60 Minutes:

Given the political implications of the rise in commodity prices, this is not the best environment in which to begin regulating markets like election contracts, but the consensus that seems to be building on the relevant questions is rather auspicious. Hedgestreet and I have presented similar legal and regulatory frameworks to allow for at least the types of election contracts we are familiar with through sites like Intrade. Given Hedgestreet’s vigorous and incisive comments, I regret not having argued more for the desirability of non-intermediated exchanges.

In their focus, however, Hedgestreet steered clear of the gaming pre-emption questions and did not present a comprehensive and general framework for event markets. In that respect, their broaching of the CFTC’s plenary option authority opens more questions than it answers, but several interesting and important markets could perhaps be traded without answering all such questions.

I encourage Hedgestreet to begin working with the NFA to develop the infrastructure necessary for the types of trading prohibitions that we each described in our comments. I encourage the CFTC to act decisively in light of the self-evident and massive value of certain event markets — even with the current political pressures, which are mainly relevant to event markets on a superficial level. Perhaps if the CFTC deems that an exercise of emergency powers is necessary at some point, that would be an appropriate day to also make a decision on event contracts public.

We are at a specific point where a little bit of additional regulation might cause an explosion in legal prediction markets, and possibly soon. As a libertarian, I generally dislike regulation, and of course it’s true, pretty much by definition, that over-regulation is bad, but I don’t believe that to be the most effective message for this comment process and the unique opportunity it presents.

Commodity Futures Trading Commission
Three Lafayette Centre
1155 21st St. N.W.
Washington DC 20581
Attention: Office of the Secretariat

Re: Concept Release on the Appropriate Regulatory Treatment of Event Contracts

JURISDICTION AND EVENT MARKETS IN GENERAL

Given the explicit statutory definitions of “excluded” and “exempt” commodities, it is reasonable to conclude that the U.S. Commodity Futures Trading Commission (“CFTC”) has jurisdiction over all exchange-traded event markets. That is, if an “occurrence, extent of occurrence or contingency” does not meet the additional “beyond the control” and “economic consequence” criteria, then contracts on such events should be considered exempt commodities. While currently all exempt commodities are associated with a deliverable other than cash, the open-ended definition of “exempt commodity” considered alongside the definitions of “commodity” and “excluded commodity” in 7 U.S.C. § 1a imply that contracts on events that are not beyond the control of participants or do not involve an outcome of economic consequence are exempt commodities.

This conclusion presents enforcement issues that the CFTC may wish to avoid, such as being obligated to pursue actions against exchanges offering contracts based on the outcome of sporting events. Unfortunately, without further statutory clarification, this conclusion seems like the most defensible one, based on the letter, if not the intent, of the law.

That said, until statutory clarification is attained, given the purposes and history of the Commodity Exchange Act (“CEA”), it would be appropriate for the CFTC to only assert jurisdiction over those event contracts satisfying “economic consequence” criteria, which would include the price discovery aspect of the former economic purpose test. An interpretation to this effect by the CFTC would not be inconsistent with the text of the CEA, and would best serve to minimize the burden on interstate commerce. This policy decision would effectively reconstitute the pre-Commodity Futures Modernization Act economic purpose test for event contracts in a way that avoids unwanted enforcement issues. Such a decision would be unlikely to meet significant resistance until such time that further statutory certainty is forthcoming.

The CFTC would be free to classify such contracts as either excluded or exempt commodities depending on their susceptibility to manipulation, before or after special trading prohibitions are in place. Although the anti-manipulation requirements that apply to exempt commodities are directed towards price manipulation, a fortiori they must also apply to outcome manipulation.¹

