Re: 6 new messages in 1 topic - digest

[Andrew Jones]

"Jim, Sorry but calling for specifically PM-related legislation is also
"nothing new". Tom Bell has been writing about that for years. The
problem frankly is that PMs have not made enough money for anyone in
the US to motivate such a lobby (not to mention that most of the
visible PM proponents have day jobs)."

But do you absolutely have to have a lobby or would researching and
drafting a bill and then presenting it to the right congressman and
regulator authorities be a possibility? after all anyone can petition
congress and there has to be a sympathetic ear in congress.

-
A

[Jim]

> -This is absolutely true. Sometimes it helps to have a significant dollar
> force behind you, though. I personally pitched the concept to our
> Congressman when we were working the DARPA contract. I have also
> participated in many such efforts in conjunction with such organizations
> as the NDIA, NSIA, NDIA, EIA, and AIAA Technical Committees. Each of
> these organizations worked closely with the Department of Defense who
> welcomed the efforts of the various industry technical committees. I
> believe it would be in everyone's interest if we could put together a
> reasonalby sized effort to address PM needs. I think the results would be
> welcomed by the Congress. Congressional staffers like to see nice
> packages that do not require much work on their part. We would need to do
> this as a technical effort and not as a lobbying activity. Besides, I
> think we are a long ways from having anything for which to lobby at this
> time.

> A
>
> >
>

[Jason Ruspini]

You can have a one-person lobby, or you can direct your lobby towards
more technical public officials rather than legislators.

We need to demonstrate the value of these markets and, what's more
difficult, that they are worth the time of public officials against
myriad other issues.

[Michael Strong]

I am working with Re-Uniting America, 

http://www.reunitingamerica.org/steering_committee

on a different project.  Re-Uniting America has, in the past, convened small, high-level gatherings of Democrat and Republican thought leaders and power brokers in an effort to create a transpartisan consensus on certain issues.  They have succeeded in getting Grover Norquist to cooperate with Joan Blades, a founder of Moveon.org, and Al Gore to discuss energy issues with global warming skeptics.

I'd like to plan, and then convene, a similar high-level gathering on legalizing prediction markets.  Their format typically includes 20-30 people in a retreat setting for 2-3 days.  We would want to select a handful of key thought leaders from the prediction market movement along with key partisan policy thought leaders and political power brokers.  The outcome would be for a handful of both Republican and Democratic leaders to leave the retreat with a solid understanding of the value of prediction market legalization, an understanding of the controversies involved, and (hopefully) an intelligent consensus on the kind of legalization needed.

I have been meaning to begin working on this for some time, but have been busy on other projects.  If anyone here wanted to send me a one to two page sketch of what they thought such a retreat should look like, in terms of people involved, topics to be covered, etc. such a proposal would accelerate the process.  I can get funding to pay for the retreat if it is well-designed and likely to have an impact.

Feel free to send me such retreat proposals off-line.

Best,

Michael

Michael Strong

CEO and Chief Visionary Officer

FLOW, Inc.

www.flowidealism.org

Liberating the Entrepreneurial Spirit for Good

Links to my articles:

http://www.flowproject.org/michael.html

When once you have tasted flight, you will forever walk the earth with your eyes turned skyward, for there you have been, and there you will always long to return. 

Leonardo Da Vinci

[Robin Hanson]

At 12:43 PM 1/27/2007, you wrote:

>I am working with Re-Uniting America,
>

><http://www.reunitingamerica.org/steering_committee>http://www.reunitingamerica.org/steering_committee

><http://www.flowproject.org/michael.html>http://www.flowproject.org/michael.html

>
>When once you have tasted flight, you will forever walk the earth
>with your eyes turned skyward, for there you have been, and there
>you will always long to return.
>
>Leonardo Da Vinci
>
>
>
>
>
>

Robin Hanson rha...@gmu.edu <http://hanson.gmu.edu>http://hanson.gmu.edu
Research Associate, Future of Humanity Institute at Oxford University
Associate Professor of Economics, George Mason University
MSN 1D3, Carow Hall, Fairfax VA 22030-4444
703-993-2326 FAX: 703-993-2323

[alex.f...@gmail.com]

Michael,

Looking at your list of attendees, there are a lot of big grassroots
leader names in there.

