MENA Futures: DoD et al open futures markets on political & econ developments

Great Debates
1

Very well, first the background:

As our very own Astro brought this to my attention, I could kiss him - in a Middle Eastern way on both cheeks (something I do all the time now, causing a look of fear in some Americans).

DARPA (The Defense Advanced Research Projects Agency) in conjunction with the Economist Intelligence Unit is opening a futures markets on MENA region economic and political developments. This is not a game per se, it appears they are requesting real money. Tant mieux I say.

DARPA says in their own blub it “is interested in improving on existing techniques for predicting future events and for assessing the issues that underlie and influence what might happen. DARPA has funded the development and operations of PAM. U.S. government agencies will not be allowed to participate in PAM and DARPA will not have access to the identities or funds of PAM traders.”

As we can see, it will be futures trading by private sector actors.

Now, as I said in the GQ, this is an idea so beautiful it brings tears of joy to my eyes.

However, the idea seemed to attact some scepticism. I frankly see no issues, but perhaps I am blinded by my predilictions.

The debate then may be (a) is this an appropriate thing for DARPA to develop (b) if not, why not, © if yes, then what are the issues regardless.

2

Bother, bother, bother, forgot the link

http://www.policyanalysismarket.org/pam_home.htm

3

In the interest of fuller information, articles from:
The New York Times

The Washington Post
http://www.washingtonpost.com/wp-dyn/articles/A59192-2003Jul28.html

Apparently this has attracted critical comment, I rather disagree with myself, although obviously certain kinds of futures, ones that may be manipulated easily probably should be off limits. And of course traders should be confidential but full identity disclosure, there clearly has to be a “market overseer” to prevent… insider trading so to speak.

Other than that, for once I love an idea coming out of the DoD.

4

I say Coll, I’m a Systems Analyst by trade. My software business designs corporate database systems to run over the web. The maths involved in this sort of thing are always profoundly interesting I find.

This is a very interesting little development. Perhaps it’s way, way beyond my humble talents - but please correct me if I’ve got this wrong…

DARPA is an intellectual arm of the Department of Defense, yes? If memory serves me correctly, DARPA was instrumental in creating and designing the internet as a means of information exchange even AFTER a nuclear attack.

My interpretation of PAM - and excuse my feeble intellect here - is that Net Exchange has been commissioned by DARPA to create a new way of predicting Middle East movements by “effectively” gambling on the value of future contracts depending on multi-faceted inter-related events in the Middle East, yes?

And the outcome of that gambling, effectively a stock market version of the “odds on a big horse race” will allow DARPA and the DoD, and in turn the US Administration, to more accurately predict future Middle East movements based on PAM indicators?

Am I close there?

Certainly, if anyone is fortuitously positioned to profit from their contacts and personal knowledge on such a thing, then it has to be yourself. Bravo I say.

Would it be unwise of someone like myself to consider becoming a PAM Trader during the prototype phase?

5

Dorgan and Wyden’s opposition seem part politicking but largely knee-jerk at the bizarre nature of the scheme. However, the basic premise seems fundamentally sound. For my part though, I must say I have only the most basic understanding of the derivatives market and your press links didn’t really fill in some gaps for me.

Collounsbury, (or anybody?) do you feel you can speculate on how close the programme will, or could, fit the current derivatives paradigm? I ask because as Dorgan said, “Can you imagine if another country set up a betting parlour so that people could go in . . . and bet on the assassination of an American political figure or the overthrow of this institution or that institution?” I imagine a contract like that would simply not be tolerated by PAM but are there analogous no go areas in the traditional model? Is it illegal or unacceptable to write certain types of futures in the commodities world?

Who decides what futures and events will be on the table for play? Would it be decentralised like I assume commodities are or would all direction come from PAM?

What about the security aspect of it? The data is to be used for predictive purposes but by its nature, won’t it be accessible to everybody? Such openness seems anathema, particularly to the current administration.

Finally, most importantly, and most intriguingly, how could it backfire?

6

Perhaps someone who understands Bayes’ theorem of subjective probability, will come forward and offer an opinion as to whether these wagers could be used to assign probabilities to future events. The USN did this in the past, on a much smaller scale.

7

Hyperthetical one here…

Imagine it’s the same date, but 1990. Imagine we’re all posting away on this postboard and Coll is where he is - just 13 years earlier.

Given that the Kuwaiti’s were calling in their debts on loans lent to Saddam Hussein during the Iran-Iraq War, and that Hussein was unable to meet those debts and hence was making ever greater belligerent statements towards the Kuwaiti’s…

What chance do you think that a PAM system would have accurately predicted a Kuwait invasion?