The CFTC is free to determine what qualifies as “economic consequence.” As with the economic purpose test, significant hedging and price discovery functions would comprise the principal criteria.² Regarding the latter, since event derivatives have no corresponding “cash” markets, the origination of prices that may improve economic decisions is all the more desirable in these cases. Furthermore, events that may only directly affect a group of private individuals may also have a strong bearing on commercial decision-making. Note that some general events and measures, as categorized and listed by the CFTC in its Concept Release, do in fact correspond to economic measures.³ Even if these events do not predictably correlate with asset prices, they may have predictable effects on market volatility. For example, from 1980 through present, the annualized weekly volatility of the S&P 500 in weeks in which a presidential or mid-term election took place was 19.97%, vs. 15.34% for all other weeks.⁴ It is difficult and ultimately undesirable to provide a quantitative recommendation for a bright-line demarcation between those markets that would satisfy an economic consequence criterion and those that would not. However, if a significant statistical test can easily be found that includes the price series of a more familiar asset, and has a logical basis, we can reasonably say that such events are associated with an economic consequence. In many cases the relevant time series may be unavailable, but in those cases the applicability of a proposed event market to other assets may be obvious. For example, consider a market predicting the likelihood of: (1) ethanol-related legislation, and its relationship to corn prices, or (2) offshore drilling legislation, and its relationship to oil prices, or (3) an attack on Iran, and its relationship to oil prices, or (4) future tax rates, and its relationship to municipal bond prices. In such cases, no quantitative test is necessary. In other cases, we may have moderately strong reasons to suspect that a given event or measure has an impact on asset prices, as we do with demographic trends, but those effects may be difficult to measure empirically.

Many potential markets may improve decision-making for a particular business, but have little bearing on the broader economy and asset prices in general. Examples of these markets include those predicting: (1) the revenue of a particular product, published title, film or performance series, (2) the launch or completion date of a particular product or project, and (3) the success of a particular approach applied to certain problem. The CFTC may find that only broad-based events or measures affecting an entire population, industry or significant percentage thereof would satisfy the economic consequence criteria. This would be nothing new, as commodity derivatives were not intended to be specialized insurance contracts. Such narrow questions also present issues from a manipulation and insider-trading perspective. In aggregate, these sorts of questions are quite relevant to the economy and will at times reflect broad trends, but may be more appropriately served by over-the-counter arrangements or riskless information aggregation, despite the obvious advantages of market incentives.

Contracts satisfying economic consequence criteria need not be approved for listing by the CFTC, though it is hoped that guidelines will be made public and remain flexible. At the limit, the CFTC will recognize that even a purely speculative market might serve an economic purpose in reducing portfolio variance.

Additionally:

The CFTC might levy a special fee on regulated event contracts to recoup expenditures related to a trading prohibition facility and other special demands on resources.

It may be required that exchanges pay interest on binary event contract collateral in order to reduce price distortions near extreme prices (100% and 0%). In illiquid markets, such distortions could be used to disguise transfers of money between anonymous participants.

The CFTC should welcome Securities and Exchange Commission opinion on contracts based on events like earnings and dividend announcements, a group of which might begin to replicate a security. Whenever a market is proposed that reflects the cash flow of a particular business or property, this opinion may be relevant.

To the extent that they subsequently conform to the CEA and CFTC policy, amnesty for any past violations should be considered with respect to Intrade and similar exchanges that have operated legally in their domestic jurisdictions.

ELECTION AND POLICY EVENT CONTRACTS

Election and policy event markets are within the jurisdiction of the CFTC based on the letter and spirit of the CEA. These markets represent the largest reasonably predictable yet unhedgeable risk facing businesses and the public. The regulation of such markets follows from the history of enlightened, flexible innovation exemplified by the CFTC. Because of their importance, election and policy event contracts naturally involve special consideration, although only in the course of satisfying the CEA.

Considering election contracts:

Trading prohibitions should be established such that candidates and proxies cannot participate due to their ability to determine the outcome of the contract. In addition to adhering to the “beyond the control” requirement of excluded commodities and general anti-manipulation precepts, the CFTC will want to consider to what extent such prohibitions might be expanded to act as insider trading restrictions similar in form to those of 7 U.S.C. § 13(f) or the proposed H.R. 2341.⁵ Especially given the all-or-nothing nature of many event contracts, this might be desirable in order to provide for fair and equitable trading.⁶

Upon the death of a candidate, the candidate’s contracts and those of all competitors must settle on the last known price before the event. A new set of contracts reflecting the new set of candidates could subsequently be offered.⁷

Analogous rules could be applied to policy and legislative contracts where appropriate. These rules, either directly administered by the CFTC and related associations, and/or required of exchanges, would firmly address outcome manipulation.

Because of their importance and sensitivity, these contracts also require special measures to ensure against price manipulation. However, it is important to note that election and policy markets have typically been traded as binary event options. Such contracts expire at a specific time according to a well-defined objective event and in that way are more resistant to manipulation than futures and perpetuities, the prices of which are unbound in one direction and always open to interpretation based on unobservable factors and developments in related markets. At the same time, the relative detachment of event contracts from the web of more familiar asset prices may make manipulation more difficult to prove.

