Midas Oracle is the only publication that defends the event derivative traders (even when they are too sarcastic, boisterous, or annoying) -at the risk of infuriating the prediction market big brass.
2
Tag Archives: TradeSports
An event derivative trader compares the trading costs of BetFair, InTrade, TradeSports and MatchBook.
InTrade-TradeSports has a web server misconfiguration problem, and CEO John Delaney has a character problem.
As I wrote at the time, the InTrade-TradeSports websites were unavailable, last Friday, August 29, 2008, during a good part of the morning.
InTrade-TradeSports is not only an event derivative exchange, but also a webspot that non-trading people often consult to get the latest market-generated probabilistic predictions. Last Friday, in addition to the traders, many people visited InTrade just to see what their prediction markets were saying about who would be John McCain’-s pick as Republican vice presidential nominee. InTrade-TradeSports CEO John Delaney has said that that Friday saw 10 times more web visitors than any usual peak day, and that their server bandwidth was not large enough to cop with all solicitations. It is well known in the media business that servers should be configured many times bigger than for the normal usage —-so as to accommodate exceptional peak times, when some impacting news break. My sentiment is that the InTrade-TradeSports technical team has probably not fully anticipated the growth of the InTrade-TradeSports followers.
As the result of this black Friday, some traders complained. One trader (Todd) started a thread on the InTrade e-mailing list. Unfortunately, Todd spiced his message with sarcasm. Which immediately irked John Delaney, who responded to the complaint, but also added a twisted line in effect inviting Todd to close his InTrade account.
–
–
That remark offended another InTrade-TradeSports trader (Lucy Vega), who talked back to John Delaney:
–
–
BetFair and InTrade-TradeSports are de facto monopolies (with 95% of the total business on their geographical zone, according to my estimation), and their direct competitors have far less liquidity, thus making them uninteresting for the big traders like Todd.
If John Delaney were really sincere in his wish to see the US public prediction market industry becoming legalized and experiencing a big growth in the coming decade, he should refrain from making offending remarks to his customers —-even when those clients started the feud with some sarcasm of their own. This kind of bullying behavior could attract the attention of the US regulators in a negative way, which is exactly the reverse of what is needed at this time.
I can understand that John Delaney is sometimes upset by some of his ultra-demanding and sarcastic customers. However, as I said, the real-money prediction exchanges are in a situation of being de facto monopolies, where their market-generated information is of high social utility, which creates a social responsibility for the executives and managers of these prediction exchanges. You don’-t insult and castigate a blogger who exposes a scandal. You don’-t censor the CNBC reports. You don’-t ask a complaining customer to close his / her account. All those things are big no-nos.
–
UPDATE
I am re-publishing an old post of mine, as an appendix, to respond to some comments:
–
Dan Laffan of InTrade has just given me permission to republish his e-mail(s) to Todd Griepenburg:
Todd,
We will absolutely not continue to be part of or facilitate any further diatribe with you on these issues.
If you are not satisfied that we
1. Have listened to your comments
2. Have replied to same and
3. Will take or have taken whatever corrective action is within our power and/or appropriate
then we reluctantly suggest that you consider closing your account on the exchange (or cease using it until our service meets your expectations). We say “reluctantly” as we do not wish to see any member leave, but we seem to be causing you immense dissatisfaction which is not our intention.
We will promptly close your account and return any funds you have in your account at your request. We await your decision and instruction.
Best regards,
Dan
Previous: A Big Trader’s Open Letter to TradeSports-InTrade + Second E-mail to InTrade-TradeSports + Third E-mail to InTrade-TradeSports + InTrade-TradeSports to Todd Griepenburg: GO TO HELL.
Dan Laffan to Todd: #1 – #2
–
UPDATE #2
For the full information of my readers, InTrade-TradeSports’-s behavior is not the worst behavior that a prediction exchange can have towards an annoying customer. I am aware of another real-money prediction exchange who does close the accounts of the customers whom they view as problematic (and that, without citing any reason) —-as opposed to just asking somebody to leave.
–
UPDATE #3:
Todd’-s new message to John Delaney
While InTrade CEO John Delaney is deceiving the journalists to sell his wares, Tom Snee of the Iowa Electronic Markets is telling them the truth: BEWARE THE VP-CANDIDATE PREDICTION MARKETS, THEY JUST AGGREGATE RUMORS.
BBC News:
According to Tom Snee of the Iowa Electronic Market, at Iowa University, futures markets need more hard information than they get in the veepstakes, to reliably predict a result.
Markets are very good at predicting elections, he says – but not choices being made inside Barack Obama’-s or John McCain’-s head.
Thank God for the BBC.
Thank God for the Iowa Electronic Markets.
Shame on John Delaney —-over 3 generations of Delaneys.
