CFTC And InTrade

The CFTC is the ineffective regulator of the futures markets. They’ve recently banned US citizens from participating in prediction markets like Intrade because according to them, they involve gaming and are against the public interest.

Let’s not overthink this – the CFTC is staffed by the sort of people who are offended at the idea of people making money from politics or decisions made by policymakers.

When you over-estimate your own ability to centrally plan the derivatives markets you end up with MF Global, OTC derivatives with few central clearing points to monitor risk and nonsensical value judgments like we’re seeing with InTrade.

Reducing participation in the prediction markets reduces the likelihood that strong trends in prediction betting carry over to talkshow discussion and put The Progressive Agenda at risk.

It concerns me that iPredict is subject to regulation here in New Zealand. What a pathetic worship of central planning we’ve embraced if a market with tiny dollar amounts involved (in the grand scheme of things) is tightly regulated but the financial sector is still the Wild West.

Instead of worrying about prediction markets, the CFTC should look at how actual users of futures markets who want to hedge risk are walking away because there is no protection whatsoever of the cash they have in their brokerage account.

A lot of silly economists think that HFT hedge funds and massive speculation will make markets more efficient. Sure, liquidity will increase, but the long term impact is that the real economy is screwed while value is transferred to players big enough to move the market so that everyone else gets stopped out of their positions.

If you were a grain farmer, why would you hedge when you could lose not only the cash you’ve put up for margin through your broker stealing your cash to fund its own trading losses in addition to getting your position liquidated by the broker you got transferred to at a loss so they get some cheap wheat contracts on their book?*

Cronyism and regulatory capture have so pervaded the CFTC and SEC that no regulation could actually protect investors better than the current regime.

Worrying about prediction markets, like, do some real introspective thinking CFTC!

* This happened to a lot of ranchers who hedged their risk through MF Global. Democrat fundraiser, Obama buddy, former Governor of New Jersey, Senator and Goldman Sachs CEO Jon Corzine not only hasn’t been prosecuted he’s starting a flipping hedge fund!

Anti Money Laundering And Barriers To Trade

Over at Offsetting Behaviour, Eric Crampton despairs over the difficulty of executing arbitrage trades with respect to the US election.

For just $8.88 he could make a guaranteed return of ~10% by purchasing an InTrade Romney contract and a BetFair Obama contract.

He quotes the terms & conditions at Intrade which make it hard to deposit money in order to comply with anti-money laundering rules.

But anti-money laundering requirements are not just barriers to performing arbitrage on electoral events.

They function as barriers to actual country-to-country trade. Just think about how hard it would be for a developing country exporter to have all the correct documentation and paperwork to open a US bank account and receive payment for commodities on account. Essentially, incumbent commodities firms have an edge because they will be able to put deals together faster than an ostensibly cheaper developing country supplier.

Imposing greater “know your client” rules functions as a barrier to entry. If you can’t get an account set up in the first place because you’re starting up a business in the developing world, you’ll have to rely on more expensive banking services.

You might even skip the mainstream banking system altogether, relying on immigrant cash transfer networks.

There are so many second-order effects of anti-money laundering legislation. Making it harder to take advantage of goods arbitrage opportunities is just one I can think of.