Based on the quality of posts in 2003 on this messageboard alone, I reckon a pretty accurate prediction would have been likely - regardless of the fact that most of the world didn’t see it coming, with hindsight.

8

Where would the opportunity to predict it have come from? The system doesn’t seem to freely evolve; it needs the PAM administrators to decide what’s up for discussion through their choice of which contracts to write. For PAM to predict that, they would have needed to write contracts that matured very quickly. How much warning did the US have and for how long was there a serious threat that Iraq would invade?

Also, what kind of an info-feedback system could this setup? How will this affect the player’s actions when they feel they’ve lost element of surprise, when their next big play is seeing heavy betting in the market?

Wouldn’t the intelligence community freak when they see media reporting of dramatic movements in the market and the resulting speculation by the pundits?

9

I agree.

I don’t know, the information on the site is far too sketchy.

I’ve written away for more, I’d love to be a charter member.

Well, in those ugly terms, yes it’s bad politics, which is why certain more lurid contracts will have to be off limits – e.g. futures on individuals’ lives has a whole slew of issues, including certain… moral hazard issues.

I believe there is, I am not a future trader, but certainly we can see some instances of analagous structures being off limits in the insurance field. In many respects, insurance policies are somewhat like a bet on a person’s life.

Well, if it is going to work, it has to be free market. Centralized direction immediately renders the whole thing a waste of money.

There has to be certain limits, and I would also say that the participants need to be vetted and monitored. I.e. unregulated markets can get ugly, and this is a case.

I don’t know, not sure on that.

Insider trading. Someone with an inside run on an event sets up the contract and collects on an event the person knows is going to happen, as an insider.

10

How about how this looks to the rest of us out here. Americans are going to gamble on future terrorist attacks? People are going to profit (out in the open) on the misery of others? Doesn’t anyone else see this as a disgusting example of the type of thing others accuse Americans of being: Arrogant, uncaring about people’s lives if there is a profit to be made, and of course the worlds greatest hypocrites.

I remember when people were decrying the possibility that terrorists made money by dumping airline stock prior to Sept 11. Americans were outraged at the idea that someone may have profited on their calamity. Anyone see a difference here?

Crap on a cracker… I give up… You folks are on your own…

11

Like any futures/commodity market, this proposal appears to be for a Las Vegas type gambling forum. Except here, the human desire to make a buck (by ‘inside trading’) is used to discern likely political events. Kind of like HUMIT in a glittery Elvis jump suit and waving a wad of readies.

Very novel, good lateral application of capitalist principles . . .no idea how well it would work in practice.

My initial reaction was to think this might be a 20 years precursor for a Middle East Stock Exchange, but it’s ambitions, at present, seem more limited.

Contract law – national and international - already has mechanisms for dealing with every unexpected) eventuality, the French term ‘force major’ (for example and IIRC) is an implied clause of international contracts (unless expressly excluded (but my memory dims . . .).

12

“Centralized direction immediately renders the whole thing a waste of money.”

If the government has any hand in it at all, its going to have some level of centralized direction (this is the Bush administration we’re talking about).

The fact that John Poindexter, of Iran-Contra fame, is also involved automatically makes it suspect.

13

OK now, I’m getting a handle on this.

In some respects, it sounds like the contracts are somewhat analoguous to the threads here in this Great Debates forum - except that instead of people writing further posts - financial transactions on the likelihood of outcome would take place instead.

I suspect that like this messageboard, traders or some other group would be free to creat new threads, or scenarios - and then the traders would bid on them, and administrators would cull certain scenarios if they were seen to be morally bankrupt.

Hmmmm… almost like a cyber strategy game in some aspects.

14

A Bayesian process is described in Leonard J. Savage’s classic book, Foundations of Statistics. The Bayesian approach works for an individual. Under Savage’s theory, an individual’s willingness to make various wagers at various odds could be used to assign a complete set of consistent probabilities. However, these probabilities would apply only to that single person. Another individual would have a different set of personal probabilities.

The next step would be for a market to combine the beliefs of many people. I don’t know whether that would work in practice. It would require a high level of interest among those with real expertise. But, IMHO those with real expertise might well have bigger fish to fry than merely playing around with this itty-bitty futures market.

A market in “catastrophe futures” was started around 10 or 15 years ago. A certain definition of “natural catastrophe event” was selected. The market allows companies or individuals to share or assume risk by buying or selling futures and options. In practice, the cat futures market never took off. The spreads between bid and asked remained very wide. The amount of trading remains light, even though there are real economic benefits to participating.

