A collection of (relatively) recent yellow bricks on the road to widespread use of prediction markets:
- Wired Magazine features an article on political prediction markets infused with a mostly healthy if occasionally misguided skepticism. I was struck most by the nonchalant subtext that prediction markets have gone mainstream: “As you’ve no doubt heard…”
- Two nice articles at MSNBC and Business Week describe the context and opportunity presented by the CFTC’s mayday asking for guidance on regulating prediction markets in the US.
- In May, twenty-two economists, including two with Nobel Prize credentials (expect that number to grow), published a position paper in Science calling on the US government to legalize and regulate socially valuable prediction markets.
- The International Institute of Forecasters has set up a new Special Interest Group on Prediction Markets as part of its Forecasting Principles portal. The prediction market content is maintained by Andreas Graefe and contains a number of valuable resources including publications, press, events, links, and a nice news feed. (Some oddhead-centric items: coverage of Dimitrov and Sami’s EC’08 paper in ScienceDaily, slides and abstracts from the 3rd Workshop on Prediction Markets, and a preview of a session on prediction markets at INFORMS.) Andreas is also involved in Pollyvote, an election forecasting aggregator that uses IEM prices as one of its four components and, according to the site, “provided near-perfect predictions for the 2004 election”.
Plus a Murphy’s Law Alert:
Mr. Murphy may be hard at work orchestrating one of his signature ironies. Picture this: Prediction market proponents (including me) aren’t careful and get what they wish for: The CFTC takes prediction markets under its regulatory purview. Then, efforts to legalize Internet gambling in the US succeed, opening up an enormous and fabulously lucrative business that the “socially good” prediction market operators are legislated out of, mired instead in a separate regulatory goop of their own making.
Hi Dave, Even if “internet gambling” were broadly legalized, many markets would still fall under CFTC regulation. Rich Jaycobs answered this sort of misgiving well a while back:
“I’m confused. What is it exactly that Congress should grant Prediction Markets? Broad exemptive relief for real money markets? If so, how broad? Every contract idea? Who should be allowed to open real money markets? The
questions are manifold.
My personal experience in this area dates back to 1989 when traditional futures exchanges first became serious about launching digital type contracts on non-financial instruments. Since then I have been the CEO of the first
exchange to be approved under the CFMA (’onExchange’) and have assisted both
HedgeStreet and Intrade and others in their real money PM efforts.
If the goal is to get a real money, large scale, open to the public prediction
marketplace up and operating then my experience suggests: (1) this is best done as a regulatory process and not a legislative process; (2) much of what real money PMs need is already in place at the CFTC; and (3) the real public policy work is in a few product domains, and not on the general nature of PMs.
If you believe that real money public PMs should be able to operate with the benefit of a safe harbor and broadly free from any regulation then the U.S. Congress is your only option. And good luck pushing that idea!
eBay notwithstanding, it’s hard to imagine how a public, real money, PM with its robust financial exchange metaphor could argue that it’s something other than a financial exchange - and all financial exchanges are currently
regulated or exempted under some regime.
In short, we should all accept the fact: real money PMs will be regulated. It is possible that a very, very, few narrowly defined PMs will be able to carve out exceptions like IEM, but these will be hobby markets and not businesses. Many observers are not even sure those hobby markets could get carve outs in
today’s environment. So, the real question is: which regulatory regime is best
suited to a real money prediction market?
Abstractly speaking, the CFTC has all the legislative authority PMs seek. For
example the CFTC (under the CFMA): has a broad definition of instruments it
can regulate; has a tiered regulations for professional markets; provides for
self certification of products by its registered Designated Contract Markets
(DCM); and has the added bonus Federal pre-emption over state gaming laws.
These are all very big tools to provide PMs a safe harbor for their operations, and may be part of the reason the CFTC has seen a parade of entrepreneurs in the last ten years.”
http://groups.google.com/group/Prediction-Markets/browse_thread/thread/e3701389f3149744
Thanks Jason, good point. This helps put the CFTC exercise in perspective. It’s very hard if not impossible to determine what “should” be under CFTC jurisdiction and what “should” be deemed Internet gambling. For example, if something like betfair were deemed legal in the US, I would think futures markets under CFTC regulation would be looking on with jealousy.