Then the Department of Internal Affairs decided they are gambling.
That decision makes little sense.
Prediction markets let people trade contracts based on whether some future event takes place. The University of Iowa’s Electronic Markets, decades ago, offered contracts paying $1 if a particular party won the Presidency and $0 otherwise. Similar contracts covered control of Congress. Traders bought and sold based on their assessments of the odds. Prices in those markets are probabilities.
From the outside, it can look like a flutter on politics. But prediction markets do something more important. They aggregate information into a continuously updated consensus forecast.
Polls tell you what respondents say to a pollster on a given day. Prediction markets traders weigh those polls alongside any other data they think relevant, decide whether a party is overvalued or undervalued, and make their trades. Those who disagree can trade the other side.
That mechanism has proven to produce remarkably accurate and useful forecasts.
More importantly, prediction markets allow risk to be separated and traded. Elections create very specific risks. A company might be an excellent investment under one government but face regulatory headwinds under another. An investor can hold shares while offsetting political risk in an election market. Traditional stocks and prediction contracts can work together as a bundle.
Laying off risk in this way is a hedge. It is the kind of thing that financial markets and futures markets facilitate. Prediction markets are futures markets.
In 2007, the Institute for the Study of Competition and Regulation at Victoria University of Wellington worked with the Securities Commission to allow iPredict operate as an exempt futures exchange. The 2008 exemption notice made clear that iPredict’s contracts were futures contracts and were not subject to the Gambling Act.
iPredict broadened the set of prediction market contracts from election outcomes to GDP outcomes, interest rate decisions, and whether particular bits of legislation would or wouldn’t pass.
The market was hampered by tight initial limits on the amount that any individual trader could deposit, which were later expanded a bit. Those limits made iPredict far less useful for hedging than it could have been. But for a time, we hosted one of the most sophisticated real-money prediction markets in the world. It was also quietly working on far more innovative combinatorial markets.
Regulatory compliance costs associated with new financial market regulations under the Key-led government snuffed them out. But the basic regulatory position was coherent. Prediction market contracts were financial contracts falling under the Securities Commission, and later the Financial Markets Authority.
Prediction markets ended in New Zealand but picked up internationally. When Kalshi applied to America’s Commodity Futures Trading Commission to operate, I lodged a submission noting New Zealand’s experience with prediction markets and the promise they continue to hold. I had served as an academic advisor for a few years while a senior lecturer at Canterbury. I doubt my minor submission made much difference, but Kalshi was authorised. And it continues to run as a CFTC-authorised exchange.
Two weeks ago, the Department of Internal Affairs declared that prediction markets are gambling and that platforms like Kalshi and Polymarket should not allow Kiwis to trade.
Both of those platforms offer contracts on sporting events. Parliament has chosen to reserve sporting event wagering to a monopoly provider. That is a policy choice.
But that logic does not extend to contracts on inflation, interest rates, or legislative outcomes. Those contracts are far closer to futures than to roulette.
And those contracts are far less like gambling than highly leveraged retail financial products that remain perfectly legal.
DIA could have asked both platforms to prevent NZ-based accounts from trading on sporting contracts.
But deeming prediction markets to be gambling is inconsistent with prior regulatory decisions. Prediction market contracts, apart from those on sporting events, are also far less like gambling than highly leveraged contracts-for-difference on currencies.
The risk is larger than whether election market tragics get to continue trading on election outcomes. Financial innovation is accelerating. New products will increasingly bundle together shares, derivatives, and event contracts to allow investors to take on very precisely specified risks. Losing access to the innovative edge matters.
If New Zealand’s default response to anything novel is to take incredibly conservative regulatory positions, even to the extent of inconsistency with prior regulatory decisions, we will fall farther and farther behind the rest of an accelerating world.
Prediction markets are not a casino. They are a tool for aggregating information, transferring risk, and generating knowledge that cannot otherwise exist.
A country that cannot tell the difference will find that innovation goes elsewhere. And that would be a bet against itself.
The Department of Internal Affairs needs to reconsider this decision.
Dr Eric Crampton is Chief Economist at the New Zealand Initiative. This article was first published HERE
From the outside, it can look like a flutter on politics. But prediction markets do something more important. They aggregate information into a continuously updated consensus forecast.
Polls tell you what respondents say to a pollster on a given day. Prediction markets traders weigh those polls alongside any other data they think relevant, decide whether a party is overvalued or undervalued, and make their trades. Those who disagree can trade the other side.
That mechanism has proven to produce remarkably accurate and useful forecasts.