As would be expected, large trader lists could be maintained and closely followed. A more powerful option is the enforcement of extraordinarily low position limits, which would greatly reduce the potential of price manipulation. At the same time, position limits should respect outstanding risks participants may have and be otherwise unable to hedge, as with traditional hedging and speculative limits. Low position limits also address trader protection concerns if such contracts were to be offered in a non-intermediated fashion. Leverage might likewise be limited. Several tiers of opt-out protection could be available to traders of various capitalization and expertise. Contracts might also be restricted to limit orders in order to curb short-term feedback trading.

Election and policy contracts ought to be restricted to domestic accounts only. This will avoid possible extradition problems where disciplinary action is required. In the case of event contracts that may reflect tax rates, this restriction will also determine that the Department of the Treasury will not lose revenue on a net basis.⁸

FLEXIBLE LEGAL IMPLEMENTATION

Instead of, or in addition to, claiming jurisdiction over some event markets, the CFTC has at its disposal a range of public interest exemptions, including some that interpret the 7 U.S.C. § 6(c)3(K)⁹ qualification clause liberally in order to include participants who might not normally trade in traditional futures and options markets. From my perspective, such exemptions may allow for a more flexible development of event markets in a less heavily-regulated environment. For example, it might allow for a contract in research science claims where trader-researchers capable of determining the outcome are not readily identifiable, or provide for trading in the sorts of narrow, business-specific questions previously mentioned. From the CFTC’s perspective, a public interest exemption may be desirable in order to avoid making a firm jurisdictional claim. However, the outcome of this comment process should be a decisive policy statement from the CFTC, not a sequence of ad-hoc actions. It is hoped that any future public interest exemptions would be offered alongside a substantial list of requirements and guidelines that would at least signal jurisdiction over a class of event markets possessing certain characteristics. Legal certainty is perhaps the most important outcome in this process, and it is not desirable for the CFTC to extend exemptions in a manner that leaves its jurisdiction completely ambiguous with respect to the markets so exempted.

This leaves aside the question of who may operate such markets. If exempted exchanges are to operate for profit, a jurisdictional statement from the CFTC is all the more necessary in order to ensure their legal standing. Exemptions directed at non-profits may be superfluous from a perspective of legal certainty, especially if such exchanges only offer trading in States where the predominant factor test holds.

The CEA allows that public interest exemptions may be issued for specified time periods. The CFTC may wish to consider to what extent exemptive or no-action letters with renew-by dates attached might be a useful tool in light of evolving legal conditions and technologies.

Note that theoretically the CFTC could also assert jurisdiction over all event markets and then direct no-action letters to the finite list of sports and gaming exchanges as a facility to repudiate jurisdiction over such markets. Typically, exempting markets formed principally for speculation would be considered against the public interest. However, if the CFTC finds no satisfactory way under the CEA to take jurisdiction over only those event markets that are associated with economic consequences, no-actioning sports and gaming exchanges would be in the public interest on a net basis, and would best promote interstate commerce. Furthermore, in some cases such exchanges operate under their own regulatory bodies and protections. It is also seldom that such exchanges allow for leveraged trading by beginner participants. In general, most gaming takes place via over-the-counter transactions.

THE PUBLIC INTEREST

I have neglected to argue for event markets in terms of the public interests they promote as these facts have been covered by others and have no doubt been obvious to the CFTC for a long time. I will only note some cases that are more subtle:

Information and estimates can be revealed in conditional form, as in the “decision markets” hosted on Intrade.¹⁰ One such market pays 100% if a Democrat is elected President in 2008 and the national debt rises in the calendar year preceding October 2011. Since the probability of the former event is also available on Intrade, by P(A | B) = P(A & B) / P(B), we can say that the probability of a Democratic president leading to a rise in the national debt is the decision market price divided by the election market price. This type of market is thus able to predict the result of electoral or legislative decisions, and different decisions can be so compared. With this in mind, consider that while prediction markets are usually described as ways to aggregate information, they are likely also useful in terms of collective problem-solving, even in cases where all information is transparent.

