US Bans Americans from Predictions Market
by Fred E. Foldvary, Senior Editor, 11 February 2013On November 2012, the predictions market Intrade announced that U.S. persons would no longer be able to hold accounts and engage in its predictions trades. The U.S. federal government has jurisdiction over financial markets within its territory, but Intrade is located in Ireland. However, the U.S. government also has jurisdiction over U.S. persons world-wide.
Intrade provides betting contracts for future events such as elections, the weather, the Academy Awards, and financial market averages. For example, there was a predictions contract for the U.S. presidential election of 2012. One could, for example, on the Intrade web site, buy a contract for Obama to win. If the current price was $60, one would pay $60 for the contract, and then if Obama won, one would get back $100, for a gain of $40. If Obama lost, the contract holder would lose the $60.
The price of the contract was based on the bids and offers of the participants. If more speculators believed that Obama would win, they would bid to buy the win contracts, which would push the price up. If more later believed that Obama would lose, they would sell the contracts, since they would collect $60 if they were right, and push the price down.
Economists who have studied such predictions market have concluded that these markets make more accurate predictions than do polls. That is because the speculators have seen the polls, and they go beyond the polls to analyze the campaigns or financial markets to estimate the future outcomes. The bettors are placing their own money, so they have a keen interest in getting the bet right. In fact, the Intrade market for the U.S. presidential election of 2012 correctly predicted the win by Obama, whereas the polls were evenly split.
In 2012 Intrade yielded to pressure from the U.S. government, and told its American customers that their accounts would be closed in December. The Commodities Futures Trading Commission charged Intrade with violating its ban on off-exchange commodity options trading. The CFTC’s complaint also accuses Intrade of making false statements about their options trading website. Americans are allowed to trade only on CFTC-registered exchanges. The CFTC considers it a commodity option market if the traders can bet on whether, for example, the price of gold will be $2000 per ounce or greater, on December 31, 2013.
The CFTC claims that its “requirement for on-exchange trading is important for a number of reasons, including that it enables the CFTC to police market activity and protect market integrity.” But to my knowledge, none of the participants of Intrade were victims of fraud. There was no evident lack of market integrity.
In a completely free society, with a pure free market and true free trade, there is no restriction or tax on peaceful and honest human action. Nobody is harmed when a person voluntarily buys a contract on whether some future event will occur. Government agencies such as the CFTC, which are supposed to protect market participants, instead end up preventing them from engaging in what to them seems the most profitable and interesting opportunities, which also provide social benefits. Predictions markets benefit society by reducing the uncertainty of the future. These markets provide a measurement of the expectations of people who are betting their own money. Predictions markets facilitate better forecasts by rewarding those whose insight is right and penalizing those whose analysis was faulty.
The U.S. government also restricts gambling on the Internet, even when the web sites are in foreign countries. U.S. government officials criticize foreign countries for restricting the freedom of expression and reading, but it too imposes restrictions and prohibitions.
Intrade will continue to have contracts held by non-Americans, and there are other predictions markets besides Intrade. But every year brings ever more restrictions, mandates, and taxes on peaceful and honest human action. Each additional intervention reduces the equity and efficiency of the economy. Each extra imposition is like another rock on a ship, so we should not be surprised at the current slow progress of the economic ship, the continuing high unemployment and sluggish growth. Keep adding more rocks, and eventually the ship will sink.
One of my favorite quotes is from the German philosopher Hegel: “What experience and history teach is this -- that nations and governments have never learned anything from history, nor acted upon any lessons they might have drawn from it." We seem to have learned nothing from the decline of civilizations such as that of the ancient Mayans, Egyptians, and the Roman Empire.
-- Fred Foldvary
Copyright 2010 by Fred E. Foldvary. All rights reserved. No part of this material may be reproduced or transmitted in any form or by any means, electronic or mechanical, which includes but is not limited to facsimile transmission, photocopying, recording, rekeying, or using any information storage or retrieval system, without giving full credit to Fred Foldvary and The Progress Report.
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