However, our problems stem more from *government* officials than
anything else. From our perspective, the important figures would be
people on the CFTC, maybe the SEC and other arms of government law
enforcement, and congressmen. And I think it's precisely because we
don't have money yet that those kinds of meetings are very hard to
arrange.

Alex

[Richard Jaycobs]

Apologies if this is a re-post. I tried to make a large post yesterday, but as
far as I can tell it got lost in the email ether, so I'm trying again.

---

I'm confused. What is it exactly that Congress should grant Prediction
Markets? Broad exemptive relief for real money markets? If so, how broad?
Every contract idea? Who should be allowed to open real money markets? The
questions are manifold.

My personal experience in this area dates back to 1989 when traditional
futures exchanges first became serious about launching digital type contracts
on non-financial instruments. Since then I have been the CEO of the first
exchange to be approved under the CFMA ('onExchange') and have assisted both
HedgeStreet and Intrade and others in their real money PM efforts.

If the goal is to get a real money, large scale, open to the public prediction
marketplace up and operating then my experience suggests: (1) this is best
done as a regulatory process and not a legislative process; (2) much of what
real money PMs need is already in place at the CFTC; and (3) the real public
policy work is in a few product domains, and not on the general nature of PMs.

If you believe that real money public PMs should be able to operate with the
benefit of a safe harbor and broadly free from any regulation then the U.S.
Congress is your only option. And good luck pushing that idea!

eBay notwithstanding, it’s hard to imagine how a public, real money, PM with
its robust financial exchange metaphor could argue that it’s something other
than a financial exchange - and all financial exchanges are currently
regulated or exempted under some regime.

In short, we should all accept the fact: real money PMs will be regulated. It
is possible that a very, very, few narrowly defined PMs will be able to carve
out exceptions like IEM, but these will be hobby markets and not businesses.
Many observers are not even sure those hobby markets could get carve outs in
today's environment. So, the real question is: which regulatory regime is best
suited to a real money prediction market?

Abstractly speaking, the CFTC has all the legislative authority PMs seek. For
example the CFTC (under the CFMA): has a broad definition of instruments it
can regulate; has a tiered regulations for professional markets; provides for
self certification of products by its registered Designated Contract Markets
(DCM); and has the added bonus Federal pre-emption over state gaming laws.
These are all very big tools to provide PMs a safe harbor for their
operations, and may be part of the reason the CFTC has seen a parade of
entrepreneurs in the last ten years.

From my perspective, the CFTC gave PMs the necessary safe harbor for an
internet based, direct to retail exchange when it approved the HedgeStreet
DCM. Let's give credit to this regulator for taking some significant steps in
the right direction. The HS DCM is not a perfect solution - for example, a
CFTC regulated DCM can not generally access the securities/equities
distribution network. Nonetheless, it's a bold step forward that will
undoubtedly be refined as HS competitors lean on this authorization for other
direct to retail PM oriented initiatives.

Clearly the public policy debate for PMs is worth having and the U.S. Congress
needs to hear the positive public policy arguments. But "prediction markets"
is not a homogeneous grass roots issue quickly digestible by Joe Congressman
or his staff and therefore it seems an inefficient way to advance the cause of
PMs.

Instead, focused dialog with the CFTC on specific product domains (e.g. the
geo-political domain) coupled with improvements to the formal CFTC contract
review process, distribution access, etc. might be all that’s needed. Also,
the regulatory approach will likely yield about the same result as would be
achieved through a direct approach to Congress.

Rich Jaycobs

[Russell Andersson]

I would like to reiterate many of the points that Rich Jaycobs has made.

