Prediction Markets in the US & the CFTC — Making it all work (Part 2 of 5)
June 17th, 2008If you're new here, you may want to get Mercury's Blog by Email or subscribe to my RSS feed. Thanks for visiting!
This is part 2 in a five-part series where I present first drafts of what I intend to send to the CFTC in response to their request for input on prediction markets or “event markets.” More background can be found in my first post here.
This post deals with questions of Public Interest.
Public Interest
1. What public interests are served by event contracts that are designed and will principally be traded for information aggregation purposes and not for commercial risk management or pricing purposes?
Event contracts do serve the public interest, by providing the public unbiased information on events of concern to society. The public wants to understand what is likely to take place in the future, whether that is the results of a political event, scientific discovery, or even the status of traffic in a major city. Though the event contract is designed for information aggregation, the information revealed can also cause people to change their behaviour.
Additional information, particularly unbiased market-based information, helps individuals and organisations make better decisions by more accurately planning for the future. If an event is important enough that people will trade on the results, it is important enough to at least some sections of society to have that information.
The news media serves to evaluate masses of information and news and filter it so that the public gets the pieces of news or information that are critical to them. However, this process is frought with difficulty and bias. Problems with corporate ownership, political bias and lack of deep understanding in technical issues means that media coverage is frequently criticised for being inaccurate. Event contracts can serve the public interest by removing that “filter” and allowing society as a whole to judge the potential that a particular event would occur. This serves the public as providing a meaningful check and balance against potentially incorrect or sensational news coverage.
Fundamentally, I believe that more information provided to the public about events that concern society is a public interest, and event contracts serve this purpose well.
3. What calculations, analyses, variables, and factors could be used to objectively determine the social value of information to the general public that may be discovered through trading in event contracts? Should this be a factor in determining whether the Commission plays a role in regulating these markets?
I don’t think that any calculation, analysis, variable or factor should be used in determining whether the Commission plays a role in market regulation. The key to the growth and social value of event contracts is precisely that they are flexible to respond to the needs of the traders that participate in the marketplace.