Other than Tom Snee (the IEM spin doctor), Chris Masse and Justin Wolfers are the only prediction market analysts to have sent out warnings about the VP-candidate prediction markets.
So, now, when our good friend Alex Kirtland (a talented Internet usability expert, and a sweet friend of the prediction markets) blogs favorably about InTrade, TradeSports, or John Delaney, we should take it with a grain of salt. -> $$$
–
Presumptuous
–
Jed Christiansen will never be a cheerleader for the prediction market industry as long as he holds those wrong views about betting on sports.
InTrade-TradeSports CEO John Delaney and HubDub CEO Nigel Eccles might be seen as “-prediction market gurus”-, at least by some —-I doubt very strongly that many industry people will add Jed in the list, after they have read the conformist bullshit that he sent to the CFTC.
We are still waiting Jed’-s reaction on Sean Park’-s comment. Cat got your tongue, Jed? At other times, we couldn’-t stop you.
–
Why the HubDub model is superior to the InTrade, TradeSports, BetFair, HSX and NewsFuturess ones
Because HubDub is the only prediction exchange whose prediction market webpages are indexed highly by Google.
–
That query leads to that prediction market webpage.
That query leads to that prediction market webpage.
That query leads to that prediction market webpage.
That query leads to that prediction market webpage.
–
In the 4 cases above, you can spot HubDub in the top 10 Google results.
I speculate that HubDub is going to harvest hundreds of thousands of Google visits in the next 12 months.
Which is probably higher that the BetFair blog will get from Google —-and there is a low conversion rate (from the BetFair blog to the BetFair prediction market webpages), probably. With the HubDub model, the conversion rate is always 100%.
Nigel Eccles, this time, I am impressed.
–
Previous blog posts by Chris F. Masse:
- Testing the new HubDub chart widgets
- Why InTrade CEO John Delaney, TradeSports acting CEO John Delaney, BetFair CEO David Yu, HubDub CEO Nigel Eccles and NewsFutures CEO Emile Servan-Schreiber should supplicate me to develop my prediction market journalism project
- The John Edwards Non-Affair: How on Earth did they get this photo, what does this photo prove, and which prediction markets should we trade on to profit from this alledged scandal?
- Nick Davis’ effort to clean up British horse racing
- Free Money On The Table At InTrade
- Google Web Search shows that I am the only blogger in the world to talk about “prediction market journalism”.
- Marginal Revolution vs. Freakonomics vs. Overcoming Bias vs. Midas Oracle
Chris Masses second comment to the CFTC on event markets (prediction markets)
Chris F. Masse
Midas Oracle
cfm —-—- midasoracle —-—- com
chrisfmasse —-—- gmail —-—- com
July 6th, 2008
Commodity Futures Trading Commission
Three Lafayette Centre
1155 21st St. NW
Washington D.C. 20581
Attention:
Office of the Secretariat- [email protected]
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.
–
What I said to BusinessWeek
BusinessWeek’-s Ricky McRoskey:
Experts expect the initial reaction to CFTC regulation to be more low-cap, nonprofit markets like the one created by the University of Iowa. Some doubt the forecasting power in these small-scale markets, since there wouldn’-t be enough monetary incentive for traders to seek and discover information. “-We do not need nonprofit prediction exchanges,”- says Chris Masse, editor and publisher of the prediction market blog midasoracle.org. He says that [offshore] exchanges like Intrade and Betfair, which are for-profit, have the capital to continually offer more cutting-edge pricing systems and additional contracts while nonprofits like the IEM have not.
–
I meant that real-money prediction exchanges that make profits do support innovation (see BetFair’-s new bet matching system and starting-price system) and are well positioned to foster socially valuable prediction markets (see the huge effort that InTrade is making in this direction).
Voila. 
–
Psstt…- You’-ll notice that I am the only one in that story to mention and speak favorably of InTrade-TradeSports and BetFair-TradeFair.
–
The Case for Decrimininalization of Prediction Markets
[This article is cross-posted from Major Wager.]
–
A recent article in the prestigious academic journal Science (May 16, 2008, Vol 320, p. 877-8) once again makes the case for regulated prediction markets, more commonly known as “-betting exchanges”- to online gamblers. The authors make the case that such markets are useful in forecasting future events with less error than traditional measures such as polling. This argument is hard to ignore, with the authors including 21 top economists from such esteemed institutions as Yale, Stanford, Berkeley, and the University of Pennsylvania. Notable among the authors is Justin Wolfers from the Wharton School of business at UPenn, an economist who has gained notoriety in gambling circles due to his work on such topics as NBA referee bias (highlighted in a May 2008 article from MajorWager: http://www.majorwager.com/index.cfm?page=27&-show_column=660).