In terms of risk-sharing, eventually the utility of political event markets might begin to address some well-known problems with representative government. Consider the typical special interest problem in which a few relatively well-funded individuals would gain heavily by a particular piece of legislation such as an industry subsidy, and so will lobby heavily for it. Even if the legislation is not in the public interest, the costs will be distributed over so many tax payers that they will not care to argue against it, and most will not even realize what’s happening. When mature legislative and public policy markets are in place: (1) the dispersed interests will have the recourse of hedging against policy they dislike, (2) special interests will also have the option of hedging their legislative fortunes, which might lead to an overall reduction in lobbying, and (3) legislators may find compromises to be easier, since interests would be able to voluntarily “meet each other half way,” with price being the arbitrator. This could ease political log-jams, making law-making itself more flexible and efficient. Sensible yet otherwise politically infeasible measures such as unwinding entrenched subsidies could be made viable.

Even if iterations are required, the outcome of this comment process should be a clear statutory interpretation and policy statement from the CFTC regarding event markets. The CFTC should also publish self-certification guidelines for those markets that it determines are within its jurisdiction. Once jurisdiction and/or a public interest exemption framework is determined, it should not be ambiguous whether, for example, a contract based on a presidential election would be approved by the CFTC in principle.

There is good deal of apprehension among those who study prediction markets that regulation will stifle innovation. In truth, exchange requirements may not be as onerous as they are often portrayed, and in most cases are perfectly appropriate. A related, implied fear is that the CFTC may not approve certain contracts such as those on election and legislative events that undeniably possess economic purpose due only to their political sensitivity and considerations of the CFTC’s source of authorization and funding. I hope that this process will assuage such fears. I encourage the CFTC to act decisively and comprehensively in accordance with its purposes.

Sincerely,
Jason Ruspini

Footnotes:

¹ For example, a market on infrequent terrorist attacks would not be approved for the simple reason that outcome manipulators could not reliably be identified beforehand.
² cf. Robert Hahn and Paul Tetlock, “A New Approach for Regulating Information Markets,” AEI-Brookings Joint Center Working Paper (December 2004).
³ Justin Wolfers and Eriz Zitzewitz, “Using Markets to Inform Policy: The Case of the Iraq War,” NBER Working Paper (June 2004).
Justin Wolfers, Erik Snowberg and Eric Zitzewitz. “Partisan Impacts on the Economy: Evidence from Prediction Markets and Close Elections,” NBER Working Paper (March 2006).
Erik Snowberg, Justin Wolfers and Eric Zitzewitz, “Party Influence in Congress and the Economy,” Quarterly Journal of Political Science: Vol. 2: No 3, pp 277-286 (2007).
⁴ F-test (α = 0.1126). If we instead only consider the Wednesdays following election day compared to all other days over this same period, α = 0.0246.
⁵ The “Stop Trading on Congressional Knowledge Act”.
⁶ Trading prohibitions on insiders will also avoid a situation in which candidates are able to enjoy a multiplier effect on their campaign funds by shorting themselves. For example, Candidate A has a campaign fund of $2, and candidate B has $1. By hedging, candidate A can maintain a $2 risk while spending $4 on campaigning while candidate B can only spend $2 to maintain a $1 risk.
⁷ cf. Intrade rules. A more challenging possible scenario involves manipulation preceding the event such that the forced settlement locks-in profits, presumably just as market power is exhausted. See note below on restricting market access to US-based accounts.
⁸ Such restrictions would however tend to limit the growth of such markets and/or result in risk premia accruing to short tax-rate positions.
⁹ “Such other persons that the Commission determines to be appropriate in light of their financial or other qualifications, or the applicability of appropriate regulatory protections.”
¹⁰ For background, see: Robin Hanson, “Decision Markets for Policy Advice,” Promoting the General Welfare: New Perspectives on Government Performance, pp 151-173, Brookings Institution Press (November 2006).

With the Nevada Caucuses taking place this Saturday, The Las Vegas Sun reports that Democrat Hillary Clinton supports a study to determine if Internet gambling can be fairly regulated so that individuals can safely participate in it and American businesses can compete in the international market.

I was not able to find that article from The Las Vegas Sun. If you get your hand on it, send me its URL and I’ll update this post (and credit you). Thanks.

A Democratic sweep in November 2008 will be beneficial for InTrade-TradeSports and BetFair-TradeFair.

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Excerpts from the Midas Oracle Dashboard (full of many dynamic charts of many prediction markets from many prediction exchanges )

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2008 US Presidential Elections

2008 Democratic Nominee

2008 US Presidential Election Winner

2008 US Senate Control

2008 US House Of Representatives Control

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BetFair

Democratic Candidate

Republican Candidate

Next US President

Winning Party

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NewsFutures

Democratic Nominee

Hillary Clinton

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Next US President Will Be Democratic.

