The Guardian (London)

                                 August 4, 2003

SECTION Guardian City Pages, Pg. 23

LENGTH 464 words

HEADLINE Briefing The dark side of futures trading

BYLINE Richard Adams

BODY


    Even by the standards of the current United States administration, last week
's report that the Pentagon was funding a marketplace for speculation on coups
and assasinations was too much to stomach.

    Such was the uproar when the "policy analysis market" was revealed that the
US defence department hurriedly terminated it and forced the resignation of the
senior official responsible.

    Nobel-prize winning economist Joseph Stiglitz was among the harshest
critics.

    "The Bush administration's naive belief in free-market economics reached a
new level of absurdity," he wrote in the Los Angeles Times, saying the idea
"seems a mockery of itself".

    The defence department's plan was for a computerised trading platform where
participants could buy and sell contracts based on future political events -
including assasination and political coups - in other countries.

    "There is something very sick about it," said Democrat senator Barbara
Boxer.

    Sick it may be, but the fundamental idea behind the policy analysis market
was little different to the future markets that already exist, trading in the
future price and supply of everything from coffee and orange juice to
electricity production and interest rates.

    The simple rationale is that these markets encapsulate all the information
that is available at the time about the underlying product - and allow those
with knowledge or analysis to take a bet on the market's likely direction,
without ever having to farm coffee beans or drill for oil.

    As things stand, conventional future markets already involve distasteful
ideas - pricing in the effects of storms or coups that push up the price of
coffee, to political instability in the Middle East affecting the supply of oil.

    In that respect, the policy analysis market would be no different to
existing future markets putting a probability on potential outcomes. That's
also no different to our current insurance market - buying an insurance policy
is in effect shifting the risk for your house being burned down or your car
being stolen to a company which calculates the chances of those events
happening.

    The policy analysis market concept originated at the Pentagon's defence
advanced research projects agency, a department devoted to "blue skies"
thinking.

    Its idea was that it could provide another source of information for
policymakers - so that a dramatic change in the survival price of the Saudi
governing family could send an early warning signal of political upheaval.

    The danger is that those with real inside information could use such a
market to make both a literal and a figurative killing.

    The bigger question is - distasteful or not - would such a market allow us
to make useful predictions? Now we'll never know.