Release: Nov. 17, 2000
Iowa Electronic Markets name Gore winner in futures payoff

IOWA CITY, Iowa — The presidential election is over, at least in the Iowa Electronic Markets (IEM). The IEM has declared Al Gore the popular vote winner over George W. Bush. Because the IEM follows the percentage of the national popular vote, IEM traders don’t have to fret over recounts, late absentee ballots and legal challenges in Florida to determine the winner of its Electoral College votes. The IEM, the University of Iowa’s real-money market in which traders buy and sell political futures, declared Al Gore the winner based on his winning by a 200,000-vote majority of the popular election as published in the Nov. 10 Washington Post. Following the rules laid out in the market prospectus, IEM directors liquidated two presidential markets on Nov. 10. In the vote-share market, which pays on the percentage of the popular vote, traders were paid .499 cents for Gore contracts, .497 for Bush contracts, and .004 for Pat Buchanan. In the winner-take-all market, the IEM paid $1 for Gore contracts, nothing for Bush and Buchanan contracts. In its New York Senate winner-take-all market, the IEM paid $1 for the winning Hillary Clinton contracts, which had been trading in the 60- to 70-cent range for several weeks leading up to the election. IEM directors have closed their congressional control market, but will delay payoffs until a winner in the state of Washington’s Senate race is officially named. Traders who bought Gore contracts at his pre-election level of 30 cents profited after the $1 payoff in the winner-take-all presidential market. Bush shares had traded at about 70 cents. However, profits were slim in the vote share market, in which the margins between the candidates were narrow, with shares separated by only a few cents during the campaign. While the IEM vote share market showed Bush as the winner on election eve at .514 cents, it was only by a narrow margin — Gore was at .469 cents and Buchanan at .017. Prices had shifted back and forth; on Nov. 5, Gore was leading .498 cents to .485 for Bush. Since it started operating in 1988, the market has had an average prediction error of 1.37 percent, including this year’s race, in which the average prediction error was 1.96 percent, according to Tom Rietz, UI associate professor of finance and IEM co-director. The IEM had 7,000 traders and more than $210,000 in equity. For an investment of as little as $5 or as much as $500, trading in the markets was open to participants worldwide. Six faculty members at the University of Iowa Tippie College of Business operate the markets as a research and teaching tool. See the markets online at http://www.biz.uiowa.edu/iem for more information or contact Jeanine Alcocer, IEM Operations Manager at (319) 335-0794.

The Iowa Electronic Markets exchange administrators made a big mistake. The designed an event derivative that was not meaningful. Nobody cares about who will win the popular vote; the key question is who will be the next US President, and that’s what traders should speculate on.

No wonders IEM has only a bunch of traders and pocket money invested in their markets.

Previous: The Philadelphia Inquirer + Iowa Electronic Markets + Iowa Electronic Markets (IEM) is a bad US monopoly on political event derivatives / prediction markets. + Iowa Electronic Markets hypocrisy

“We have been threatened several times with suits by various states,” he wrote, “but so far the CFTC coverage [i.e., the two 'no action' letters that the CFTC gave the IEM] has been our trump card.” Prof. Neumann offered this example: When the IEM ran a market on Hilary Clinton’s run for the New York Senate seat, an N.Y.C.-based district attorney “contacted us (via a very nasty letter) to tell us that NY had a law that forbade gambling on elections in that state. He demanded a list of each and every NY State resident who was a participant in our market.” Wielding the CFTC’s “no action” letter in defense of the IEM, Prof. Neumann directed the DA to file suit in, um, a venue at once very local and yet very inconvenient.

Alas for those who would like to match Neumann’s feat of legal acumen, the CFTC’s treatment of the IEM so far looks like a one-shot deal. Or, rather, it looks like a big-shot deal; you would probably need some political help to squeeze another such letter out of the CFTC. While you’re at it, please ask the CFTC to issue an advisory opinion saying, “The CFTC has no rationale to regulate transactions or markets in which price discovery functions predominate over hedging functions.” It could state a market cap limit to make clear the limits on its discretion.

Such a “public no action letter” would give a great many useful prediction markets freedom to help us discern the future, just as the IEM has done. It would also, to judge from the IEM’s experiences, give new prediction markets a shield from state anti-gaming prosecutions.

[Crossposted to Agoraphilia.]