CFTC Event Futures
vega...@gmail.com
Has the current derivatives-related crisis completely undermined any
chance of CFTC licensing/regulating event futures within the next few
years?
JT Maloney (IM: jheuristic)
banks and financial institutions made permanent. -j
John Delaney, CEO, Intrade.com
This is a great question and one I expect many PM aficionados have
pondered recently.
I posted up some of my own jumbled thoughts here
http://www.intrade.com/jsp/intrade/misc/blog/#jd_3
I believe the current turmoil in financial markets could slow things
down a bit due to many other pressing obligations that the regulatory
authorities have. However with significantly increased transparency
being demanded by all I view this very positively for PM’s.
While prediction markets are not perfect, but they typically deliver
real-time, efficient, easily understood information on uncertain
future risks and events i.e. transparency.
It seems to me that we should be more confident than ever of our
future rule as a result of the increased need for better information
and our combined ability to deliver it.
Best regards,
John
Jason Ruspini
a lot of political hay-making over commodity prices and I think that
was actually a more hostile environment for the CFTC and any
enlightened decisions they may have wanted to make with respect to
event markets. I think we'll get a satisfying statement from them by
early next year that will at least allow for some public interest
exemptions.
H. Hofkirchner
> Hi -- Not sure. Would like to see the embargo of naked shorts on investment
> banks and financial institutions made permanent. -j
topic regarding the CFTC's stance on PM. We should still discuss it on
this board as its concerns a question of market theory. There is a lot
of blaming about the crisis being "The Market's Fault" and changing
the market rules being the solution. However, "The Market" is not to
blame for this crisis. The bubble's root was once more in easy credit,
this time starting with overheated US house prices.
In market experiments it has been shown that a short selling
prohibition INCREASES the likelihood and amplitude of bubbles. So,
theory would prescribe not to enact such a market rule.
Recent practical experiences are consistent with this finding. A short
selling prohibition on bank shares was enacted in Germany by its
regulator BaFin on 20 September. I cannot attach a telling chart here,
so I describe what happened: In the two months prior to this new rule,
the German index DAX has been trending downwards from ca. 6500 points
to ca. 6000 points. in the one month since the prohibition, the DAX
fell to a level of now around 4500. Three-times more decline in half
the time makes for a six-times worsening, AFTER introducing the new
rule.
So the short selling prohibition did nothing to halt the correction to
what may be (or may not be) a more rational share price level.
Rather than add a cosmetic - if not counterproductive - short selling
prohibition to the market rules, the regulators should enact improved
credit rules to avoid that assets-backed loans count on inflated
bubble valuations. I am thinking of a rule like: "The minimum
valuation over the past ten years, adjusted for inflation, may count
as a security for asset-backed loans, the remainder must be put up as
equity."
Jim
----- Original Message -----
From: "H. Hofkirchner" <h...@redmonitor.com>
To: "Prediction Markets" <Predictio...@googlegroups.com>
Sent: Tuesday, October 28, 2008 6:16 AM
Subject: Re: CFTC Event Futures
>
> On Oct 27, 4:18 pm, "JT Maloney \(IM: jheuristic\)"
> <jheuris...@gmail.com> wrote:
>> Hi -- Not sure. Would like to see the embargo of naked shorts on
>> investment
>> banks and financial institutions made permanent. -j
>
> John's comment has not gotten a reply, maybe for being slightly off-
> topic regarding the CFTC's stance on PM. We should still discuss it on
> this board as its concerns a question of market theory. There is a lot
> of blaming about the crisis being "The Market's Fault" and changing
> the market rules being the solution. However, "The Market" is not to
> blame for this crisis. The bubble's root was once more in easy credit,
> this time starting with overheated US house prices.
>
I take issue with some of the blame placement. I rather suspect that the
downturn in the market is a sense or fear of the economic ruin that will
result from an Obama regency. His Socialistic redistribution will totally
destroy the economy for years to come.
David Pennock
the crisis & I don't buy the argument that securities were so complex
that buyers didn't understand what they were buying.