Doing a simple analysis of some the key events in the 2008 Presidential Elections against prices on Intrade shows that on discrete events there is a clear relationship between prices and news flow. However over longer periods the relationship is not always clear.

On the 4th of March CBS announced the results of a straw poll conducted at the conservative PAC convention in Washington DC. They picked Romney as their favourite. Romney’s price on Intrade lifted immediately where it stayed for about a week.

On the 11th of April the Fred Thompson revealed on Fox News and ABC Radio that he had been diagnosed with non-Hodgkin’s lymphoma nearly three years prior. The New York Times and other publications picked up the story the next day. Looking at his price chart shows he opened on the 12th of April at 19 but then closed at 15. The next day he opened at 11.2 but then closed at 17, as the story died down.

In both these cases, the news stories the media considered to be the important ones correspond with the news flow that traders thought was important.

However, the most interesting market movement of the year must be the Obama August slide. On the first of August Obama opened on Intrade at 35.5 but by the 24th of that month he had slide to 17.2. He continued sliding hitting a rock bottom of 10.7 on the 14th of October.

The question is what was the news flow on Obama from the 1st of August to the 24th of August? Analysing the news articles in the New York Times suggests a disconnect between what was reported and how the market was reacting. Obama started August badly with a bungled comment on use of nuclear weapons.

Additionally, his continued line that stabilisation of Iraq had been a ‘complete failure’ may also have cost him some points.

However in sum these news items don’t seem to correlate with an 18 point slide. This could lead us to two possible conclusions:

1. The New York Times didn’t report the most market sensitive news affecting Obama in August
2. Obama was over-sold in August and his price did not reflect his true value

Cross-posted from the Hubdub blog.

1. Uninformed traders will be able to trade their opinions. Most of the US citizens have an opinion (positive or negative) on the US Congress politics and the federal legislations.
2. Informed traders (hopefully, the market makers) will be able to follow some advanced indicators (in the Washington D.C. media, for instance) pertaining to this upcoming legislation (if any).

Once again, it shows that John Delaney’s InTrade is the King of the Prediction Markets —and that BetFair-TradeFair is painfully playing catch-up.

Here’s the InTrade contract statement for the US — (USA agrees before end of 2009 to reduce CO2 emissions by 10% or more by year 2025):

A contract will settle (expire) at 100 ($10.00) if the United States agrees before the end of 2009 to reduce CO2 emissions by the amount specified in the contract by the year 2025 (relative to the 1990 emissions baseline).

A contract will settle (expire) at 0 ($0.00) if the United States DOES NOT agree before the end of 2009 to reduce CO2 emissions by the amount specified in the contract by the year 2025 (relative to the 1990 emissions baseline).

Any reduction target must be part of a United Nations Framework Convention on Climate Change (UNFCC) [*] agreement reached before the end of 2009. Any agreement to reduce CO2 emissions made outside of the UNFCC will not be considered for expiry purposes.

A reduction target does not have to be ratified for the contracts to be expired – only agreed to under the UNFCC. [*]

Expiry will be based on official and public announcements from US officials or the UNFCC Secretariat, as reported in three independent and reliable media sources.

Due to the nature of this contract please also see Contract Rule 1.7 Unforeseen Circumstances.

The Exchange reserves the right to invoke Contract Rule 1.8 (Time Protection) if deemed appropriate.

Any changes to the result after the contract has expired will not be taken into account – Exchange Rule 1.4

Please contact the exchange by emailing help@intrade.com if you have any questions regarding this contract before you place a trade.

Important:
Please contact the Exchange if you have any query or uncertainty (including how it may be settled) about this Contract, the Rule above or the Contract Rules before you trade.

There are 4 other contracts (E.U., Russia, Japan, and China+India).

[*] There are 3 “C”s actually. Those Irish bozos are not even able to spell it correctly. –> UNFCCC (United Nations Framework Convention on Climate Change). Look at the logo, below.

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UPDATE: Mike Linksvayer’s comment…

They’d be even more interesting if offered in combination with electoral outcomes and more yet if offered in combination with climate outcomes. I’m happy to see BINLADEN+MUSHARRAF contracts recently added, but volume is almost nil. Intrade (or someone new) will need better technology to be really socially interesting — be a source of many contingent probabilities. Many explicit combination contracts is just unworkable. I’m also happy to see Intrade offering several multi-year contracts, of which the climate ones are a good example. I believe the Google Lunar contract is currently the longest term one, expiring in 2012. I’m rooting for Intrade and for something better to come along, simultaneously.

