Risk Markets And Politics

Monday, January 29, 2007

Legal "prediction markets", sooner than you think.

This month continues to see consensus build that "prediction markets" ought to be regulated by the Commodity Futures Trading Commission. It is quite possible that the CFTC will approve CME's Credit Event Futures on Wednesday, signaling the legal way ahead for other "event futures" in the US.

Richard Jaycobs made a good point, among several, saying that calls for a PM lobby unrealistically ignore regulation, or treat it as an afterthought. The CFTC of course already has a regulatory framework in place that shields markets from gambling laws. In the case of Hedgestreet, it has also approved non-intermediated small-contract trading. Russell Andersson notes that the CFTC is, "open minded, approachable, thoughtful, and progressive", and that, "Without question, the CFTC is by far the most approachable and reasonable regulatory agency out there."

Whence the unease with CFTC regulation then? Aside from the barrier to entry of the contract market designation process, there is the fear that the agency will not approve potentially controversial contracts such as political markets — even if they unquestionably satisfy an "economic purpose test".

Along the same lines, traders aren't happy with Hedgestreet's current offerings, and this colors their opinion of CFTC regulation. But Hedgestreet's current lack of original longer-term contracts probably says more about the company's internal development than it does about the CFTC. (Not to imply that it says anything negative about their development.)

In any case, if Hedgestreet were to launch 2008 election contracts, much of the unease over CFTC regulation would evaporate. Hopefully the wheels are already in motion, with the relevant parties recursively making sure that no-one will be too "surprised". (And if Hedgestreet doesn't offer these contracts, someone else might. I suspect that one or two "dormant" exchanges are re-tooling for similar retail trading.) Election markets have been the most popular (non-sports) prediction markets to date and their legal operation in the US is the next major benchmark to anticipate. Such markets are also a natural starting point for any dialog with the agency.

3 Comments:

  • Hi --

    The SoCal Cluster does a deep dive of prediction markets and social networks including and examination of the legality of PMs by law professor Tom Bell. See:

    http://www.pmcluster.com/LAX.htm

    Cheers,

    -j

    By Blogger jheuristic, at 5:42 PM  

  • The CFTC did approve Credit Event Futures last Wednesday, January 31st. This is an encouraging milestone.

    I am not sure what Tom Bell will have to say on CFTC jurisdiction at this point.

    By Blogger Jason Ruspini, at 9:46 AM  

  • i am not usually for regilation but i think this a positive step to be governed under Commodity Futures Trading Commission

    By Anonymous Florida Public Adjuster, at 1:24 AM  

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