WeatherBill can be thought of a) as expressive insurance b) as a combinatorial prediction market with an automated market maker.

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This clarification from our good doctor David Pennock shows how indispensable this research scientist is to small people like us. :-D Without David Pennock, the field of prediction markets would collapse like a castle of cards. Ha! ha! ha!…-

As a blogger, WeatherBill presents a difficulty: How to you categorize it? I fill it in these 4 categories:

  1. insurance (obviously)-
  2. finance (because it is hedging)-
  3. exchanges (because of what our good doctor Pennock said above, see the title)-
  4. betting (because the reverse of hedging is speculation)-
  5. UPDATE: I just added “-hedging”- —-so that’-s 5 categories now, probably too many. (It probably shows my readers that I am confused…- and really need a “-research scientist”-. Ha! ha! ha! :-D )

WeatherBill C.E.O. David Friedberg hopes to persuade [!?] the Commodities Futures Trading Commission (C.F.T.C.) to change the requirement that currently limits weather derivative traders to accredited investors with a minimum net worth of $1 million.

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Hummmmmmmmm…- Quite a bold ambition. I’-m very surprised by his statement. Is he naive?

Via our chief economist Michael Giberson.

An Atlanta hair saloon is one of the many satisfied clients of WeatherBill.

Via Steve Roman, The Atlanta Journal – Constitution:

[…-] Atlanta hair salon owners Ray Luciano and Spencer Malay recently reeled in a bundle — tens of thousands of dollars — after taking out insurance-like coverage called “-weather derivatives.”- Their Buckhead salon does well when it rains, drawing walk-ins and overflow from the nearby mall and movie theater. “-If it’-s a sunny day, they [shoppers] tend to do outside stuff, not go to the movies, not go shopping, not get their hair done,”- Luciano said. […-] In the last nine months, the owners at Spencer Malay Hair have taken out four contracts, and Lady Luck has smiled on them three times. The most recent was for the holiday season between mid-November and just before Christmas. “-We put a dry-season contract on it because we hired a couple of new stylists,”- Luciano said. The proceeds, which he declined to talk about in detail, allowed them to “-pay our staff while business was not as good as good as it could have been.”- […-]

Previously: Eric Zitzewitz on WeatherBill

Read the previous blog posts by Chris. F. Masse:

  • Davos – World Economic Forum
  • CME Group = Chicago Mercantile Exchange + Chicago Board Of Trade
  • Democratic and Republican caucuses in Nevada + Republican primary in South Carolina
  • The BetFair blog is not a serious publication.
  • MICHIGAN PRIMARY @ BETFAIR: Niall O’Connor asks the very pertinent question.
  • One thing John Delaney and his Irish employees at InTrade-TradeSports can learn from the BetFair-TradeFair folks at HammerSmith.
  • BetFair compound chart on the Michigan primary

Sounds like Sean Park will strike it rich, once again.

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Sean Park (Founding Partner at Sixth Paradigm, and blogger at The Park Paradigm)

Sean Park is a leading independent thinker on the future of financial markets, the author of The Park Paradigm, and the founding partner of Sixth Paradigm LLP:

The technology of the digital age is driving an unprecedented explosion in the ability to create markets in anything. Trade anything. Not just physical goods. Not just financial instruments. But ideas. Events. Outcomes. The emergence of these kinds of markets will – over time – impact how we view and interact with the world in all aspects of our personal and professional lives. They will fundamentally alter the current world economic and social paradigm.

Sean is also a founding investor in innovative companies such as Betfair and WeatherBill (where he is also a non-executive Director) and has extensive experience investing in and advising start-up and high growth companies in addition to over 16 years of experience working at a senior level in capital markets and investment banking. Building businesses has been a key theme throughout his career.

I’-m bullish on WeatherBill. They showed that an event derivative exchange can have a more user-friendly interface —-stuff that BetFair-TradeFair and TradeSports-InTrade have not computed yet. I wonder whether the WeatherBill approach could work out with other risks —-other than weather.

On Sean Park, as a blogger, one of my sources said to me that he sometimes elaborates on ideas invented by others years ago and makes it like they are his. I’-m a brand-new feed subscriber to his little blog, so I’-ll judge by myself.

