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

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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:

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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”.

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#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.

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#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.

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#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.

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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

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RELATED POSTS:

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

- What the CFTC is asking.

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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.)

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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”.

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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.

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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.

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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.

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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.

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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

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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

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I was thinking about the constitutionality of prediction markets when reading Gary McDowell’s “The War For the Constitution”:

Warren Burger summed it up for many when he described Mr. Bork as simply the best qualified nominee in the former chief justice’s own professional lifetime — a span of years that included the appointments of such judicial luminaries as Benjamin Cardozo, Hugo Black and Felix Frankfurter. Such praise was no empty exaggeration.

A former Yale law professor and U.S. Solicitor General, Mr. Bork was, at the time of his nomination, a judge on the United States Court of Appeals for the District of Columbia Circuit. When he was a circuit court judge, Mr. Bork’s opinions not only were never overruled on appeal, but on several occasions his dissents were adopted by the Supreme Court as its majority view.

In an earlier day such an appointment would have been celebrated as adding breadth, depth and luster to the highest bench. Instead, the nominee faced a mauling by those who set out not only to destroy him personally but to discredit all that he stood for as a jurist.

It was immediately clear that the unprecedented vote of 58-42 against his confirmation reflected something far more historic and fundamental than an ordinary partisan standoff. The confrontation in fact had been one of the most cataclysmic and divisive events in American domestic politics during the second half of the 20th century. The reason was that Mr. Bork’s opponents succeeded in making the fight over his nomination into a contest over the future of the Constitution.

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Time has shown that Mr. Bork’s theory of constitutional interpretation remains very much alive; he was defeated but his central idea was never discredited. That theory of interpretation and its implicit belief in restrained judging should continue to guide anyone who believes that the inherent arbitrariness of government by judiciary is not the same thing as the rule of law.

One thing that is more scary than irrational voters is whimsical judges. And I know a few, personally.

*Off the top of my head, free speech and peaceful assembly seem to enable our rights to prediction markets.

UPDATE: Chris Masse linked prediction markets to the right to privacy here last year. I’m not sure that is as relevant as speech and assembly–the whole point being prices from prediction markets is a public good (even as I concede that the anonymity of traders improves prices). But what do I know–I’m not an attorney or judge, just someone who knows a lot of them.

UPDATE: Tom Bell, on the Constitution’s call for progress in science and arts.

UPDATE: Alvin Roth, on the repugnance of markets (including prediction markets in terror). This reframes my point–constitutional repugnance is good, fleeting cultural repugnance is irrelevant. Just as slavery markets were not repugnant yesterday (but unconstitutional), so prediction markets are repugnant today (but constitutional)!

Cross posted from Caveat Bettor.

Law professor Tom W. Bell… blogging at Agoraphilia.

As I wrote previously, it’s a pity that the GOP got hijacked by the neo-con warmongers (like Dick Cheney and Paul Wolfowitz).

Washington State Gambling Commission investigators seized computers from a new Seattle-based Internet-betting site Monday, claiming the business violated the state’s 2006 online gambling ban — a contention the site’s founder strongly disputes. [...] “This is ridiculous,” Jenkins said. “I’m going to fight it. I don’t like the heavy-handed state coming down on entrepreneurs.” [...] “This is an honor-based betting platform,” he said. “How can you be gambling under a legal definition if you don’t have to pay when you lose?” [...] After assembling a team of investors and putting his own money on the line, he did a soft launch of the site three weeks ago, “to work on the bugs.” Soon after, he was contacted by the state. Two weeks ago, he explained his legal rationale to commission attorneys. On Friday, the Gambling Commission summoned Jenkins to Lacey to talk about his Web site. The meeting was quick. “They said shut it down or else,” Jenkins said. “I told them the law doesn’t apply to us. They said the law is a matter of interpretation.” The same day, Jenkins filed his lawsuit seeking to stop the state from applying the Internet gambling law to Betcha.com. The search warrant came three days after Jenkins and the state failed to reach agreement on the site’s legal status. He said the commission has lost perspective on which laws it should enforce and upon whom. “When you are a hammer, I guess everything looks like a nail,” he said.

Below is Nick Jenkins’ only recent blog post I spotted on the topic of betting regulations, where Nick does not mention the busting.

Washington Lawyer Seeks to Have State Internet Gambling Law Declared Unconstitutional
By Nicholas Jenkins
Posted on July 09, 2007 @ 21:24:00 ET

Good news out of the Pacific Northwest. Renton lawyer and card player Lee Rousso has filed suit Off Site Link: /northwest/story/125303.html against the State of Washington to have our much-maligned Internet gambling law declared unconstitutional. The gist of his argument: the state’s law is protectionist, and as such violates the Commerce Clause.
I met with Lee yesterday. The guy knows his stuff, and we’ll be watching his case closely. Of course, I’ve long maintained that the gambling laws don’t apply to us because betting on Betcha isn’t gambling. The libertarian in me, however, wants to see this invasive law tossed once and for all. Besides, it’s nice to see someone other than me stand up to the leviathan.

And here’s a prior Nick Jenkins interview on YouTube. WATCH THIS VIDEO, FOLKS. VERY INFORMATIVE.

I wish the best to Nick Jenkins.

Previous Midas Oracle blog posts about Betcha.com.

Law professor Tom W. Bell on Betcha.com.

UPDATE: REPORTS OF THE BETCHA.COM DEMISE HAVE BEEN GREATLY EXAGGERATED.

Via David Pennock, who is both fascinated and skeptical.

Click here to get all the previous Midas Oracle blog posts on Betcha, including Tom Bell’s one. Heu, sorry, I meant, Tom W. Bell.

Previous: Nick Jenkins welcomes you to Betcha.com, America’s first person-to-person betting site.

ABOUT BETCHA: I wish Nick Jenkins the very best.

BetBug (which billed itself as the “Kazaa of betting”, and thus thought that it was above the law):

Dear BetBug User,
It is with deep regret that BetBug has voluntarily chosen to stop publishing its peer-to-peer software and will stop populating the software’s wagering menu with events. The effect will be that users will no longer be able to use the software to find others with whom they can make personal and direct bets. As always, to process a withdrawal or other financial transaction, please login to your account at www.payp2p.com click on “Pay Out Money” and select the withdrawal method of your choice. Alternatively you can login to your BetBug application, click on “My Wallet” and select “Withdraw”. While we continue to believe that BetBug’s true peer-to-peer software does abide by all major Federal gaming laws in the United States, the current legal environment seriously deters our chances of success. We hope to be able to reintroduce the software to the public at a later date.
BetBug Management

Previous: Nick Jenkins welcomes you to Betcha.com, America’s first person-to-person betting site.

UPDATE: Betcha.com’s Hack of Anti-Internet Gaming Laws – by law professor Tom Bell