If you go to Mike’s wall, you will see that I broke the FaceBook etiquette. I can’t be stopped.

Here’s the PDF file —in case you missed it.

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I would like to focus on John Blank’s 3-point introduction. In short, he describes a modern world where both the derivative exchanges and the CFTC have to adapt to an Internet-empowered population of citizens who will want to access the Web-based derivative markets. As I understand him, he says that the whole derivative industry is going the prediction market industry way, that is with:

- Web-based trading (no pits);

- simplified structures of derivatives.

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Behind all this is the reduction of the derivative trading costs. And, in my view, that goes hand in hand with the existence of generalist prediction exchanges that are allowed to have the widest offerings possible (including sport event derivatives). Indeed, prediction exchanges that would be confined to some topics only (politics, current news, finance) would have higher transaction costs, which does not seem to be the right direction of history.

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Finally, let me say again that I strongly disapprove the use of the term “event markets” —which would seem to mean that there is selling and buying of “events”. Sounds stupid. Our industry is imposing its “prediction markets” keyword to the media, and to BetFair in the U.K.. I don’t think it’s a good idea to surrender to a bunch of bureaucrats in Chicago. Let’s impose our views on them.

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“Prediction markets” is the right keyword in the brand-new world described by John Blank —a world where more and more people (“retail users”, as the CFTC labels them ) will access the derivative markets, and, of particular interest to us, the event derivative markets. Indeed, it’s easier to explain to people what we mean when we say that:

- It’s about a prediction traded on a market.

- This prediction is bought or sold at a price determined by the market mechanisms.

- This market generates a probablistic prediction, expressed in percentage, about the likelihood of the outcome of an event.

Simple but not simplistic, as Einstein would like it.

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UPDATE: Sean Park’s comment, just below this post, makes me think about the term “outcome derivative markets”… Would it be better than “event derivative markets”? I’ll have to think about that…

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Just because 2 or 3 bureaucrats at the CFTC have decided to use that term does not mean that that term makes sense. It does not. “Event derivative markets” or “prediction markets” are better terms. It’s with great displeasure that I saw our own Mike Giberson (supposedly, a libertarian, and supposedly, a wannabe academic) followed the step of the CFTC like an obedient little poodle.

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Just because somebody in power says something stupid that makes no sense at all does not mean that you should swallow it and direct it straight to your stomach.

Use your brain to perform critical reasoning.

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Asia Times:

[...] Outperforming Taiwan’s polls shouldn’t be hard. They’re notoriously bad as a forecast of election outcomes. In late 2006, for example, many media polls underrated the pro-independence party’s support – a recurring problem. Taiwan’s prediction markets did a much better job of estimating vote shares (the island’s two markets both called the Kaohsiung mayoral election wrong, but that contest was a statistical dead heat). “Most opinion polls usually have 20 to 30% ‘no answer’,” said Lin Jih-wen, director of the Center for Prediction Markets. “We don’t have missing data or a sampling bias, that’s our strength.”

The market has now picked the strong likelihood of victory by the China-friendly candidate Ma Ying-jeou. Time will tell if it’s got the right guy. But even if it doesn’t, the markets’ enthusiastic reception shows how Asia – like the US and Europe – has embraced such markets as a powerful fortune-telling tool.

A “powerful fortune-telling tool”? Jesus.

“Outperforming” the Taiwanese advanced indicators which they are feeding on? Humm…

[Mike Giberson will write a comment, below, reminding me of Prof Koleman Strumpf's work (PDF file) showing that the historical prediction markets were accurate enough, even though the scientific polls were not invented yet. Yes, I know of that, Mike, but I still don't get whether it's a puzzle or a mystery. ... Do you?]

Exchange bets favor Obama for Democratic nomination.

Punters more accurate than polls, says study.

The journalos emphasize the bets and the punters. I would highlight the markets and the exchanges, rather. We should point to the information aggregation mechanism.

Mike Giberson, please do agree with me.

So, now we can appreciate Mike Giberson‘s new face picture —his old one, published on his website (and now pulled down), made him look a Dracula sucking young boys’ blood.

Clean. Rested. Shaved. Good. But… –> The next time he’ll take a face pic, maybe he’ll pronounce the magic word: CHEESE.

[If Eric "Ultra Serious" Zitzewitz could do it, then Mike can do it too.]

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If you want your won “gravatar” on Midas Oracle and on all the other WordPress blogs… go to http://site.gravatar.com/ .

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Reminder: The comments and the registration process are completely open. (By the way, for your information, my battle with the spammers is turning to my advantage.)

David Pennock:

[...] Each order is associated with a decision variable x that ranges between 0 and 1, encoding the fraction of the order that the auctioneer can accept. There is one constraint per outcome that ensures that the auctioneer never loses money across all outcomes. The choice of objective function depends on the auctioneer’s goals, but something like maximizing the fill fraction makes sense.

Once the program is set up, the auctioneer solves for the x variables to determine which orders to accept in full (x=1), which to accept partially (0<x<1), and which to reject (x=0). The program can be solved either in batch mode, after waiting to collect a number of orders, or in continuous mode immediately as new orders arrive. Batch mode corresponds to a call market. Continuous mode corresponds to a continuous auction, a generalization of the continuous double auction mechanism of the stock market.

Each order consists of a price, a quantity, and an outcome bundle. Traders can just as easily bet on single outcomes, negations of outcomes, or sets of outcomes (e.g., all Western Conference NBA teams). Every order goes into the same pool of liquidity no matter how it is phrased.

Price quotes are queries to the linear program of the form “at what price p will this order be accepted in full?” (I believe that bounds on the dual variables of the LP can be interpreted as bid and ask price quotes.) [...]

Go reading all the post. There is a bunch of good comments… the best was submitted by Mike Giberson…