The problem was not the novelty or complexity of the products, but
rather that people bought the products on credit, with money they didn't
have. A plain and simple failure mode that has repeated and will repeat
itself many times and that has nothing to do with the modern era or
innovation.
Also, banning short selling seems silly. Here's another idea: let's ban
stock prices from going down.
regards,
Dave
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Bob Holley
manager who stated that the complex, mathematical models that were supposed
to guarantee profits stopped working. While I'm a professor myself, I have a
great mistrust of models because reality is philosophically infinite and
models are finite. Models are almost always based upon an interpretation of
the past, but the future has a penchant for taking unexpected turns that
these models can't cope with. Whenever my colleagues praise the accuracy of
models, I ask them about the stock market--perhaps the most studied
social/economic phenomenon because getting it right means making lots of
money. Models can be accurate for a time and perhaps even for a long time,
but the "black swans" of unexpected and unpredictable events almost always
eventually undermine them.
On a personal note, I'm not surprised at what happened. My spouse can vouch
for the fact that I talked about buying a put on the Standard and Poor's
Index, but I didn't so that I'm much poor along with most investors right
now.
Bob
Robert P. Holley
Professor, Library & Information Science Program
Wayne State University
Detroit, MI 48202
313-577-4021 (phone)
313-577-7563 (fax)
aa3...@wayne.edu (email)
-----Original Message-----
From: Predictio...@googlegroups.com
[mailto:Predictio...@googlegroups.com] On Behalf Of David Pennock
Sent: Tuesday, October 28, 2008 10:20 AM
To: Predictio...@googlegroups.com
Subject: Re: CFTC Event Futures
JT Maloney (IM: jheuristic)
innovation. That is absurd. I suggested continuing the sensible, continued
embargo of NAKED shorts of investment banks.
http://en.wikipedia.org/wiki/Naked_shorts
(It's funny and typical that people read what they want too.)
Banks should be banks - stable, secure, traditional, not exposed to the
public equity markets. Most of the 8600 banks in the USA and ROW operate
that way. Rigging the system with default credit swaps and self-serving
rankings is harmful and abusive innovation.
This Wall Street episode finally marks the transformation from a tangible
economy to an intangible one. It is painful but necessary. Everything of
substance (capital) in the economy and markets is now based on networked
intangibles - confidence, reputation, risk, etc. Yet, the infrastructure
operates like it is still the 19th century. Time for a change. See:
Also, we need to cure the "World's Deadliest Disease" - the zero-sum game.
It is taught, mastered in b-school. See:
Finally, isn't it a crowning achievement the first Harvard MBA president was
able to loot the Treasury for his cronies (rational self-interest) just
16-weeks before leaving office? Atlas Shrugged. It's like the lurid tale of
a banana republic dictator in some 2-bit sidewalk pulp at your local used
bookstore. Problem the world has is that it ain't fiction, it's real.
-j
-----Original Message-----
From: Predictio...@googlegroups.com
[mailto:Predictio...@googlegroups.com] On Behalf Of David Pennock
Sent: Tuesday, October 28, 2008 7:20 AM
To: Predictio...@googlegroups.com
Subject: Re: CFTC Event Futures
Russ Andersson
Dear Lucy:
My personal take on the matter is that that the financial crisis meltdown has delayed the chances of event futures being approved next year, but has increased the chances of them being approved in the longer term.
The likely fallout from this fiasco is the recognition that OTC markets have inherent weaknesses in terms of transparency and counter party risk, and there will likely be a huge regulatory and industry push to bring these types of products onto centralized clearinghouse platforms, and ultimately onto exchanges. The net result is that the CFTC and SEC are going to have to confront issues that they have been avoiding and are going to have to work together more than ever before because it's now clearly in the public interest and the public will, and should, demand it. So there are substantial changes ahead. However, their focus in the short term will be on the bigger issue of regulating OTC markets (which have event based characteristics). Because these regulators are resource constrained event futures per se will put it on the back burner while they address this major issue. However, as a result of the OTC learning/integration process, regulators will need to modify regulations such that event futures are grand-fathered as a secondary and unintended consequence. So event futures may be dragged along though this process, and will see the light of day, its merely going to take a while.