Over the years, I have had substantial dialog with the CFTC on a variety
of issues. I have also had dealings with regulators in other
jurisdictions. I can assure you that the CFTC are open minded,
approachable, thoughtful, and progressive. Without question, the CFTC
is by far the most approachable and reasonable regulatory agency out
there.

I would firmly discourage this community from attempting to put
political pressure on the CFTC through contacting congressmen or other
lobbying groups. This is a strategy that is unlikely to be successful
and will be counterproductive. Rather, I would respectfully suggest that
this community consider putting together a working group to have a
meaningful dialog with the CFTC. This approach is likely to be far more
productive.

This electronic mail message and any attachments may contain
confidential and/or privileged information that is only intended
for use by HedgeStreet, Inc. or third-parties to whom it is directed.
The contents of this electronic mail message are not to be copied,
modified, published, transmitted, distributed, performed, displayed,
or sold in any way. If you are not the addressee, you are
prohibited from disclosing, copying, distributing or taking any action
based on the contents of this message. If you have received this
message by mistake, please contact the sender immediately.

All email sent to or from HedgeStreet's corporate email system may
be retained, monitored and/or reviewed by HedgeStreet personnel.

[Robin Hanson]

On 1/28/2007, Richard Jaycobs wrote:
>I have been the CEO of the first exchange to be approved under the CFMA
>('onExchange') and have assisted both HedgeStreet and Intrade and others
>in their real money PM efforts.
>If the goal is to get a real money, large scale, open to the public
>prediction
>marketplace up and operating then my experience suggests: (1) this is best
>done as a regulatory process and not a legislative process; (2) much of what
>real money PMs need is already in place at the CFTC; and (3) the real public
>policy work is in a few product domains, and not on the general nature of PMs.

>... we should all accept the fact: real money PMs will be regulated. It

>is possible that a very, very, few narrowly defined PMs will be able to carve
>out exceptions like IEM, but these will be hobby markets and not businesses.

>... Abstractly speaking, the CFTC has all the legislative authority PMs seek.
>... the CFTC gave PMs the necessary safe harbor for an internet based, direct
>to retail exchange when it approved the HedgeStreet DCM. ... But

>"prediction markets"
>is not a homogeneous grass roots issue quickly digestible by Joe Congressman
>or his staff and therefore it seems an inefficient way to advance
>the cause of
>PMs.

Russell Andersson echos:

>I would like to reiterate many of the points that Rich Jaycobs has

>made. ... the

>CFTC is by far the most approachable and reasonable regulatory agency out
>there. I would firmly discourage this community from attempting to
>put political
>pressure on the CFTC through contacting congressmen or other lobbying

>groups. ... Rather, I would respectfully suggest that this community consider

>putting together a working group to have a meaningful dialog with the CFTC.

I fear the phrase "prediction market" has been inflated to include any market
whose price makes an interpretable prediction, which most financial markets do.
By this definition, yes, the CFTC is ready to allow many prediction markets.

I am interested in markets for which there is little or no hedging demand, but
where the price information is valuable enough to justify the costs to create
and maintain those markets. The consistent impression I have gotten from the
CFTC over the years is that they do not feel they are authorized to allow non-
hedging markets. Since they presume any useful market has a
substantial trading
volume, they feel comfortable requiring an expensive legal approval process.

While a large volume market might well be able to afford a million
dollars in legal
fees, such costs are deadly for the small "hobby markets" you seem to dismiss,
and where I think most of the value lies. While I agree that the
time is probably
not yet ripe to lobby Joe Congressman, since we have not yet had enough clear
successes to make it worth his attention, when the time is right we
may not have
much other choice than to lobby him to allow more "hobby" markets.

[Jason Ruspini]

" The consistent impression I have gotten from the CFTC over the years
is that they do not feel they are authorized to allow non-hedging
markets."

It is puzzling when they say things like that since their definition
of economic purpose includes price discovery. (http://www.cftc.gov/opa/
brochures/opaeconpurp.htm)

Also, macroeconomic releases carry no risk in themselves and yet such
markets have been approved.