UPDATE #2: I have just found out, this Sunday afternoon, thanks to a tip from Ralf Martin, that the InTrade global warming prediction markets were set up in collaboration with the London School of Economics’ Centre for Economic Perfomance.

UPDATE #3: InTrade have corrected the spelling on Saturday, December 15, 2007.

NEXT: The London School of Economics chose InTrade-TradeSports over BetFair-TradeFair for floating event derivatives on global warming.

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Take a look at the blogroll of the NewsFutures blog, which cites everybody but BetFair:

Recent Posts

UC Riverside’s eLab eXchange : featuring Competitive Forecasting and Idea Pageants
Demise of a Sarko Killer
Results of the Dutch Political Stock Market
Los Angeles conference on collective intelligence networks
Washington DC conference on prediction markets

Blogroll

Midas Oracle
Odd Head
Overcoming Bias

Markets Powered By NewsFutures

Davos Global Risks
eLab eXchange
NewsFutures Exchange
Yahoo! Tech Buzz Game

NewsFutures

Company Website
RSS FEED

Other Public Prediction Markets of Note

Hollywood Stock Exchange
Intrade
Iowa Electronic Markets

Frankly, I do believe that BetFair, the world’s #1 betting exchange, is “of note”, because of its great liquidity.

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Now, seriously, let’s re-read Mike Giberson’s take:

BetFair gives every impression of being a success at sports betting, but sports betting generally doesn’t generate a lot of U.S. press unless corruption of some sort is involved. (And, by the way, BetFair was mentioned in U.S. media in conjunction with the ATP match-fixing suspicions.)

Does BetFair have a Ron Paul contract? I can’t find the political markets on www.betfair.com. Ah, click on “BetFair Sports” scroll down through the list of “All Markets”, and there lies “Politics” between “Rugby League” and “Poker.” Select “USA,” select “Republican candidates.” Aha! There he is at “24” in decimal odds (or, alternately, at 23/1 standard odds). A quick calculation indicates an implied 4.1 percent chance of receiving the GOP nomination.

I suspect American reporters (1) find it easier to locate the American political markets on Intrade, and (2) find prices directly interpretable as probabilities easier to report.

Also, the charts are hard to find (hidden as a link attached to the name, but the name is just black text against a white background and gives no indication that a chart and other information is available by clicking the name). If a reporter finds the market, clicks on the hidden link, and clicks the “Inverse Axis” box under the chart, then finally the reporter gets an easy-to-interpret implied probability chart.

While BetFair obviously works for experienced bettors, inexperienced visitors are given little help in discovering information that readily feeds into news stories. If BetFair wants the free publicity, it will need to be easier for reporters to get what they want.

Civil War Gold Hoax was an 1864 hoax perpetrated by two US journalists to exploit the financial situation during the United States Civil War.

On May 18, 1864, two New York City newspapers, the New York World and the New York Journal of Commerce, published a story that President Abraham Lincoln had issued a proclamation of conscription of 400,000 more men into the Union army. At the time, there were fierce battles taking place between Union and Confederate troops in Virginia and the public took it to mean that the war was not going well for the Union. Share prices fell on the New York Stock Exchange when investors began to buy gold, and its value increased 10%.

During the day a number of people, one of them former Union commander General George McClellan, became suspicious of the fact that the proclamation had been published in just two newspapers, and went to the offices of the Journal to determine the source. Editors of the paper showed them an Associated Press dispatch they had received early in the morning.

Before noon, the Associated Press issued a statement that the dispatch had not come from them, and at 12.30 p.m. the State Department in Washington DC sent a telegram to verify that the proclamation was “an absolute forgery”. By then, however, the stock market had already been affected.

Further investigation revealed that the dispatches had been delivered by a young courier just after the night editors had gone home. The timing had been perfect: the night foreman had had to make a decision as to whether to include the proclamation in the next day’s paper or not. Night foremen in various other newspapers had tried to verify the message, and when they found out that not every paper had received the message, they decided to delay it pending further proof. Only foremen for the World and Journal of Commerce had added it.

President Lincoln was enraged when he heard about the case: he gave an order to close the two papers down and had their editors arrested for suspicion of complicity. Soldiers seized the two offices and, for some reason, the office of the Independent Telegraph Line. Lincoln eventually had the editors released.