The concept behind using prediction markets as a decision-making tool is simple. “-Shares”- are made available on an open market, and the participants use their capital (and the promise of profits) to make predictions on future events, which is incorporated into the share price. In general, information tends to be widely dispersed, and a market allows wide-ranging opinions to be gathered and consolidated into a market-wide prediction. In other words, an infinite amount of opinions can be aggregated, and an open market with potential for profit provides an incentive for individuals to make their opinions publicly known.
Prediction markets always get more than their fair share of press near the end of the 4-year U.S. Presidential election cycle. The Iowa Electronics Market, housed at the University of Iowa, is perhaps the most well-known. The authors of the Science paper show that, in the week immediately preceding the Presidential elections from 1988 through 2000, the Iowa Electronic Markets erred by an average of only 1.5 percentage points from the actual vote results, while the traditional Gallup poll was off by 2.1%. Numerous other studies have shown the superiority of markets compared to other forecasting tools.
Of course, there have been some dust-ups regarding prediction markets in the past, most notably the “-terrorist strike market”-, unveiled a little too close to 9/11 to be palatable to the general public. The official name was the “-Policy Analysis Market“-, and it was established by the Pentagon to act as a prediction market for Middle East political events. It was quickly scuttled after heated comments from U.S. Senators, calling it “-grotesque”- and “-stupid”-, due to the perception of using catastrophic events such as assassinations as profit-making tools. Regardless of its political correctness (and the misinformed opinions of a few politicians), such a prediction market still holds value as a glimpse into the collective mindset of everyone with an understanding of political currents in the region. Utilizing such a prediction market as a component of foreign policy decisions may have ultimately spared the U.S. much grief in Iraq.
In recent years, prediction markets have grown beyond academic and government roles. Dublin-based InTrade is rapidly growing and provides many more options than the Iowa Electronic Markets. Others such as MatchBook have focused more on sporting contests, but provide coverage of other events as demand calls. Of course, those outside the U.S. have access to the largest betting exchange of them all, the massive European markets of BetFair. The success of these exchanges speaks to the public interest and feasibility of prediction markets.
One factor holding back the growth of online prediction markets is their close association with the quasi-legal world of sports betting and internet casinos. InTrade has been fairly proactive in this regard, spinning off from Tradesports to clean up its corporate slate, but it is still knee-deep in the legal sludge surrounding offshore “-gambling”-. All have to deal with the legal and financial hurdles of operating offshore.
The authors of the Science paper propose that clarification of internet gambling laws is needed to exploit the benefits of prediction markets within the United States. Clearly, the Unlawful Internet Gambling Enforcement Act (UIGEA) of 2006 is one such mechanism restricting the widespread use of prediction markets. Another is the Commodity Futures Trading Commission (CFTC), the regulatory agency which oversees futures markets in the U.S. The CFTC has provided a “-no-action letter”- to the Iowa Electronic Markets, an assurance that they will not seek any enforcement action against the exchange. However, this protection is not absolute and may not trump state and federal law if challenged. The Science authors propose a number of legal reforms which will allow prediction markets to begin to gain acceptance within the U.S. financial regulatory structure.
By no means does the Science article condone large-scale public markets, at least not initially. They take a (typically academic) conservative approach, recommending new legal framework to allow for the establishment of small markets with limited scope so as to evaluate the promise and use of prediction markets. But baby steps are going to be a necessity in the growth and acceptance of regulated public markets.
Clearly, there are negative aspects to financial markets, and regulation certainly has its place. Bear Sterns, Enron, the S&-L scandal of the 80s, and the current housing bubble all caused tremendous loss of wealth resulting from missteps in the financial markets. The current oil crisis is due at least in part to speculation, leading to the introduction of no less than 9 separate bills in the U.S. Congress seeking tougher regulation over the trading of commodities. However, the existence of problems in the financial markets does not necessitate their dissolution. Likewise, prediction markets are sure to encounter bumps in the road, but their utility should far outweigh the risks.
Should prediction markets be legalized in the U.S.? Almost certainly. They would have benefit across numerous industries, from business decisions to political policies to financial forecasting. Unfortunately, this would require building an unlikely bridge over the Puritanical moral moat placed around gambling in the U.S. But there is no inherent difference in betting on who will win in an election than what the price of oil will be in 6 months, or what the S&-P 500 will close at on a particular date. Distancing prediction markets from “-illegal”- gambling, and instead likening them to regulated financial markets, will be a necessary first step towards broader acceptance.
The academic groundwork on prediction markets has already been laid, and offshore exchanges have begun to turn these concepts into functioning businesses. As these markets grow and begin incorporating more diverse opinions, we can expect their success rate at predicting the future to only grow. To restrict such a promising tool simply due to its perception that it is a gambling outlet is silly indeed.
6-25-08
Jay Graziani
MajorWager.com
[email protected]
–
[This article is cross-posted from Major Wager.]
–