Time to Short Online Political Futures

Washington thinks political races shouldn’t be hedged | “That’s like saying we shouldn’t have weather futures”

Elizabeth Dwoskin

A pack of online bettors known as Intraders, who wager real money on the outcomes of current events, have been hailed as election oracles ever since they predicted President Obama would win in 2008. This year they were spot-on again, correctly forecasting the presidential election results in 49 states. (The hive missed Florida.) But if regulators have their way, the 2012 election was Intrade’s last.

On Nov. 26, the U.S. Commodity Futures Trading Commission sued Dublin-based Intrade, which also runs an array of financial product prediction markets, and banned it from soliciting U.S. customers. The civil lawsuit accuses Intrade of operating an unregistered exchange, citing its options for gold and crude oil, as well as the options for predicting whether the U.S. unemployment rate or gross domestic product would reach certain levels by specific dates. The government also says Intrade violated a 2005 settlement in which the company agreed to stop offering similar types of online betting. Intrade declined to comment.

The suit doesn’t cite Intrade’s political predictions markets, but the CFTC did take issue with election forecasting in an unrelated April ruling. The North American Derivatives Exchange, a Chicago futures market offering options on commodities and weather, requested permission to open up betting on the 2012 presidential and congressional races. The CFTC said options trading on elections is poorly disguised gambling. Elections, they ruled, don’t affect the prices of goods and services, a condition for federal oversight and approval. The CFTC also said the financial consequences of political races are unpredictable, so investors can’t reasonably use a futures exchange to hedge against them.

“That’s like saying we shouldn’t have weather futures because we don’t know the exact number of people who are going to turn on the air conditioner when it turns 90 degrees,” says Dartmouth College economist Eric Zitzewitz. “We don’t need to know the exact consequences of a Republican winning over a Democrat to make it worth hedging against.”

Zitzewitz is among a group of economists who have pressed the CFTC to allow political futures in part because they’re valuable to companies. “Speculative markets do a remarkably good job of aggregating information,” says Robin Hanson, an economist at George Mason University and consultant to a predictions trading software company. Let’s say bettors forecast the U.S. will tumble off the fiscal cliff: Retailers can deduce people will save more and reduce inventory. But John Parsons, who teaches courses on futures markets at Massachusetts Institute of Technology’s Sloan School of Management, says to qualify for registration with the CFTC, political markets would need “real evidence” showing how “actual decisions are being impacted by the election.”

Nadex had argued that a rich investor concerned that a candidate’s win would raise his taxes could try to offset that potential hike by buying shares in the candidate’s win, says Timothy McDermott, Nadex’s attorney. Had the government approved its request, he estimates customers would’ve traded about $100 million on its political market this year.

Intrade is open only to users abroad, but 10,000 of its bettors were Americans, which the company has said comprise the majority of its users. For now, it’s posted this hopeful update for customers: “This in no way signals the end of Intrade in the U.S.” That’s no sure bet.

The bottom line Intraders correctly bet on the results of the presidential race in all but one state; they may not get to wager on another.


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