Detectives tracked down the culprits. They found the messengers and questioned them. On May 21 they arrested Francis A. Mallison, a reporter for the Brooklyn Eagle who informed on his city editor Joseph Howard, who was also arrested. Howard came quietly and confessed.

Howard had bought gold on margin May 17 and started the ruse because he knew that any news of a prolongation of the war would cause a rise in the price of gold when investors wanted to transfer their savings elsewhere. He had forged the two AP dispatches and had them sent to various city newspapers in an appropriate time. The next day, during the furor, he had sold his investment and profited immensely.

Howard spent only three months in prison and was released on August 22, 1864. With perfect irony, at that time Lincoln had to issue a call for 500,000 more soldiers.

Market reaction was muted on the day of the actual announcement, July 18th, with commentary centering on an unexpectedly early bond issue by the new Secretary of Treasury, Fessenden. Perhaps the markets had priced in a conscription by then, or perhaps they weren’t concerned with the conscription per se. The hoax had occurred during the Battle of Spotsylvania, one of the longest, most northerly confrontations of the war.

Austin – Boston – Chicago – Houston – London – Los Angeles – New York City – Paris – Philadelphia – San Francisco – Shangai – Seattle – Toronto – Washington D.C. -

The European Union Emission Trading Scheme is the largest multi-national, greenhouse gas emissions trading scheme in the world. It commenced operation in January 2005 and all 25-member states of the European Union participate in the scheme.

- Wikipedia – Carbon emissions trading:

The world’s only mandatory carbon trading program is the European Union Emissions Trading Scheme (or EUETS). Created in conjunction with the Kyoto Protocol, a 1997 international treaty that took effect in 2005, it caps the amount of carbon dioxide that can be emitted from large installations, such as power plants and factories, in the EU’s 25 member countries.

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- Evolution Markets:

Evolution Markets specializes in structuring transactions and providing consulting and risk-management advisory services for environmental credit markets, energy markets, (such as over-the-counter coal, and natural gas) and emerging markets, including weather derivatives.

- Point Carbon:

Providing critical insights into energy and environmental markets

Point Carbon is the leading provider of independent analysis, forecasting, market intelligence and news for the power, gas and carbon emissions markets.

Point Carbon was founded in 2000 and now has more than 90 employees, 14 hold a PhD. The expertise of our staff includes international and regional climate policy, mathematical and economic modelling, forecasting methodologies, risk management and energy industry analysis.

Our in-depth knowledge of power, gas and CO2 emissions market dynamics positions Point Carbon as the number one supplier of price-driving fundamentals for European and North American energy markets and for global environmental markets. Point Carbon has offices in Oslo (Head Office), Washington D.C., London, Kiev, Brussels, Hamburg and Tokyo.

Point Carbon has more than 15 000 subscribers in over 150 countries. Our reports are translated into Japanese, Chinese, Portuguese, German, Polish, French, Spanish and Russian. Our clients include governments, investment banks and large industry players such as BP, Norsk Hydro, RWE, Shell and Vattenfall.

- Gryphon – Carbon Consultancy:

Gryphon carbon consultancy was founded in 2004 and the founders have expertise in carbon markets and climate change since 1999 and in energy markets since 1997. We operate in the newly emerging carbon markets in the EU and across the globe. Special expertise is available on price formation of CO2 allowances, and their impact on the power markets. Strategic advice on carbon induced changes in commodity and energy markets is available for hedge funds and others that are entering these markets. We take pride in being among the best in our business and delivering excellence to our clients. As a consultancy we are fully independent and we see that as an important competitive benefit in this new market.

- Carbon Trust:

The Carbon Trust is an independent company funded by Government. Our role is to help the UK move to a low carbon economy by helping business and the public sector reduce carbon emissions now and capture the commercial opportunities of low carbon technologies.

- TFS Green:

TFS Energy is an international commodities brokerage, with global teams in emissions trading under the Carbon Credit Markets created by the Kyoto Protocol (CERs, ERUs) as well as in the Voluntary market (VERs). Working closely with our team of brokers in the European Union Emissions Trading Scheme, TFS Energy is able to monitor real-time pricing to maximize the commercial value of our clients’ carbon credits. Established over 25 years ago, TFS Energy has a wide network of clients from Europe, Japan and the United States, interested in working with project owners in China, India, Latin America, Southeast Asia and other CDM emergent markets. Our carbon credit team is based in Beijing, New Delhi, Manila, Sydney, New York and London to provide global coverage and service to our Sellers and Buyers.