The CFTC appears to be beating the OTC-Clearinghouse drum:
In terms of why the fiasco happened, it happened for the same reasons all economic events happen: incentives. There were large incentives for the decision makers within the financial structure to take on these risks and few incentives to discourage them from doing so. This is the point Greenspan was trying to make the other day when he said he had lost faith in the free market system. Few people in the know believed that there wasn't a big problem brewing that at some point would come home to roost, but they thought thought they had more time. At the investment banks who originated these products they merely believed they could get in, make a buck, and get out before the bubble burst. And at these new fangled credit hedge funds that provided the capital, they likewise believed that they could do a similar thing, clip that 2 and 20 fee structure, and be gone before the storm broke. The true tradjedy, is that in large part they are correct, the majority of them have made fortunes over the previous several years and will stroll into the sunset largely unharmed. While somebody else cleans up the mess. See this article from Mike Lewis, a bit shrill, but the point is valid, they came, they saw, they made the money, and they are going to be fine:
http://www.bloomberg.com/apps/news?pid=20601039&sid=ajTvXXdpb748&refer=home
Its less clear what to do about it, there are arguments either way. But the fact that the OTC markets have been unregulated for so long, now in hindsight, looks like the truly idiotic and negligent act it was.
All the best,
Russ
Richard Jaycobs
optimistic that the long term will invite new forms of financial innovation.
As you know, I have some very direct experience regarding the
OTC-Clearinghouse situation.
My sense is that the current problem was NOT caused by incentives (aka
GREED), but rather the pure unbridled hubris of the Wall Street dealer
community.
For example, there was some view among dealers that posting 'original
margin' at the CME reflected an antiquated system that did not recognize
the impervious financial resources of the firms. Therefore, posting
'original margin' was a requirement from which the dealers should be
exempted. This wasn't an argument based in greed (the costs were
relatively small), but rather based on self-importance.
One more thing...
I'd caution anyone who favors developing real money prediction markets
from passing judgment on the economic value of any 'derivative' strategy
- including Naked Shorts.
A ban on Naked Shorts (or other strategies) can quickly be
oversimplified into a dialog on baning all forms of derivative
securities. For example, a ban on Naked Shorts might require that S&P500
futures be closed down. (A purchase of the entire S&P excluding bank
stocks followed by a hedge with S&P500 futures achieves the Naked Short
result. BAN IT?!?)
Currently, the CFTC (with SEC consent) permits event futures on M&A
activity. Would a ban on Naked Shorts ultimately reverse the legality of
this product?
After 25 years of developing new derivative products, my observation is
this...
Derivative products create systemic risk when they become large relative
to their underlying market. Naked shorts are not inherently bad unless
the volume of Naked shorts dominates the size of the underlying stock.
This is the problem that needs to be addressed.
Credit Default Swaps demonstrate this very well. When the CDS market
grew far beyond the underlying assets that were being 'insured', then
the product took on a life of its own. Mix in lots of leverage and, $50
trillion later, you have a systemic problem.
Sure, banning the instrument is a sure-fire quick fix to any problem(s)
it may compound. But it's overkill.
Rich Jaycobs
JT Maloney (IM: jheuristic)
Hi --
Again, no one is suggesting banning shorts or naked shorts for the wider
market. (Arrgh!)
Just an embargo of naked shorts on investment banks and financial
institutions. That's the killer. It is too easy, a no-brainer, to run these
banks into the dirt, at the first hint of weakness.
Anyway, arguably, for starters, these so-called banks should not be in the
public markets in the first place.
Good, interesting comments otherwise.
Cheers,
-j
-----Original Message-----
From: Predictio...@googlegroups.com
[mailto:Predictio...@googlegroups.com] On Behalf Of Richard Jaycobs
Sent: Tuesday, October 28, 2008 9:59 AM
To: Predictio...@googlegroups.com
Subject: Re: CFTC Event Futures