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Previously: Thoughts on Weather Bill – by Eric Zitzewitz – 2007-01-04

What I think is most innovative is the idea of marketing a prediction market contract as “insurance.”

Is WeatherBill doing well, really??

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WeatherBill does so well that TechCrunch has just published two –-yes, two–- blog posts on it, today (Wednesday, October 17, 2007). Here’-s the first one, which basically says that two VCs have just poured $12,5 million dollars in it. Good for them. The second blog post, written by another TechCrunch writer, and which has been quickly taken off their website, basically said the same, but with this twist:

CEO David Friedberg says that WeatherBill has hundreds of customers and faces such high demand that it needs to bring more people aboard to increase capacity. The site has launched not only in the US but Canada, the UK, the Netherlands, Spain, Germany, and Norway as well.

So, should we believe the content of this now-deleted blog post? Or was it deleted because this information is not accurate? Mystery. ValleyWag should investigate. :-D

APPENDIX: Here’-s the deleted TechCrunch blog post on WeatherBill. (The second item that follows is the first blog post that was published by TechCrunch.)

Deleted TechCrunch WeatherBill

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UPDATE: VentureBeat on WeatherBill…-

VentureBeat on WeatherBill

UPDATE: Mark Hendrickson of TechCrunch…-

Our apologies for misleading everyone into thinking Weatherbill enables people to gamble the weather as if it were a casino game. The service is meant rather to provide insurance for companies that could be aversely affected by fluctuations in the weather.

Weatherbill’s CEO informs us that only companies with a net worth of at least $1 million can participate due to regulations of the Commodity Futures Trading Commission. He also says that Weatherbill is the first service to ever provide access to hedges on the weather (online or otherwise).

Also, for anyone wondering why we had two posts up about this story, that’s because Duncan and I reported on it independently by accident. I guess you could say we both find the weather very interesting.

WeatherBill contracts are financial instruments, regulated by the CFTC.

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Weather Bill

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Via Tech Crunch, Weather Bill is now open for business. This is their ABOUT page:

WeatherBill sells Weather Contracts to eligible buyers. Weather Contracts can be used to protect your business from adverse weather conditions, by paying you when those adverse conditions occur. Some eligible buyers may also use WeatherBill to make speculative bets on the weather. Weather Contracts are financial instruments, which fall under the regulation of the Commodities and Futures Trading Commission. They are completely legal to buy, as long as you are an eligible buyer. [...]

In order to purchase a Weather Contract from Weatherbill, you must meet eligibility requirements. These requirements are set by the Commodity Exchange Act. You can try to Sign Up for an account, to determine if you are eligible.

Weather Bill FAQ &amp- Answers:

What are WeatherBill contracts?

WeatherBill contracts are financial instruments that can be used by business managers and owners to protect against adverse weather. Adverse weather can be as simple as a rainy day or as destructive as a 6-month drought. If you know what weather conditions may impact your business, you can create a Contract that will pay you when the conditions occur, thus “-hedging”- your risk. Hedging your weather risk helps decrease the volatility of your business’-s profits. There is no minimum contract amount – you can buy protection for as little as $1.

Why would I want to buy a WeatherBill contract?

Every year, 70% of US businesses are impacted by the weather. Heat waves, hurricanes – even just abnormally warm winters or wet springs can impact the operations of all types of business. Ski resorts suffer during a warm winter and amusement parks lose visitors on rainy days. Sound planning means putting together a solid business interruption strategy. Weather Contracts can help guard against some of the unpredictabilities of weather. Use the WeatherBill Tools to learn more about how your business may impacted by the weather.

Are WeatherBill contracts the same as weather insurance?

No. WeatherBill contracts are financial instruments, regulated by the Commodity Futures Trading Commission. Weather Contracts do not require an insurance agent, a claims process, or a proof of loss to qualify for payment. Weather Contracts require payment based solely on weather measurements. WeatherBill automates this “-settlement”- and you will usually get a check in the mail within a few business days after a Contract has been settled.

Who are eligible buyers of WeatherBill contracts? How do I know if I’-m eligible?

Buyers of WeatherBill contracts range from retail store owners to traders to state governments. In order to create an account, you must be a US-based corporation, individual, or entity, and you must meet the criteria of an “-Eligible Contract Participant”-, as defined here [*].

Why do you need my Social Security number?