Leaving aside liquidity cannibalization and controversial subjects,
I'm not sure why a retail-enabled DCM couldn't host "hobby" markets
like science claims.

[Richard Jaycobs]

I absolutely agree with Jason's observation.

Roughly speaking, (and apologies in advance to the lawyers and regulators)
economic purpose is the public policy dividing line between legitimate markets
and gambling. Hedging activity makes an economic purpose easier to
demonstrate, but the requirement is not absolute. For example, one can look to
the 1980's applications for the CRB Index futures and USDX Index futures
contracts to see that the 'hedging' arguments were only loosely coupled to the
economic purpose.

My previous post had two goals: (1) to encourage a narrowing of the dialog to
something very specific and concrete and (2) to emphasize that the CFTC was,
most likely, the path of least resistance. In roughly 20 years of working with
the CFTC, I have found that this regulator responds well to properly
constructed and narrowly focused initiatives.

Has anyone on this list actually approached the CFTC with a product domain
that was properly structured using, for example, the 1980's style contract
approval format that included sections on 'economic purpose' (note: not
limited to hedging examples), price discovery, and interviews with potential
market users, etc?

If so, and the CFTC objected, what was the domain and what was the particular
experience and/or objections? Were any objections well founded or buried in
regulatory capriciousness? Good data about a regulator's capricious behavior
might be what Joe Congressman can understand!

Robin, your point is well taken: smaller (is "hobby" too pejorative?) markets
need lower costs of entry; there may be sound public policy reasons for these
markets to exist; and the CFTC is sensibly reluctant to issue a broad
exemption on this issue. Do I understand therefore, quod erat demonstratum,
the correct approach is to lobby Congress to exempt these types of markets?!

I still maintain that relief is most likely to come from a pre-existing
process with a well informed regulator rather than from Congress - and I
encourage this group to help formalize a narrowly focused process to
(incrementally) advance the PM cause.

BTW, onExchange received its DCM and DCO for about $400,000 in legal fees
(year:2000). Others have spent more I'm sure, but onEx had industry savvy
staff familiar with the regulatory process and we saved massive amounts in
legal fees as a result. By comparison, in the end, what does a Congressional
lobbying effort actually cost?

SIDE NOTE: As a business person, it pains me to see so many start-ups paying
legal fees just to be educated on the basics of the CFMA and other securities
type laws. This is another area where this group can offer some cost effective
programs that might provide significant value to new PMs. For example, a
lightweight program that takes content from the Series 3 and Series 7 exams
might be a good place to begin.

Rich Jaycobs

[Robin Hanson]

At 01:06 PM 1/29/2007, Rich Jaycobs wrote:
>Robin, your point is well taken: smaller (is "hobby" too pejorative?) markets
>need lower costs of entry; there may be sound public policy reasons for these
>markets to exist; and the CFTC is sensibly reluctant to issue a broad
>exemption on this issue. Do I understand therefore, quod erat demonstratum,
>the correct approach is to lobby Congress to exempt these types of markets?!
>I still maintain that relief is most likely to come from a pre-existing
>process with a well informed regulator rather than from Congress - and I
>encourage this group to help formalize a narrowly focused process to
>(incrementally) advance the PM cause.

I'd welcome your advice as someone well informed about the process - what
exactly *is* our best strategy to eventually achieve a low cost of
entry for low
volume open-to-the-public markets that produce valuable information? I'm
not at all clear on how we could "help formalize a narrowly focused process"
to help.

[John Maloney ( http://kmblogs.com/ )]

To Russell, Richard, Robin, et al,

Thanks for all the fine comments on this thread. These group discussions and
the authentic conversations at the PM consortium clusters are central to
formulating our regulatory approach.

It is particularly important to frame the question, e.g., "I have found that

this regulator responds well to properly constructed and narrowly focused

initiatives." So far, this is something that still needs to be done.

We should applaud all the PM consortium sponsors and participants that have
helped codify and lead these early conversations on regulation. More needs
to be done and the mechanisms are in place. Vendors that provide sponsorship
resources and the cluster participants gather attention and create coherence
leading to very productive outcomes. This is the purpose of open, industry
consortia.

