secretary 

From: 

Sent: 

To: 

Chris Masse [cfm@midasoracle.com] 

Monday, July 07, 2008 3:26 PM 

secretary 

Subject: Concept Release on the Appropriate Regulatory Treatment of Event Contracts ... ,, 

Chris F. Masse 

Midas Oracle 

cfm@midasoracle.com 

chrisfmasse@gmail.com 

July 6th, 2008 

Commodity Futures Trading Commission 

Three Lafayette Centre 

1155 21st St. NW 

Washington D.C. 20581 

Attention: 

Received CFTC 

Records ~tlon 

7/f/C(j 

Ci 

1 .... , 

(/) \.,., 

C> 

~;-() 

("1 

·--1 

~;;:::::-

:)::J 

~ 

, 

c.-:-: ...... 

Office of the Secretariat- secretary@cftc.gov COMMENT 

Reference: 

Concept Release on the Appropriate Regulatory Treatment of Event Contracts 

73 FR 25669 

Just a technical note, before I give you my thoughts. In the following, I call "prediction 

market" the specific market where one particular event derivative is traded. (For 

instance, the "Barack Obama will be elected US President in November 2008" prediction 

market.) And I call "prediction exchange" the general marketplace where many prediction 

markets (on political elections and other events) are traded. (Hence, I call HedgeStreet a 

"prediction exchange"). 

Please, allow me to give you my thoughts on the subject of real-money prediction 

exchanges: 

ABOUT THE INFORMATION AGGREGATION MECHANISM, FORECASTING, THE LIQUIDITY OF THE SOCIALLY 

VALUABLE PREDICTION MARKETS, THE DEVELOPMENT OF A US-BASED PREDICTION MARKET INDUSTRY, AND 

THE PROTECTION OF RETAIL TRADERS 

The information aggregation mechanism functions well only if there are enough traders. 

Probabilistic predictions (which are of interest of the economists cited in the CFTC's 

concept release) are generated only when there is enough liquidity, that is, when many 

traders come speculating on an event derivative market (e.g., on the topic of the next 

political election). Just because forecasters are interested in a topic and want to 

generate a market-based probabilistic prediction does not mean that traders will flock en 

masse. Market-generating forecasting is an offspring of the trading activity; if you have 

too little liquidity, you don't have any trustworthy probabilistic prediction. 

The socially valuable prediction markets should meet 3 criteria: 

- their contracts should be very well drafted, so that the probabilistic predictions 

generated would be useful .to society; 

- a sufficient number of traders should like the topic; 

- there should exist advanced, primary indicators which traders can follow to get early 

information (e.g., polls, among other sources of information, in the case of prediction 

markets on political elections). 

Here's a counter example. Yahoo! Research scientist David Pennock (one of the most active 

and well regarded researchers in this field) has created a set of prediction markets 

regarding the percentage share of web searches made in the US in 2008, for each Internet 

1 
search engine (Google, Yahoo!, etc.) That would be extremely valuable, on the paper. 

Unfortunately, those sets of prediction markets have attracted only a fistful of traders: 

http://www.intrade.com/aav2/trading/tradingHTML.jsp?eviD=78364&eventSelect=78364 

&updateList=true&showExpired=false 

Hence, no trustworthy probabilistic predictions were generated. 

The CFTC should take with a grain of salt the 2008 petition organized by the American 

Enterprise Institute 

http://www.reg-markets.org/publications/abstract.php?pid=l276 

that states that "not-for-profit research institutions" and "government agencies" should 

be allowed to run US-based, real-money prediction exchanges, for the good of society. Just 

because an oganization is smart and fascinated by the prediction markets does not mean 

that its executives and managers will be capable of drawing traders. Obviously, prediction 

exchanges should be run by trading specialists and event derivative professionals, and 

properly regulated. No good will be done by the CFTC if amateurs are allowed to run unregulated, real-money prediction exchanges. 

I see 2 important keys for the development of socially valuable prediction markets. 

a) The socially valuable prediction markets (which are not very popular, other than the 

ones on political elections) should be organized by the generalist prediction exchanges 

that draw traders en masse because they offer prediction markets on very popular topics. 

Sports is a popular topic. If the CFTC go to the website of TradeSports 

http://www.tradesports.com/ , they will see that TradeSports links, on its frontpage, to 

the InTrade prediction markets at http://www.intrade.com/ and, thus, send the TradeSports 

traders to the InTrade prediction markets, which is obviously good for InTrade's liquidity 

in general, and especially good for InTrade's socially valuable prediction markets. In the 

same manner, the prediction markets on political elections organized by BetFair UK 

http://www.betfair.com/ are located within their central prediction exchange that is 

mainly devoted to sports. · 

The hard fact is that the most popular topic among individual traders (the retail 

customers of the prediction exchanges) is sports. As long as US laws and regulations won't 

allow US-based, real-money prediction exchanges to organize prediction markets on the 

topic of sports, many US event derivative traders will give their business to offshore, 

real-money prediction exchanges who accept to take money from US residents (as it is the 

case with TradeSports-InTrade Ireland). 

