Michael Sisk Correspondent
605 words
9 February 2004
Securities
Industry News
English
Copyright (c) 2004 Thomson Media Inc. All Rights Reserved
The
presidential primary season is in full swing, a time when pundits will grasp at
most anything to predict an outcome: man-on-the street interviews, exit polls,
fund-raising success. But one indicator rarely cited by the talking heads is the
trading of political futures contracts.
Perhaps
it's seen as unseemly to equate the democratic process with the trading of
orange juice and pork bellies, or just too wacky. Fresh in people's minds, also,
might be the futures exchange proposed last year by John Poindexter at the
Defense Advanced Research Projects Agency to trade contracts in geopolitical
events, specifically terrorism. Poindexter, of course, resigned in the ensuring
furor. Yet the fact remains that political futures contracts can be traded-and
they were astonishingly accurate leading up to last Tuesday's hotly contested
Democratic primaries.
Of
the four states for which political futures contracts could be traded on
Intrade.com, the invisible hand of the market was four for four-even correctly
predicting the razor-thin victory of General Wesley Clark in Oklahoma.
"There's
never been an exchange where you could trade political contracts on an organized
exchange," says Intrade CEO John DeLaney. Intrade went live in 2001 and has
traded more than $1 billion in contracts since then, on everything from whether
Poindexter would resign to when and if Osama Bin Laden would be captured or
"neutralized."
Given
Intrade's three-year history, trading in political contracts is not exactly new;
and the Iowa Electronic Markets, where political contracts can also be traded,
predates Intrade by more than a decade. But the Iowa market-run by the
University of Iowa College of Business, and where contracts cannot exceed
$500-is more an academic exercise than a functioning exchange, as the
Dublin-based Intrade claims to be.
Intrade
took a step toward becoming a more full-fledged participant in the financial
markets with the rollout recently of its own application programming interface
(API), which allows trading firms to interface directly with Intrade's back
office. So far, two firms use Intrade's API.
By
building volume, Intrade may someday play a key role in hedging political risk,
according to Justin Wolfers, assistant professor of economics at Stanford
Business School, who has written a research paper based on data provided by the
exchange.
His
conclusion is that Intrade operates as a rational, predictive market of events,
bringing more transparency to the murky world of assessing political risk.
"It doesn't remove the risk," Wolfers said, "but it makes it more
explicit, so you can price it more accurately."
Wolfers
says one of the benefits of a market that trades futures contracts in events
such as whether Senator John Kerry will become President, is that "you can
extract a very small piece of information, and that is tremendously
valuable." If a Kerry presidency is seen as less bullish for the oil
industry than a second term for Bush, Wolfers says, then an oil company or exec
might mitigate that risk by buying futures contracts in a Kerry win.
Right
now, regulations would probably bar such a market in the United States. However,
as Wolfers says, there is a "continuum from betting to investing,"
where the legal line is not always easy to draw. Betting on how the weather will
affect the orange crop is OK; betting on how the weather will affect a football
game is not.