there are enough traders. Probabilistic predictions (which are of interest of the economists cited in the CFTC’s concept release) are generated only when there is enough liquidity, that is, when many traders come speculating on an event derivative market (e.g., on the topic of the next political election). Just because forecasters are interested in a topic and want to generate a market-based probabilistic prediction does not mean that traders will flock en masse. Market-generating forecasting is an offspring of the trading activity; if you have too little liquidity, you don’t have any trustworthy probabilistic prediction.

The socially valuable prediction markets should meet 3 criteria:
- their contracts should be very well drafted, so that the probabilistic predictions generated would be useful to society;
- a sufficient number of traders should like the topic;
- there should exist advanced, primary indicators which traders can follow to get early information (e.g., polls, among other sources of information, in the case of prediction markets on political elections).

Here’s a counter example. Yahoo! Research scientist David Pennock (one of the most active and well regarded researchers in this field) has created a set of prediction markets regarding the percentage share of web searches made in the US in 2008, for each Internet search engine (Google, Yahoo!, etc.) That would be extremely valuable, on the paper. Unfortunately, those sets of prediction markets have attracted only a fistful of traders:
http://www.intrade.com/aav2/trading/tradingHTML.jsp?evID=78364&eventSelect=78364&updateList=true&showExpired=false
Hence, no trustworthy probabilistic predictions were generated.

The CFTC should take with a grain of salt the 2008 petition organized by the American Enterprise Institute
http://www.reg-markets.org/publications/abstract.php?pid=1276
that states that “not-for-profit research institutions” and “government agencies” should be allowed to run US-based, real-money prediction exchanges, for the good of society. Just because an organization is smart and fascinated by the prediction markets does not mean that its executives and managers will be capable of drawing traders. Obviously, prediction exchanges should be run by trading specialists and event derivative professionals, and properly regulated. No good will be done by the CFTC if amateurs are allowed to run un-regulated, real-money prediction exchanges.

I see 2 important keys for the development of socially valuable prediction markets.

a) The socially valuable prediction markets (which are not very popular, other than the ones on political elections) should be organized by the generalist prediction exchanges that draw traders en masse because they offer prediction markets on very popular topics.

Sports is a popular topic. If the CFTC go to the website of TradeSports http://www.tradesports.com/ , they will see that TradeSports links, on its frontpage, to the InTrade prediction markets at http://www.intrade.com/ and, thus, send the TradeSports traders to the InTrade prediction markets, which is obviously good for InTrade’s liquidity in general, and especially good for InTrade’s socially valuable prediction markets. In the same manner, the prediction markets on political elections organized by BetFair UK http://www.betfair.com/ are located within their central prediction exchange that is mainly devoted to sports.

The hard fact is that the most popular topic among individual traders (the retail customers of the prediction exchanges) is sports. As long as US laws and regulations won’t allow US-based, real-money prediction exchanges to organize prediction markets on the topic of sports, many US event derivative traders will give their business to offshore, real-money prediction exchanges who accept to take money from US residents (as it is the case with TradeSports-InTrade Ireland).

I understand, though, that the CFTC is working under a jurisdiction that presently outlaws prediction markets on sports.

b) The executives of the popular, real-money prediction exchanges should be willing to create socially valuable prediction markets by collaborating with outside researchers who specialize in certain verticals.

As of today, InTrade is the only real-money prediction exchanges that fill these 2 criteria —a) and b). InTrade’s executives and managers have deployed a considerable effort to create and run an impressive number of socially valuable prediction markets.

BetFair UK have chosen not to develop socially valuable prediction markets, alas —other than those on UK politics, which are well developed and of high social utility. And HedgeStreet does not have yet the CFTC’s stamp of approval to run markets of event derivatives non-financial topics, since that’s the purpose of the May 2008′s concept release.

The economists Justin Wolfers, Eric Zitzewitz, Robin Hanson, Koleman Strumpf and David Pennock (among others) have collaborated with InTrade Ireland to frame interesting questions. Obviously, the research institutions which those economic scientists are affiliated with (e.g., universities, colleges, business schools) have no business running real-money prediction markets.

If the “not-for-profit research institutions” and “government agencies” want to develop socially prediction markets, then they should do it in cooperation with established, popular, regulated, real-money prediction exchanges, who know what they are doing.

(In passing, I fully support Tom W. Bell’s point made in the 5th paragraph of his petition. The CFTC should not favor the not-for-profit prediction exchanges at the expense of the for-profit prediction exchanges. Tom W. Bell’s comment to the CFTC has not yet appeared on the CFTC website, as I type this. http://agoraphilia.blogspot.com/2008/07/lets-tell-cftc-where-to-go.html )

As I said, I follow the prediction market industry since 2003, and the 2 most common mistakes I see made by the people proposing brand-new socially valuable prediction markets are that:
- they forget that the event derivative traders should have fun;
- they forget that, for each prediction market, there should exist advanced, primary indicators that traders should rely on to inform their trades.

