No Elections Futures Market

Back in December, I made not of the efforts of a Chicago firm to receive permission from the CFTC to establish a futures market in election results. I was skeptical about the request at the time and wondered how it would be any different from sports betting in Las Vegas. Well, it would appear that this request is going to be denied:

Financial regulators are expected to prohibit traders from betting on the outcome of the 2012 election, according to people briefed on the matter, dealing a blow to Wall Street’s recent attempts to profit from politics.

The Commodity Futures Trading Commission is poised this week to reject plans for so-called political event contracts, a lucrative derivative deal that would allow firms to wager on Congressional races as well as the presidential battle, the people briefed on the matter said. The agency is expected to decide, in part, that such trading amounts to gambling — and that it could unduly influence election results.

The North American Derivatives Exchange, the Chicago-based firm that sought to offer the contracts, portrayed its effort as consumer-friendly. With a modest minimum buy-in of $100, and a maximum payout of $250,000, the exchange said it was appealing more to mom-and-pop investors than Wall Street titans.

“We think we’re the perfect exchange to do it because we’re a retail exchange,” Timothy McDermott, the firm’s general counsel, said in an interview last month.

Interestingly, the proposal that NADEX was making would have been illegal in America’s gambling capital:

Some states explicitly outlaw gambling on elections. Even in Las Vegas, the epicenter of gambling, betting on elections is off limits, regulators say.

Intrade is the most prominent player in the world of trading political event contracts, but it is based in Ireland. It is unclear whether American law applies to Intrade.

Only academics have escaped the strict rule. For two decades, United States regulators have allowed business students at the University of Iowa to operate an electronic exchange for trading political contracts.

As the markets have gained prominence, the public and the media have turned to Intrade and others not just for trading, but as a barometer for the election. Indeed, Intrade has become a public opinion polling site of sorts, providing the latest odds on, for instance, who will secure the Republican presidential nomination.

Nadex says it was well positioned to become the only major election trading exchange, because unlike Intrade and other competitors, it is subject to federal oversight at the futures commission.

“If the information is going to be reported to the public on such a wide basis, shouldn’t it be coming from a regulated exchange rather than an unregulated overseas trading platform?” Mr. McDermott said.

As I noted in my December post, though, it’s not at all clear that either Intrade or the Iowa markets are anything more than a reflection of information already available to the public. Moreover their predictive value has been mixed at best during the time that they’ve been operating.

On some level, if people want to bet on elections, or baseball games, I really don’t have a problem with it. Do it in a casino, though, rather than pretending it’s some kind of new financial instrument.

H/T Wonkblog

FILED UNDER: Economics and Business, Quick Takes, US Politics
Doug Mataconis
About Doug Mataconis
Doug holds a B.A. in Political Science from Rutgers University and J.D. from George Mason University School of Law. He joined the staff of OTB in May 2010 and contributed a staggering 16,483 posts before his retirement in January 2020.

Comments

  1. As I noted in my December post, though, it’s not at all clear that either Intrade or the Iowa markets are anything more than a reflection of information already available to the public. Moreover their predictive value has been mixed at best during the time that they’ve been operating.

    People who believed in markets also believed in Intrade precisely because it was “a reflection of information already available to the public.”

    The same people who believe that the Apple price, or the gasoline price, always encapsulates the best estimate of future conditions, also believed that Intrade encapsulates …

    So … I wonder how you feel about markets and their predictive power in general.

    (I personally think markets, Intrade, Apple, or gasoline, are right part of the time, but we can never know which part of the time that is.)

  2. @john personna: .

    There are distinct differences between markets in the commodities you mention and something that merely involves bettering on information already widely available to the public as a whole and there are very few serious economists who have pointed to Intrade or IEM as examples of a market in action

  3. Or, on the topic of encapsulation:

    On some level, if people want to bet on elections, or baseball games, I really don’t have a problem with it. Do it in a casino, though, rather than pretending it’s some kind of new financial instrument.

    That might encapsulate some lack of understanding of financial instruments.

    While people only rarely make prudent investments in casinos, some unknown fraction on Wall Street are gambling, perhaps without understanding it.

  4. @Doug Mataconis:

    There are distinct differences between markets in the commodities you mention and something that merely involves bettering on information already widely available to the public as a whole and there are very few serious economists who have pointed to Intrade or IEM as examples of a market in action

    Explain that Doug. Do you think influences on “gasoline” are less widely reported than influences on “Romney?”

