The plan to establish a futures market in terrorism may have been quietly scrapped by the defense department, but that doesn’t mean you can’t still bet on terrorism. As my friend Rom Enke, an options trader, explained to me, buying and selling futures is just a fancy way of betting:
Don’t let the “futures” part confuse you. “Buying” a future is betting yes, “selling” it is betting no. … The way the futures contract works, is that if an event happens the contract becomes worth $1. If it doesn’t it becomes worth $0. Someone who is willing to pay fifty cents for it now, thinks there is at least a fifty percent chance it will happen. Someone who is willing to sell it at twenty-five cents thinks there is at least a seventy five percent chance it won’t happen (3 to 1 against).
And there is a site, Tradesports.com, that lets you bet by buying and selling futures on everything from sports events to, yes, terrorism (although they refer to it as “Security Alert Levels,” but its functionally equivalent). It seems that many of there customers are actually futures traders. Its probably where DARPA got the idea from in the first place! What I find truly hilarious is that they are are now taking bets on whether or not DARPA head, Admiral Poindexter, will resign by the end of August!
Tradesports has opened a new 0-100 proposition contract on Admiral Poindexter remaining on the Defense Advance Research Projects Agency(DARPA) payroll by August 31st 2003.
This contract can be found under Current Events>Pentagon.
BONUS LINK: Economist Brad DeLong has a good post on the issue of “moral hazard” and whether the DARPA scheme could have worked.
UPDATE: I asked Rom how Tradesports could possibly be legal, and how it may or may not be different from gambling. Here is his reply:
It very definitely is gambling. And it is legal because it doesn’t technically take place in the United States–the company, the servers, and the bank accounts are all in Ireland. And gambling and bookmaking are completely legal in Ireland and the UK.
The exchange concept is a bit of a twist on the traditional bookmaker, but not essentially different at all. When you go to a bookmaker, in Vegas, the UK, or online, to get odds on a game, they give you slightly different odds for either team. IE, either way the odds are skewed slightly against you. Like if you bet on a coin toss and bet .50 cents on either side they will only give you .45 cents. Well it’s not that blatantly unfair (like in the casino), because no one knows what the true odds are. Well in the exchange you can “improve the market”, you can tighten the spread between each team’s odds. Like say a Vegas book maker will offer you 3-to-2 on the Niners. Well suppose I want to get better– I want to get 7-to-4. On the exchange I post my bid. And eventually some comes along and sees that he can get 4-to-7 from me for the Saints, which is better than the 1-to-2 that the casino’s were offering. So on the exchange there’s no house that you bet with. You don’t know who you’re betting with. There are professional bookmakers who make two-sided markets in every event, but there are also customers who know which side they want and just put their price out there and wait to get filled. You don’t know who you trade with. Just like the stock market and the options markets. But it’s still a business that facilitates and makes money from gambling.
UPDATE: Here is a New Yorker article (from back in May) on the subject.