I want to tell the CFTC that most people who talk about creating brand-new socially valuable prediction markets are totally unaware of these 2 basic rules.

In the beginning of this comment, I said that prediction markets are forecasting tools (and, hence, decision-support tools) if, and only if, there is sufficient liquidity. I also noticed that the world’s most liquid socially valuable prediction markets are offered by 2 exchanges (TradeSports-InTrade and BetFair) who use popular prediction markets (on sports, the fact is) to support the marketing of less popular, socially valuable prediction markets. (After making that argument, I acknowledged that the CFTC currently works for a legal environment that prohibits prediction markets on sports.)

My point here is to emphasize the uber importance of liquidity on socially valuable prediction markets. In my view, the best situation is when a big, generalist, real-money prediction exchange organizes socially valuable prediction markets and helps them to thrive. Only InTrade Ireland has done that, so far. My suggestion to the CFTC would be to create a legal environment such that their liquidity could be “repatriated” to the US, on a “InTrade USA” real-money prediction exchange.

A related issue is that the CFTC should be concerned about HedgeStreet’s financial health. After its third round of funding, HedgeStreet raised a total of $24.9 million.

http://www.hedgestreet.com/abouthedgestreet/pressreleases/pressrelease_21.html

Lately, HedgeStreet was aquired by an offshore investor for $6 million.

http://www.hedgestreet.com/abouthedgestreet/pressreleases/pressrelease_32.html

Obviously, there has been destruction of wealth, here.

The CFTC did a great job in 2004 when it approved HedgeStreet’s application as a Designated Contract Maker (DCM). The CFTC should now finish the job by creating a legal environment favoring the profitability of HedgeStreet and of other non-intermediated DCMs (e.g., InTrade USA, or BetFair USA, or TradeFair USA) —which I hope will be started up in the future in the US.

What I am afraid with the May 2008′s concept release on “event markets” is that the CFTC does not look into the real issues: the liquidity of socially valuable prediction markets, and the profitability of US-based companies operating real-money prediction exchanges (non-intermediated DCMs).

I’m afraid that all the solutions consisting in “exemptions” and “no-action” letters are false solutions that do not address the real issues.

Finally, for the issue regarding the protection of retail traders, I suggest that the CFTC looks into the worst scandal that occurred in the field of prediction markets —the “North Korea Missile prediction market” scandal. I am sad to say that InTrade Ireland acted in the worst way possible, and, thus, have indelibly tarnished their reputation, alas.

http://www.midasoracle.org/predictions/nkm-scandal/

-

Thanks for listening,

Chris F. Masse
Panorama B, Green Side
305, avenue Saint Philippe
Les Templiers, Sophia–Antipolis
06410 Biot, Alpes-Maritimes
France, European Union

–
–

-

RELATED POSTS:

- Chris Masse’s first comment to the CFTC on “event markets” (prediction markets)

- What the CFTC is asking.

-

July 6th, 2008

Commodity Futures Trading Commission
Three Lafayette Centre
1155 21st St. NW
Washington D.C. 20581

Attention:
Office of the Secretariat- secretary@cftc.gov

Reference:
Concept Release on the Appropriate Regulatory Treatment of Event Contracts
73 FR 25669

-

My name is Chris F. Masse, and I’m the publisher of CFM (a vertical portal to prediction markets, which is the only one I know of that lists extensively the URLs of all the world’s play-money and real-money prediction exchanges)

http://www.chrisfmasse.com/

and Midas Oracle (a group blog on prediction markets, which is the most popular resource on this topic).

http://www.midasoracle.org/

I’ve been covering the prediction market industry since 2003 (when the brouhaha caused by the Policy Analysis Market attracted the attention of many). I would like to give my input to the CFTC on the subject of real-money prediction exchanges.

First of all, let me say that I welcomed:

#1. The CFTC’s decision to investigate and approve HedgeStreet’s application as a DCM in 2003 and 2004 (in spite of the opposition of the Chicago Mercantile Exchange);

http://www.hedgestreet.com/abouthedgestreet/pressreleases/pressrelease_1.html
http://www.hedgestreet.com/faq/
http://www.financial-spread-betting.com/hedgestreet-application.pdf
http://www.cftc.gov/files/submissions/comments/comdcm038cme.pdf

#2. The CFTC’s decision to publish a concept release on “event markets” in May 2008 (73 FR 25669).

http://www.cftc.gov/lawandregulation/federalregister/proposedrules/2008/e8-9981.html

Just a technical note, before I give you my thoughts. In the following, I call “prediction market” the specific market where one particular event derivative is traded. (For instance, the “Barack Obama will be elected US President in November 2008″ prediction market.) And I call “prediction exchange” the general marketplace where many prediction markets (on political elections and other events) are traded. (Hence, I call HedgeStreet a “prediction exchange”).

Please, allow me to give you my thoughts on the subject of real-money prediction exchanges:

-

ABOUT DISPERSED INFORMATION PRICED IN EVENT DERIVATIVE MARKETS, EXCLUDED COMMODITIES, DCMs, AND EXTENDING THE COMMENTING PERIOD ON THE CFTC’s CONCEPT RELEASE ON “EVENT MARKETS”.