The most suitable approach is crafting a PM manifesto and specific
initiative to bring forward to the CFTC. Lobbying is not appropriate right
now. This specific work and its published deliverables are best developed
and originate within the aegis of our PM Consortium. This work requires
resources. PM vendors have been participating actively and enthusiastically.
They have carried you this far. Internet advertising companies like Google
and Yahoo! need to step up as do enterprise players. The network is in place
and the time is right.

If you would like to seize this initiative and move prediction markets into
the future, then join and sponsor your PM Consortium and engage in the
cluster conversations. Your active participation is instrumental in leading
these critical conversations. For those wishing to collaborate on a
well-conceived proposal for the CFTC, please contact me back-channel to be
invited into a private SharePoint workspace where this work is being
conducted.

Cordially,

John

John Maloney
IM/Skype: jheuristic
Blog: http://kmblogs.com/
ID: http://2idi.com/contact/=john.maloney

My status

Assistant:

Sarah V. Jones, Colabria
Email: sa...@colabria.com
Phone: 978-468-0267
Fax: 206-984-2429

[Richard Jaycobs]

John, your post is is spot on.

Robin, you specifically asked how to "eventually achieve a low cost of entry
for low volume open-to-the-public markets that produce valuable information"?

Re "low cost", my general view would be to work with the CFTC and see if there
are specific limitations for PMs that would enable a low cost version of the
DCM application process. I have no clue if the CFTC has the statutory
authority to somehow mix the EBoT filing philosophy, with the HS DCM access
model, with the IEM's participation limits to form a low cost, low volume,
open to retail, PM market application.

More immediately, a processes could be set up (and sponsored?) jointly with
existing DCMs to put forward the economic justifications for each "market that
produces valuable information", with priority being given to the most
commercially viable and least socially controversial. Generally, DCMs have
viewed this as proprietary information, but maybe that's an anachronistic
approach if the desire is to launch truly innovative markets.

These initiatives are not to be undertaken lightly. The issues are complex and
may touch areas from capital market integrity, to politically sensitive
consumer prices, to deep held feelings on social policy. And the CFTC does not
have unlimited resources to address these issues. Furthermore, there are some
folks who think barriers to entry are good.

I saw that John proposed a PM manifesto. How best to go about putting
something like that together? I think about it this way:

Assume Congress authorized "Predictio...@googlegroups.com" as the self
regulatory authority (SRO) for PMs, what framework would PMGroups propose? As
an SRO, PMGroups will need to be concerned that U.S. Public Policy objectives
are not circumvented. It's hard to imagine that Congress would accept caveat
emptor as the regulatory philosophy of this SRO, so what is the right framework?

Some examples: what limitations should be put on PMs? their owners? their
customers? their products? What about anti money laundering laws, how do they
apply? Do PMs need centralized regulatory reporting of positions which can be
shared across regulators and analyzed for illegal or unscrupulous activity?
Etc., etc., etc.

John raises this issue: who will pay for the work that PMGroups SRO is doing -
is it a pro bono organization, a sponsored organization, or will every small
PM markets have to ante up?

As John points out, with a PM manifesto, it is possible to do a 'gap analysis'
on the current regulatory regime and develop a "formalized, narrowly focused
process".

Rich Jaycobs

[Jim]

I'm happy to see the discussion on this thread. We need to keep in mind
that the concept of blanket exemption is loaded with mines. Every state
could theoretically invoke insurance regulation, their anti gamling,
securities laws, etc. We need federal jurisdiction to preempt and thus
remove this impediment. Whether PMs should be self regulated or under some
agency is an open issue. Self regulation certainly requires some degree of
sophistication and financial capability which is not presently available.
Not being a lawyer, I am not in an authoritive to position to comment on
CFTC authority, but as a lay person reading the legislation, I do not find
anything that remotely suggests authority to regulate any type security that
does not represent some tangible value.

Jim Neiers