Crain's Chicago Business September 8, 2003, Monday SECTION: Pg. 4 LENGTH: 1019 words HEADLINE: Futures shock: terror trades; Web-preneur sees market for everything from J. Lo's wedding to Al Qaeda's next strike BYLINE: JULIE JOHNSSON BODY: There is a market for everything-even those much- maligned terrorism futures that recently cost retired Rear Adm. John Poindexter his job as a Pentagon adviser. Chicago entrepreneur Richard Buchanan is launching Opinion-Exchange.com, a Web site where people will trade ideas-and, eventually, contracts-on current events ranging from Howard Dean's presidential prospects to Jennifer Lopez and Ben Affleck's impending nuptials to the likelihood of a terror strike, the kryptonite topic that tripped up Mr. Poindexter. The first incarnation of the site, to be launched Sept. 17, will be more Meetup.com than mercantile exchange. Online visitors can register their views on the topics du jour and see instantly, via slick graphics, how many people agree or disagree with them. Generating traffic shouldn't be an issue. Starting Oct. 1, boxes featuring instant polls created by Opinion Exchange LLC will run on the Web sites of 14 television stations owned and operated by NBC. The sites drew a combined 67.8 million page views in July, the most recent month for which data are available. By mid-2004, Mr. Buchanan plans to morph the site into an online futures exchange where small-time traders will speculate in news events, buying and selling contracts of $100 or less. The concept must first pass muster with federal exchange regulators, however. ''The point of this is not to make people rich, but to have fun and test the market for your opinion,'' says Mr. Buchanan, a lanky London native and former futures trader. He faces serious obstacles, however, including the risk of reviving the public uproar that doomed the futures market commissioned by the Pentagon's Defense Advanced Research Projects Agency (Darpa). ''You have to question the ethical and moral decision to develop a market that in some way centers around the misery and misfortune of others,'' says one naysayer, Sean Moulton, senior policy analyst with OMB Watch, a Washington, D.C.-based watchdog group that denounced the Darpa effort. Mr. Buchanan also faces a potent competitor in Net Exchange. That's the San Diego consultancy that mixed commodities and geopolitics, at Darpa's request, to see if market forces-embodied by 100 policy wonks armed with futures contracts-could predict the likelihood of war and terror strikes in the Middle East. Net Exchange was just weeks away from running a beta test of its Policy Analysis Market, better known as Pam, when word of the project leaked out. Mr. Poindexter was forced to resign from the Bush administration amid the ensuing hail of negative publicity. The California firm, which designs software and markets, is undeterred by the backlash and is mulling releasing Pam as a purely private concern. ''The technology, the intellectual property, is all ours,'' says Net Exchange President Charles Polk. ''It's all ours to relaunch. You can presume that we are thinking of such a thing.'' 'Markets aggregate information' The concept isn't that outlandish. Securities markets have long provided a rough barometer of events to come, such as the economic recovery. And it isn't a great leap to go from buying and selling weather futures to hedging against man-made disasters like a terrorist strike. The general public has shown some interest in applying futures-trading concepts to non-financial markets like sports and elections, a trend that Mr. Buchanan hopes to expand. TradeSports.com, an Irish exchange, allows visitors to place contracts on sporting events. The 15,000 traders registered with the Iowa Electronic Markets, run by the University of Iowa's Tippie College of Business, trade positions on national political races and high-profile local elections, like the California recall vote. (Actor Arnold Schwarzenegger is the early favorite, in light trading.) Iowa's political exchange consistently outperforms public opinion polls in predicting election outcomes, including those in 2000. The system's average margin of error is a slim 1.5%, vs. the 2.25%-to-2.5% margin that's typical for polled results. ''Markets aggregate information; they're really good at that,'' says Forrest Nelson, a professor of economics at the University of Iowa. ''Different people have different beliefs. Let them trade away, and what emerges is a single price, which is the average aggregated belief of all traders.'' Traders on Mr. Buchanan's Opinion-Exchange.com will base their contract price on the likelihood that a given event will occur within a specific period. If that likelihood increases, they make money. To keep the terrorists from cornering the market on a terrible event that they then create, a fear cited during the Darpa flap, Mr. Buchanan will require balance-an equal proportion of buyers to sellers-and transparency: Every trader will have to provide verifiable identification to the exchange. Gambling by another name? Still, the prospect of additional markets in this vein is disturbing to traditional futures traders like John Lothian, president of the electronic trading division of the Price Futures Group, a futures broker with the Chicago Board of Trade. ''What they're doing is taking the mechanism, the infrastructure, the nomenclatures of futures and applying it to gambling,'' says Mr. Lothian. Responds Mr. Buchanan: ''We're providing an introduction between buyers and sellers. There's no book, no odds, no bookie.'' Gambling, and the true nature of these exchanges, will likely be hot issues as the U.S. Commodities Futures Trading Commission decides in the coming months how to regulate ventures like Opinion Exchange. While the commission exempted the Iowa political markets from oversight with a ''no-action'' letter 15 years ago, Mr. Buchanan isn't likely to get a similar free pass given the recent outcry over terrorism futures. ''Before Darpa, it may have been easier to get that kind of letter,'' says David Aron, a Washington, D.C.-based partner with Chicago law firm McDermott Will & Emery who specializes in derivatives law. ''The letter to the Iowa group may prove to be a one-off situation.'' GRAPHIC: Exchanging ideas: Former futures trader Richard Buchanan is launching Opinion-Exchange.com, a site where people will trade ideas-and, eventually, contracts-on current events.