  5. @john personna:

    Futures markets in gasoline (and oil, and wheat, and pork bellies, etc.) exist for reasons that have nothing to do with betting or speculation:

    Futures markets can be used for speculating, but they are designed as vehicles for hedging and risk management so that people can avoid “gambling” if that is not their choice. For example, a wheat farmer who plants a crop is, in effect, betting that the price of wheat won’t drop so low that the farmer would have been better off not planting at all. This bet is inherent to the farming business, but the farmer may prefer not to make it. The farmer can hedge this bet by selling a wheat futures contract. Futures markets can be used for both hedging and speculating.

    Markets based on the movements of interest rates, or stock indexes, serve a similar purpose and are widely used by large mutual funds to hedge the bets that they make on the open market. That’s not what NADEX was proposing with its “Election Futures Market”

  6. Tsar Nicholas says:

    FYI, nobody that plays the Intrade elections markets believes that they’re some new type of “financial instrument.” Everyone there knows these simply are wagers.

    Concerning the predictive value thereof, you have to keep in mind that various left-wing groups often try to manipulate these markets. Back in 2004, for example, when it was obvious to everyone other than to liberals and the media (I know, redundant) and to other loopy and spacey types, that Bush was going to win reelection, you’d have days on which Soros-affiliated money funds would submit huge bets on Kerry, thereby driving down the price on Bush’s contracts. That was being done specifically to mess around with those markets. It was easy money for the rest of us, however. Granted, Intrade is not foolproof, far from it, but absent deliberate manipulation certainly it’s not any less accurate than the likes of widely-followed media polls, which often are not even ship-to-shore close to being correct.

    Lastly, I agree 100% that elections futures should not be traded on official futures or other derivatives exchanges. As stated above, these are pure wagers and should be treated accordingly.

  7. Brummagem Joe says:

    As I noted in my December post, though, it’s not at all clear that either Intrade or the Iowa markets are anything more than a reflection of information already available to the public.

    Doug you say the funniest things sometimes. The same is true of the formbook

    Moreover their predictive value has been mixed at best during the time that they’ve been operating.

    Yep Doug, a lot of punters at Pimlico and Churchill Downs have arrived at the same conclusion. LOL.

  8. @Doug Mataconis:

    Boy, are making dumb claims.

    Futures markets in gasoline (and oil, and wheat, and pork bellies, etc.) exist for reasons that have nothing to do with betting or speculation

    Futures exist because in a free economy someone will always offer something for future delivery, and in an innovative economy someone will figure a way to hand-off that promise of future delivery.

    Of course, once you have those things in place, people will trade for all kinds of reasons.

    Do I need to point you to a consumer investment service ready to help Doug Mataconis trade in lumber futures? Are you bound to only invest in those if you need lumber for actual delivery?

    I think maybe you are trying to go in the weeds with this argument … or maybe I hope so. Because if you think you are making sense, that is even worse.

    Markets based on the movements of interest rates, or stock indexes, serve a similar purpose and are widely used by large mutual funds to hedge the bets that they make on the open market. That’s not what NADEX was proposing with its “Election Futures Market”

    You really believe that crap?

    Futures may be used for those purposes, but have no limit that trades only be between actual future users, or people with a material interest in the outcome.

    Here Doug:

    Commodity Futures Trading for Beginners

    That page should not exist, right?

  9. Brummagem Joe says:

    @Tsar Nicholas:

    Concerning the predictive value thereof, you have to keep in mind that various left-wing groups often try to manipulate these markets. Back in 2004, for example, when it was obvious to everyone other than to liberals and the media (I know, redundant) and to other loopy and spacey types, that Bush was going to win reelection, you’d have days on which Soros-affiliated money funds would submit huge bets on Kerry,

    Hey Counsellor Nicko, the old paranoia is showing this afternoon.

  10. @john personna:

    The condescension really isn’t necessary. I know what’s going on in Future’s Markets even if I don’t invest in them.

  11. @Tsar Nicholas:

    FYI, nobody that plays the Intrade elections markets believes that they’re some new type of “financial instrument.” Everyone there knows these simply are wagers.

    There are people (Doug’s “serious economists”) who had hopes for prediction markets. I think the real take-away is that things like Intrade can fail to predict for the same reasons that “real” markets fail to predict.

    Some economists, for instance, will apologize that Intrade is just a thin market, and therefore sensitive to the actions of a few large players … well, the same thing has been known to happen in big, important, and real markets as well. I mean, Enron and energy.

  12. @Doug Mataconis:

    I condescend because you dump that grade-school definition of a futures market on me. I mean, get real.

  13. Actually, seriously, “Commodity Futures Trading for Beginners” should not exist, but that it does illustrates what unifies Intrade and Lumber.

