secretary 

From: 

Sent: 

To: 

Subject: 

jsalvati@u.washington.edu 

Thursday, June 26, 2008 2:51 AM 

secretary 

Public Comment Form 

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Below is the result of your feedback form. It was submitted by 

(jsalvati@u.washington . edu) on Thursday, June 26 , 2008 at 02 :5 0:41 

commenter subject : 73 FR 25669 

COMMENT commenter frdate: 06/25/08 

commenter frpage: 08-0 0 4 

commenter comments: To Whom I t May Concern, 

This is a comment on the Commodities and Futures 

Trading Commissi on s Concept Release on the 

Appropriate Regulatory Trea tment of Event 

Contracts. 

Recently, the American Enterprise Institute a nd 

others have asked the Commodities and Futures 

Trading Commission to proh ibit for-profit 

prediction market exchanges, and only allow 

prediction markets to charge modest fees . I wi ll 

make the case here that both for-profit e xchanges 

and more than modest may both be important for 

getting the most benefits from prediction markets. 

One of the major benefits o f prediction is t hat 

people and companies can use pre diction ma rkets 

relatively accurate and well- calibrated predictions 

to improve t h eir planning. Market predictions 

reduce the ca lculation work that people and 

companies have to do in order t o come up with 

predic tions b ecaus e the y can outsou rce the wor k to 

prediction markets. 

I t would be a mist a ke t o unnecessarily limi t t he 

area s which prediction markets are u s ed to predict, 

because it is difficult to predict what areas may 

help people a nd companies improve thei r planning . 

For profit exchanges will have i ncenti ves to find 

as many places where such mo re accurate and better 

calib rated p redic t ions are usefu l, e s pecially in 

industry. Thus i t wo uld be a mi stake to prohibit 

e ither for-pro fi t exchanges or limit the fees that 

exchanges can charge . 

Consider t he fo llowi ng scenario : 

A number of compan ies in some industry are 

i nterested in the information abou t the future 

price of cert a i n products, the f uture of industry 

releva nt techno l ogies or i n f uture d emand for 

certain products or a ny number of things of that 

might be predic t ed using prediction mar kets . 

I n response to this interest, a for- profit company 

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creates a prediction market exchange for contracts 

about the information that those companies are 

interested in, and then sells access to the 

exchange to companies in relevant industries. The 

exchange company uses the revenue generated from 

exchange subscriptions to subsidize contracts in 

order to generate more accurate predictions. 

Employees from the companies who subscribe to the 

exchanges woul d be the market participants . 

Such exchanges would be even more attractive to 

companies than internal prediction market exchanges 

because contract subsidies and the pool ing of 

market participants in multiple companies into one 

market would improve the usefulness of prices 

significantly. 

Allowing a for profit company to create such 

exchanges means that it will have strong incentives 

to make its exchange contracts the more useful to 

its subscribers, whereas non-profit companies will 

ha ve weaker incentives to do so . Now, perhaps 

someone would step up and c reat e a non-profit 

exchange to fill this role, but perhaps none would. 

This is especially likely in markets where there is 

little camaraderie and collusion . Non- profit 

exchanges will probably also get c reated and 

develop slower than for-profit exchanges. This 

would very bad in cases where subscriber needs 

change frequently, because non- profits would have 

trouble keeping up. 

Limiting the fees that exchanges can charge is also 

a bad idea, beca use the amount by which the 

exchange company would need to subsidize a contract 

i n order to achieve the desired accuracy could be 

large in some cases . When developing models, and 

collecting an analyzing data is costly, large 

subsidies would be needed to get people to make 

accurate predictions. 

I do not doubt that non-profit prediction market 

exchanges are likely to be very valuable, 

especially in public policy arenas, but it would be 

a serious mistake limit prediction mar ket exchanges 

to non-profits . 

Sincerely, 

John Salvatier 

University of Washington Engineering Student 

commenter name: John Salvatier 

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