WeatherBill is required by US federal law to collect the Social Security Number (SSN) / Taxpayer Identification Number (TIN) of every customer. This is done to maintain an exact record that identifies all parties that buy our Weather Contracts, which are regulated contracts. These identifiers are transmitted and stored securely, and will not be used or disclosed by us for any purpose other than as required by law.

Is my personal information safe with WeatherBill?

Yes. We keep all information encrypted and secure, and will never share or sell it to anyone except as required by law.

Is this gambling? Is WeatherBill legal?

This is not gambling. If you are an eligible buyer, you are entering into a legal and binding Contract with WeatherBill when you purchase a Weather Contract. WeatherBill contracts are intended to be used as risk-management instruments that can help buyers manage financial risk tied to the weather. Weather Contracts are commodity contracts regulated by the Commodity Futures Trading Commission. They can be traded over-the-counter (i.e. not on a public exchange or marketplace), so long as both parties entering into the trade are eligible to trade. To find out if you’-re eligible, please read the definition of “-Eligible Contract Participants”- here, or try to register for a WeatherBill account.

WeatherBill using settlement data supplied from EarthSat, an independent provider of weather data.

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[*] Eligibility requirements for a WeatherBill account:

1. You must be acting for your own account.
2. You must be a US-based corporation, individual, or entity.
3. You must meet the definition of “-Eligible Contract Participant”-. We have made it rather simple for you to determine if you qualify as an ECP – you may try to register for an account and you will be asked several questions that will automatically determine your eligibility.

Weather Bill ECP

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Addendum: Jason Ruspini sends me this CFTC’-s EBoT page. No idea whether the “-Weather Board of Trade”- that is listed on that CFTC page is the parent company of Weather Bill.

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Previous Blog Posts:

- Comments on Weather Bill dot com – REDUX

- Comments on Weather Bill dot com

- Thoughts on Weather Bill – professor by Eric Zitzewitz – (Written before the opening of Weather Bill)

Previous blog posts by Chris F. Masse:

  • A second look at HedgeStreet’s comment to the CFTC about “event markets”
  • Since YooPick opened their door, Midas Oracle has been getting, daily, 2 or 3 dozens referrals from FaceBook.
  • US presidential hopeful John McCain hates the Midas Oracle bloggers.
  • If you have tried to contact Chris Masse thru the Midas Oracle Contact Form, I’m terribly sorry to inform you that your message was not delivered to the recipient.
  • THE CFTC’s SECRET AGENDA —UNVEILED.
  • “Over a ten-year period commencing on January 1, 2008, and ending on December 31, 2017, the S & P 500 will outperform a portfolio of funds of hedge funds, when performance is measured on a basis net of fees, costs and expenses.”
  • Meet professor Thomas W. Malone (on the right), from the MIT’s Center for Collective Intelligence.

Thoughts on Weather Bill

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See this article on the new firm, which will offer daily weather prediction market-like contracts on temperature and precipitation (our host mentioned them earlier today).

A couple thoughts:

1. I really don’-t see that many accredited investors having so much exposure to daily weather risk that they’-ll feel the need to hedge at prices they’-ll assume imply negative expected value (given that both Weather Bill and the hedgies they offload risk on need their pounds of flesh).

  • Movie theaters are a nice example of someone who is long rain, but they are mostly owned by large chains. Portfolio theory suggests that public companies have no business paying to hedge risks that are not large enough to threaten bankruptcy.
  • The law of large #s helps people out with weather. Yes, rain is bad for a golf course, but really they care about a rainy summer (or decade) more than a rainy day. And memberships provide a means of offloading some of that risk on the golfers.

2. Weather isn’-t the kind of thing that a lot of people think they know a lot about (unlike, say, sports and politics). So I’-m not sure “-betting”- is going to save them.

3. Part of why the wholesale weather futures market hasn’-t taken off and has devolved into an OTC affair is an absence of liquidity trading. Only a few big utilities have a real need to hedge temperature (many are still hedged by the regulatory environment they operate in), and in an open market, there is the worry that you’-ll always be trading against someone with a better model than you.

4. What I think is most innovative is the idea of marketing a prediction market contract as “-insurance.”- But I’-d have started with housing. Sell me “-insurance”- against a 10% or greater decline in the SF property market, and then dynamically hedge with the new CME futures.