  14. @john personna:

    Did you notice where that came from? The website of the CFTC itself

  15. Brummagem Joe says:

    @john personna:

    Boy, are making dumb claims.

    It’s not a dumb claim although perhaps a bit of an extreme interpretation. Futures markets do provide a vehicle for speculation but this doesn’t invalidate their other functions. The two aren’t mutually exclusive.

  16. @Doug Mataconis:

    Of course Doug. It’s called a Fig Leaf.

  17. @Brummagem Joe:

    It would be really interesting if someone suggested that say, only airplane owners could trade jet fuel. I get that they have a real, rational, economic, and productive reason to do so.

    I don’t expect a change though, and so what I’m trying to highlight is our “polite fictions” about these markets, and how they share with Intrade (or for that matter, Las Vegas).

    Doug basically is taking refuge in the fictions at this point, telling me that if CFTC says they are for motherhood and apple pie, then they must be, and any marketing to unsuited investors is just out of the question (never mind my links).

  18. Brummagem Joe says:

    @john personna:

    Doug basically is taking refuge in the fictions at this point, telling me that if CFTC says they are for motherhood and apple pie,

    Except it’s not a fiction. Futures markets do have a legitimate and essential function just as stock markets do. The fact they are also vehicles for speculation (some of it unsavory) as are just about all markets btw doesn’t alter this.

  19. @Brummagem Joe:

    The fiction is not that they have a useful function, for some. See “jet fuel” above.

    No, the fiction is that you can just say the futures markets are for a thing, and that becomes all they are for.

    Remember, this started with elections futures. People said they were for a thing too.

  20. (Basically, the rational observer is going to say that any market is “for” all of the things it is actually used for.)

  21. Brummagem Joe says:

    @john personna:

    No, the fiction is that you can just say the futures markets are for a thing, and that becomes all they are for.

    Doug did somewhat oversimplify the case as I mentioned but so did you when you said it was a dumb claim. It has some substance.

  22. @Brummagem Joe:

    I called it dumb when Doug dodged a discussion of what set apart the actual behaviors of “gasoline” and “Romney” markets with the idea that commodities markets are “for” hedging.

    That was a distraction because he did not actually disprove speculation.

    Get it?

  23. (It would have been different to say that “political futures are only speculation, while commodities futures have both speculation and hedging, but Doug did not make that smart claim.)

  24. … which of course highlights the inconsistency in saying that speculation should not exist in political futures, but no one should limit speculation in natural resources.

  25. Intrade is the most prominent player in the world of trading political event contracts, but it is based in Ireland. It is unclear whether American law applies to Intrade.

    There’s been several cases of the US arresting executives from gambling companies for violating US laws even when their operations were perfectly legal in their home country. So whether American law applies is a moot point: the US is going to enforce it whether it applies or not.

  26. kafantaris says:

    “Contracts [tied to the outcome of the U.S. elections] involve gaming and are contrary to the public interest.”
    Well said CFTC.
    The future of our country is not a game.

  27. Kit says:

    On some level, if people want to bet on elections, or baseball games, I really don’t have a problem with it.

    Let’s bet on the outcome of court cases too. I mean, what could go wrong?

  28. @kafantaris:

    Is oil important to the future of our country? Two tidbits:

    Speculators can currently buy $100 worth of oil futures with only $6 down, while investors in stocks put down 50%. The [CFTC] has the authority to call for higher margin requirements from exchanges where oil futures and various other commodities are traded.

    and

    “The commission” is the Commodity Futures Trading Commission, which oversees this. The House GOP wanted to cut its budget by around $90 million, or basically cut it in half. But under the deal that averted the government shutdown, it actually got a 20% increase, to $203 million.

    What I’m trying to highlight here is that we don’t have very clear distinctions in this country, or certainly not as clear as we like to pretend.

    If futures were only for hedging, we’d put in place rules to reduce speculation. But many, the free market boosters especially, oppose that.

    At the same time, prediction markets are bad? I don’t really get it. Not unless they are just supposed to take everyone’s eye off the real gambling going on in the back of the bar.

  29. Sorry, the link is:

    Gas prices and speculation

  30. Brummagem Joe says:

    @john personna:

    If futures were only for hedging, we’d put in place rules to reduce speculation. But many, the free market boosters especially, oppose that.

    ALL markets are inevitably subject to speculation. I speculate mildly in the art market of all things. Putting in rules usually does more harm than good because people always figure out a way around them.

  31. @Brummagem Joe:

    So then you wouldn’t be opposed to prediction markets?

    What about “gambling” versus “lotteries?” 😉