-

#1. I fully agree with the point #2 made by professor Vernon Smith in his comment (CL01) to the CFTC.

http://www.cftc.gov/stellent/groups/public/@lrfederalregister/documents/frcomment/08-004c001.pdf

The information aggregation mechanism that constitutes the essence of each prediction market (for instance, the “Barack Obama will be elected US President in November 2008″ prediction market), and the objective probabilistic predictions generated by all these information aggregation mechanisms, are of high social utility.

-

#2. I fully agree with HedgeStreet in their comment to the CFTC (CL12) that political elections qualify as “excluded commodities”.

http://www.cftc.gov/stellent/groups/public/@lrfederalregister/documents/frcomment/08-004c012.pdf

The point made by HedgeStreet about economic consequences, risk management and hedging is extremely important with regards to:
- the future revenues of the for-profit, commercial companies who would be operating the real-money prediction exchanges on political elections (since hedging-oriented derivative markets experience much more volumes than speculative-only betting markets);
- the financial innovations, which would be created by this process, and whose benefits will, on the long term, spread throughout society (just like what has happened with the traditional derivatives).

However, I notice that HedgeStreet does not state specifically whether the topics other than political elections (mentioned in the CFTC’s concept release on “event markets”) qualify, too, as “excluded commodities”.

This issue is the cornerstone of the discussion on “event markets”. In the concept release, the CFTC mention many other prediction markets than those about political elections. I saw only one comment (from Jason Ruspini, CL11) that elaborates in detail about non-political “event markets” —as of Sunday, Juy 6th, 2008, one day before the deadline for the commenting period.

http://www.cftc.gov/stellent/groups/public/@lrfederalregister/documents/frcomment/08-004c011.pdf

Hence, I believe that the CFTC do not (as of this Sunday) have enough pieces of external opinions about this important issue to make their determination about the regulatory status of “event markets”.

I am asking the CFTC to extend the deadline to September 7th, 2008.

I believe that since the most interesting comments (other than Vernon Smith’s one, which appeared the first in May 2008) were made the last week preceding the July 7th deadline, there wasn’t enough time for the previous commenters or some other commenters to agree or disagree with those recent comments.

On top of all that, I understand that some people and organizations might well submit their comment on Sunday, July 6th, 2008 —the day before the deadline for the closure for the comments. I know that law professor Tom W. Bell will do so. It is rumored that 2 prediction exchanges will do so, too. It will be impossible for other commenters to assess those last comments, and give their opinion about those to the CFTC.

I believe that more people and organizations would come forward in the coming 2 months with interesting opinions about the “excluded commodities versus exempt commodities” debate (or some say, the “jurisdiction vs. exemption” debate), which is, as I understand it, the cornerstone of the CFTC’s concept release on “event markets”. Indeed, some business media organizations I know of will publish news articles about this debate, after the July 7th deadline. Hence, many more people will be drawn in the conversation about “event markets”, and we will all benefit from their input.

As I said, one one hand, the debate needs more external comments from people arguing that non-political events are “excluded commodities”.

On the other hand, the debate needs more external comments from people arguing that about the “exempt commodities”, “ECMs”, or “no-action letter” points of view. The American Enterprise Institute’s public petition of May 2008, the concept release of May 2008, and the comments sent to the CFTC published on the CFTC website as this Sunday, do not give many legal details about this side of the argument.

Pushing the deadline to September 7th, 2008 will allow another round of informal and formal discussions between the two sides of this important issue.

Already, one commenter (Jason Ruspini) is on the record publicly saying that, had he read the HedgeStreet’s comment to the CFTC, he would have put more emphasis on some of his arguments.

http://www.midasoracle.org/2008/07/05/my-response-to-the-cftc-on-event-contracts/

It’s for all those reasons that I am asking the CFTC to extend the deadline to September 7th, 2008.

-

#3. I fully agree with HedgeStreet in their comment to the CFTC (CL12) that the DCMs (and especially a non-intermediated DCM like HedgeStreet) should be allowed to operate prediction markets on political elections, as discussed by the CFTC’s concept release of May 2008.

As I said above, not enough commenters have addressed the specific issue of how the non-political “event markets” should be regulated (or semi regulated, thru the “exemption” way). Hence, I can’t see how the CFTC can’t reach a wise decision on the issue of which type of “event markets” should be offered by which type of derivative exchanges (DCMs, ECMs, or exchanges that are granted a “no-action” letter).

Again, I am asking the CFTC to extend the deadline to September 7th, 2008.

-

Thanks for listening,

Chris F. Masse
Panorama B, Green Side
305, avenue Saint Philippe
Les Templiers, Sophia–Antipolis
06410 Biot, Alpes-Maritimes
France, European Union

–
–

-

RELATED POSTS:

- Chris Masse’s second comment to the CFTC on “event markets” (prediction markets)

- What the CFTC is asking.

-