More importantly, prediction markets allow risk to be separated and traded. Elections create very specific risks. A company might be an excellent investment under one government but face regulatory headwinds under another. An investor can hold shares while offsetting political risk in an election market. Traditional stocks and prediction contracts can work together as a bundle.
Laying off risk in this way is a hedge. It is the kind of thing that financial markets and futures markets facilitate. Prediction markets are futures markets.
In 2007, the Institute for the Study of Competition and Regulation at Victoria University of Wellington worked with the Securities Commission to allow iPredict operate as an exempt futures exchange. The 2008 exemption notice made clear that iPredict’s contracts were futures contracts and were not subject to the Gambling Act.
iPredict broadened the set of prediction market contracts from election outcomes to GDP outcomes, interest rate decisions, and whether particular bits of legislation would or wouldn’t pass.
The market was hampered by tight initial limits on the amount that any individual trader could deposit, which were later expanded a bit. Those limits made iPredict far less useful for hedging than it could have been. But for a time, we hosted one of the most sophisticated real-money prediction markets in the world. It was also quietly working on far more innovative combinatorial markets.
Regulatory compliance costs associated with new financial market regulations under the Key-led government snuffed them out. But the basic regulatory position was coherent. Prediction market contracts were financial contracts falling under the Securities Commission, and later the Financial Markets Authority.
Prediction markets ended in New Zealand but picked up internationally. When Kalshi applied to America’s Commodity Futures Trading Commission to operate, I lodged a submission noting New Zealand’s experience with prediction markets and the promise they continue to hold. I had served as an academic advisor for a few years while a senior lecturer at Canterbury. I doubt my minor submission made much difference, but Kalshi was authorised. And it continues to run as a CFTC-authorised exchange.
Two weeks ago, the Department of Internal Affairs declared that prediction markets are gambling and that platforms like Kalshi and Polymarket should not allow Kiwis to trade.
Both of those platforms offer contracts on sporting events. Parliament has chosen to reserve sporting event wagering to a monopoly provider. That is a policy choice.
But that logic does not extend to contracts on inflation, interest rates, or legislative outcomes. Those contracts are far closer to futures than to roulette.
And those contracts are far less like gambling than highly leveraged retail financial products that remain perfectly legal.
DIA could have asked both platforms to prevent NZ-based accounts from trading on sporting contracts.
But deeming prediction markets to be gambling is inconsistent with prior regulatory decisions. Prediction market contracts, apart from those on sporting events, are also far less like gambling than highly leveraged contracts-for-difference on currencies.
The risk is larger than whether election market tragics get to continue trading on election outcomes. Financial innovation is accelerating. New products will increasingly bundle together shares, derivatives, and event contracts to allow investors to take on very precisely specified risks. Losing access to the innovative edge matters.
If New Zealand’s default response to anything novel is to take incredibly conservative regulatory positions, even to the extent of inconsistency with prior regulatory decisions, we will fall farther and farther behind the rest of an accelerating world.
Prediction markets are not a casino. They are a tool for aggregating information, transferring risk, and generating knowledge that cannot otherwise exist.
A country that cannot tell the difference will find that innovation goes elsewhere. And that would be a bet against itself.
The Department of Internal Affairs needs to reconsider this decision.
Dr Eric Crampton is Chief Economist at the New Zealand Initiative. This article was first published HERE
4 comments:
Novel? It is gambling. You can go to international waters 20 miles offshore and fill your boots!
You're a bit behind the times, Anon 618.
The first 12 nautical miles beyond the shore or baselines used in lieu thereof are the Territorial Sea. The next 12 nm are the Continuous Zone where a country can enforce its laws pertaining to immigration, currency, and a few other things. From 12 to 200 nm is the Exclusive Economic Zone and even there you may have difficulty "filling your boots" because of controls imposed by the shore state! The term 'international waters' (or 'high seas') strictly speaking refers to waters beyond 200 nm which are governed solely by UNCLOS (UN Convention on the Law of the Sea 1982). However, some 'high seas' rights for shipping apply right up to the contiguous zone.
UNCLOS like a load of woke nonsense. They’re not the bosses of the world and never have been.
Sounds like it's high time you had a look at UNCLOS, Anon 913. It takes quite a lot of reading as there are 320 Articles organised into 17 sections including Territorial Sea & Contiguous Zone, Exclusive Economic Zone, High Seas, Continental Shelf, and Rights of Access of Land-locked States. None of the Articles say anything about being 'bosses of the world', though, and the concept of 'woke' simply doesn't fit in anywhere.
UNCLOS is an international law success story as it is made up of universally agreed-to rules that govern shipping world-wide.
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