A rose by any other name…
or tomAto, tomAAAto, version 341…
Was going over some old emails this morning and came across this news from a few weeks back:
The CFTC has issued a no-action letter permitting the offer and sale in the US os the Sydney Futures Exchange‘s one-day option contract based on the Chicago Board of Trade’s mini-sized Dow Futures contract.
Assume it will be analgous to their SPIDO product (Australian sharre index underlying.)
So how is this fundamentally different from a spreadbet on the daily closing level of the Dow (or any other financial underlying)? I’ve discussed these semantics previously here and here:
In my eyes the difference between investing and gambling, betting and trading lies not in the underlying but in the approach of the person dealing in whatever instrument. Investing or trading involves a careful and analytical approach to decision making and risk taking. Betting or gambling involves a purely impulsive or emotional speculation. The irony is that many ordinary people are much more informed about sports or politics or the weather than macro-economic trends or the financial prospects of this or that company, and yet are encouraged by the prevailing culture and legislation to risk their savings investing in the latter through bonds or stocks while being chastised and in many cases legally prohibited from seeking to profit from their detailed knowledge of particular sporting or political outcomes.
Given that this semantic gap is largely driven by culture, religion and emotion, it is extremely difficult to speculate as to when – if ever – it may change, again especially in the US. However, I think it ultimately will if only due to the borderless nature of the internet; it is already happening in the UK and increasingly elsewhere. For instance, it is estimated that Betfair ‘traded’ just under $10bn in volume in 2005 and regularly executes between 2 and 5 million trades a day which is more than any financial exchange in the world (and this without accepting any business from the US – clearly potentially the biggest market in the world.) The market in Europe alone is predicted to top $150bn. I think it will become hard for the US stay aloof. Another factor that will drive this in the longer term will be generational change. The digital generation now growing up I think will not have the same historical prejudices as to what assets – real or virtual – can or should be traded. Indeed, sometime in the next decade or so I would expect ‘prediction’ markets more generally to become ubiquitous.
As far as I can see the main difference (only difference?) is that one is permitted (in the US) and one is not (or at least is on more shaky ground.) And as far as I can tell both [types of trading/betting] can be done “in your bathrobe!!!” (thanks Jon Stewart again), so that can’t be the reason Congress likes one better than the other…