From a political POV, I agree with those who see this idea as a non-starter.

15

Well, imagery.

I admit imagery is important, and yes, there is a negative to this.

However the global markets use derivatives and futures contracts all the time. One can cast that in the light you do below, betting on the collapse and ruination of the dollar, but it is more than that.

Insofar as the EIU is involved and given the lack of other restrictions, it is not an Americans only endeavor. Looks like it is open to one and all.

Well, one man’s gain is another’s loss. However risk management as often involves working against the misery as not.

I don’t see this as being a particularly well-founded attack quite as yet.

Hmmm, well, if they did it was a smart move on their part. Illegal of course, being insider trading or market manipulation.

Come now, it is a bit early simply to be throwing up the hands.

16

London - I detect a very subtle point there my friend.

If the ability to create new threads is open to all registered dealers say, and if it turns out that one particular dealer was party to some very nasty nefarious terrorist shit say, then in theory, the opportunity for said trader to start a thread based on his inside information might be too much to miss - ergo a “scenario” would be placed up on PAM for all the world to see.

Hence, in turn, this would provide intelligence agencies with an amazingly efficient means of looking out for implausible vectors of attack. What an interesting concept. PAM, in a weird way, is a way of appealing to the inherent greed in all humans with a view for just one of them to spill the beans on something nasty.

Bam… you could trace everything. The trader’s IP address… who he’s been ringing… his bank movements… his contacts… BAM!

Hmmmm… I look at this as being an internet based way of bribing future informants. I don’t have a problem with that at all.

17

Are regular old commodities futures traders any good? I thought for a futures trade to render a profit, one side of the deal had to have erred, either to sell short or to sell for profit. If this is true, and 50% of traders will be losing out on their futures trades, how much more accurate are traders and analysts likely to be about political machinations over regular pundits?

18

From the website:

So the NSA can’t set up an account. Can its employees? That particular prohibition strikes me as meaningless if they can but it’s moot as we’re not clear as to whether anybody will be checking anyway. We do know DARPA won’t be. That leaves the issue of funding. I’d assumed DARPA would take a cut through fees or commissions, brokerage of a sort, but without access to funds, it’ll be federally funded. Visceral, emotional opposition by the two Senators and other Americans sharing kingpengvin’s views will become torrential when it becomes clear they are helping to enrich those who are profiting/profiteering.

There’s lots of ironing out and PR massaging to be done during the trial run. It’s a shame as I can see a lot of value in the idea. I’d go bullish on futures giving this no chance.

19

Well let me note a few things.

(a) It appears that there is going to be a restricted universe of traders allowed to participate. I presume this means vetting, and I presume this means that not any fuck is going to be able to sign up.

(b) They make reference to opening a trading account, which implies along with the clearing functions, that again, (i) traders will have to put real money up (ii) it is likely there will not be anonymity, indeed if there were I would say that would be a program killer.

© I presume that there will be rules on allowable futures contracts.

As such I don’t see much underworld activity in this at all.

I would presume that participants would be persons such as myself with reason and perhaps ego to believe they can make a bet on the future in a select universe of possibilities - and depending on the structure of the market, might be able to use it to hedge against certain kinds of outcomes. It’s really a bit speculative since the information is minimal. If the size of the contracts at minimum is large, then this is not a betting parlour, its a corporate tool. If it is medium to small, well things change a bit, but again I don’t see if as a pure betting parlor.

As for the futures market - it is not an isssue of erring, for most of the market the issue is not betting on an outcome but hedging against an outcome. You sell off some upside for a certain outcome where you benefit to gain on a downside, where you would lose. Insurance policies in a sense.

In regards to the pundits - talk is cheap. Note, e.g. the Conservo Pundit talk in re Iraq pre war. A lot of loose and silly talk that frankly those of us with regional knowledge found absurd. Had we had a futures market running on this, you might have seen some aggregation of where opinion was according to those who had a substnative interest in the situation and wanted to hedge one way or another.

However, this presumes a certain degree of ‘liquidity’ and interest, and frankly while in theory I find this little market fascinating, the devil is in the detials.

Still, I’ve written away for me free information.

20

Well the concept itself is not completely new - “London bookies” are constantly putting out odds on various political and public events, which presumably reflect the consensus opinion of those willing to put their money on the line. And recently there were millions of dollars traded in Saddam Hussein futures. (Of note is that the futures were not uniquely insightful, and appeared to simply fluctuate with public opinion).

I guess this might be a bit different if they can attract a greater amount of money over a broader array of topics. I am skeptical.