I understand, though, that the CFTC is working under a jurisdiction that presently outlaws 

prediction markets on sports. 

b) The executives of the popular, real-money prediction exchanges should be willing to 

create socially valuable prediction markets by collaborating with outside researchers who 

specialize in certain verticals. 

As of today, InTrade is the only real-money prediction exchanges that fill these 2. 

criteria ---a) and b) .. InTrade's executives and managers have deployed a considerable 

effort to create and run an impressive number of socially valuable prediction markets. 

BetFair UK have chosen not to develop socially valuable prediction markets, alas ---other 

than those on UK politics, which are well developed and of high social utility. And 

HedgeStreet does not have yet the CFTC's stamp of approval to run markets of event 

derivatives non-financial topics, since that's the purpose of the May 2008.'s concept 

release. 

The economists Justin Wolfers, Eric Zitzewitz, Robin Hanson, Koleman Strumpf and David 

Pennock (among others) have collaborated with InTrade Ireland to frame interesting 

questions. Obviously, the research institutions which those economic scientists are 

affiliated with (e.g., universities, colleges, business schools) have no business running 

real-money prediction markets. 

If the "not-for-profit research institutions" and "government agencies" 

want to develop socially prediction markets, then they should do it in cooperation with 

established, popular, regulated, real-money prediction exchanges, who know what they are 

doing. 

2 
(In passing, I fully support Tom W. Bell's point made in the 5th paragraph of his 

petition. The CFTC should not favor the not-for-profit prediction exchanges at the expense 

of the for-profit prediction exchanges. Tom W. Bell's comment to the CFTC has not yet 

appeared on the CFTC website, as I type this. 

http://agoraphilia.blogspot.com/2008/07/lets-tell-cftc-where-to-go.html ) 

As I said, I follow the prediction market industry since 2003, and the 2 most common 

mistakes I see made by the people proposing brand-new socially valuable prediction markets 

are that: 

- they forget that the event derivative traders should have fun; 

- they forget that, for each prediction market, there should exist advanced, primary 

indicators that traders should rely on to inform their trades. 

I want to tell the CFTC that most people who talk about creating brand-new socially 

valuable prediction markets are totally unaware of these 2 basic rules. 

In the beginning of this comment, I said that prediction markets are forecasting tools 

(and, hence, decision-support tools) if, and only if, there is sufficient liquidity. I 

also noticed that the world's most liquid socially valuable prediction markets are offered 

by 2 exchanges (TradeSports-InTrade and BetFair) who use popular prediction markets (on 

sports, the fact is) to support the marketing of less popular, socially valuable 

prediction markets. (After making that argument, I acknowledged that the CFTC currently 

works for a legal environment that prohibits prediction markets on sports.) 

My point here is to emphasize the uber importance of liquidity on socially valuable 

prediction markets. In my view, the best situation is when a big, generalist, real-money 

prediction exchange organize socially valuable prediction markets and helps them to 

thrive. Only InTrade Ireland has done that, so far. My suggestion to the CFTC would be 

create a legal environment such that their liquidity could be "repatriated" to the US, on 

a "InTrade USA" real-money prediction exc~ange. 

A related issue is that the CFTC should be concerned about HedgeStreet's financial health. 

After its third round of funding, HedgeStreet raised a total of $24.9 million. 

http://www.hedgestreet.com/abouthedgestreet/pressreleases/pressrelease 21.html 

Lately, HedgeStreet was aquired by an offshore investor for $6 million. 

http://www.hedgestreet.com/abouthedgestreet/pressreleases/pressrelease 32.html 

Obviously, there has been destruction of wealth, here. 

The CFTC did a great job in 2004 when it approved HedgeStreet's application as a 

Designated Contract Maker (DCM). The CFTC should now finish the job by creating a legal 

environment favoring the profitability of HedgeStreet and of other non-intermediated DCMs 

(e.g., InTrade USA, or BetFair USA, or TradeFair USA) ---which I hope will be started up 

in the future in the US. 

What I am afraid with the May 2008's concept release on "event markets" 

is that the CFTC does not look into the real issues: the liquidity of socially valuable 

prediction markets, and the profitability of US-based companies operating real-money 

prediction exchanges (non-intermediated DCMs). 

I'm afraid that all these solutions consisting in "exemptions" and "no-action" letters are 

false solutions that do not address the real issues. 

Finally, for the issue regarding the protection of retail traders, I suggest that the CFTC 

looks into the worst scandal that occurred in the field of prediction markets ---the 

"North Korea Missile prediction market" scandal. I am sad to say that InTrade Ireland 

acted in the worst way possible, and, thus, have indelibly tarnished their reputation, 

alas. 

http://www.midasoracle.org/predictions/nkm-scandal/ 

Thanks for listening, 

3 
Chris F. Masse 

Panorama B, Green Side 

305, avenue Saint Philippe 

Les Templiers, Sophia-Antipolis 

06410 Biot, Alpes-Maritimes 

France, European Union 

http://www.midasoracle.org/ 

http://www.midasoracle.net/ 

http://www.midasoracle.com/ 

http://www.chrisfmasse.com/ 

4