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…
September 8th, 2006 at 9:22 pm
[…] I tried to make two main points. One is that gambling vs trading is an irrelevant frame insofar as the distinction between the two is made as a function of the underlying (sports, shares, commodities, …) and so the emotive response to condemn ‘casinos’ is not based in rational reasoning. The second was that ‘betting markets’ were better placed (than traditional financial markets and exchanges, mini contracts notwithstanding) to aggregate individual/consumer/SME risk appetite and that the granularity and heterogeneity gained by including these participants in global risk markets was beneficial for everyone. Indeed, I see betting markets as potentially highly complimentary to the major financial exchanges as they could act as aggregators and increase interest, liquidity and volumes for all. […]
January 18th, 2007 at 2:59 pm
[…] There has been some noise around the idea that businesses hedging weather risk with Weatherbill online is akin to gambling. If you are interested in my views on the semantics of investing / hedging / risk management / gambling / etc. I would refer you an earlier post. But quick and dirty: if the same business hedges it’s interest rate or credit or currency (etc.) online with the CME or an investment bank, is that gambling or prudent risk management? Making the distinction according to the underlying is just plain non-sensical. Especially when the underlying in this particular case - the weather - is probably the risk underlying that can be least influenced by the actions of market participants (well you can always try I guess! ). You can buy all the warm days you want, but it won’t make the sun shine any harder. […]
December 4th, 2007 at 1:36 pm
[…] I’m about as far away from being knowledgeable about horse racing (and betting on horse racing) as you can get, so I might have this all wrong, but it would seem to me that their are remarkable similarities between the “starting price” (for a horse race) and a “fixing (price)” on an exchange. (Previous thoughts on gambling v. trading here.) […]
January 10th, 2008 at 4:01 pm
[…] …would seem to be an interesting question to put to the various ‘prediction markets’ that seem to be proliferating. (see Jed’s blog for a reasonably comprehensive round-up) Ironically most of these are US based - as is much of the ‘academic’ activity surrounding these new information markets - and so are limited (mostly) to play-money and fantasy leagues. (Rather than repeat myself, I refer you to this previous post as to the hypocrisy and inanity of the US legislation in this regard…) […]
March 17th, 2008 at 8:06 pm
[…] Yes betting. The new CME contracts will allow people to bet on the monthly US nonfarm payroll number. Shocking I know… The optimist in me wants to believe that new contracts like these will further expose the latent hypocrisy implicit in the relevant US regulatory and legislative regimes and will ultimately lead to a more lucid and robust rewriting of these over the next several years. The pessimist in me fears that the growing power of the CME, combined with a knee-jerk reaction to anything vaguely associated with (financial) innovation due to the current market crisis, will mean any market innovation will need the explicit or implicit support of the boys in Chicago. […]