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My Question:

Does somebody in the plane know of other links of interest regarding carbon credits exchanges?

1. Prediction Market Scenery:

Adrien Amzallag states that “Prediction markets innovate in that aggregating information and information discovery are their primary purpose—not profits (Wolfers 2004, Feigenbaum 2003).” Humm… In America, the field of prediction markets has been hijacked by the tenured professors of economics. Because the IEM scholars (who pioneered event derivatives, who don’t operate for profits, and who managed to get a monopolistic exemption from the CFTC), stated that forecasting is the primary goal, then all the other scholars (including Hanson) will parrot tell the same myth. The truth is that forecasting is an offspring. Making profits is the goal of both the commercial prediction exchanges and the speculators. Simplifying the design of futures contracts was necessary to induce the masses (the Joe-Six-Packs accessing the Web-based prediction markets from their dorm or home computer) into trading these simplified European call options. TEN CEO John Delaney and BetFair CEO David Yu, along with their traders, don’t give the first fig about predicting the future. If and when they play that card, it’s because it gets them some Press coverage in some prestigious business magazine.

2. Terrorism Prediction Exchanges/Markets:

2.a. Adrien Amzallag’s thought experiment was to create a terrorism prediction market using David Pennock‘s dynamic pari-mutuel market design (DPMM – PDF). I would have used Robin Hanson‘s market scoring rules (MSR – PDF), which seems to be en vogue.

2.b. Adrien Amzallag states that “Contracts should forecast specific details of terrorist attacks, such as time, location, attack method, target type, terrorist demographics, and other features (Hanson 2005a, Khalsa 2004).” Actually, Robin Hanson’s DARPA FutureMAP PAM was not about predicting specific terrorist attacks, but rather some MidEast economic indicators. However, four specific terrorism prediction markets was added by either DARPA IAO or its contractor, behind Robin Hanson’s back (my understanding), in some (falsely) descriptive webpage (but not in the core of the PAM website). Interestingly, one of these four (described, not implemented) terrorism prediction markets was intended to forecast whether North Korea would send a missile. (As you know, when TradeSports/InTrade picked up on that topic, it lead to the biggest scandal ever seen in the field of prediction markets.) Lastly, I will tell you something that I found interesting in the PAM program, and that those idiots in the Press the Washington D.C. reporters completely overlooked. I noticed, in some PAM brochure (maybe not intended to be implemented), a prediction market on the number of terrorism-related casualties in the Middle East. That was pure genius. What does a terrorist seek? To frighten people. How would he/she do that? By maximizing the number of casualties. So, in my view, those metrics would be what a terrorism prediction market should aim at forecasting (maybe yearly, not quarterly). Alas, BetFair, TradeSports/InTrade or HedgeStreet would never float such sensitive (but socially useful) contracts.

In Robin Hanson’s Own Words:

The Policy Analysis Market (PAM), however, was a U.S. military research project designed to test the ability of speculative markets to forecast overall geopolitical trends, not terror attack details (Polk, Hanson, Ledyard, & Ishikida, 2003). This two-year-old million dollar research project began long before Poindexter joined its funder, the Defense Advanced Research Projects Agency (DARPA), and was five months from public trading of under one hundred dollar bets. PAM traders could have, for example, bet on the chance of high levels of civil unrest in Saudi Arabia in the fourth quarter of 2004, conditional on the US moving its troops out of there two quarters earlier. By comparing estimates based on different assumptions, PAM could have advised us on the effect of various US Mideast policies. — [The Informed Press Favored the Policy Analysis Market - Robin Hanson - 2005 —PDF]

Selected Excerpt From Adrien Amzallag’s Dissertation: Prediction market contracts should satisfy the following criteria (Wolfers 2004):

1. Verifiable —the contract topic must be observable and verifiable
2. Clarity —ambiguous language should be avoided as much as possible
3. Time-measurable —a time interval must be specified (short-term or long-term)

Post Scriptum: As I type this blog post, CNBC is reporting that a small airplane or more probably a helicopter has crashed on a residential Manhattan building. How can a prediction market foretell such a specific event? Give me a break.

Post Scriptum 2: The bilingual Adrien Amzallag (Adrien.Amzallag +~ gmail +~ com) is from England. I wish him the very best for his future career.