The Toronto Star

August 3, 2003 Sunday Ontario Edition

SECTION: BUSINESS; Pg. C03

LENGTH: 954 words

HEADLINE: All bets off on U.S. terrorism futures

BYLINE: Mark Skertic, Chicago Tribune

HIGHLIGHT:
Investors betting on war, assassination deemed unethical But some defend a
market established solely to gather data

BODY:
There are financial markets for just about everything: the future price of
coffee, the weather, barge freight rates and whom the Democrats will nominate
for president.

And until last Tuesday, the U.S. Pentagon was ready to back creation of another
market, one that would have allowed investors to speculate on assassinations and
political coups in the Mideast.

Those willing to gamble would make or lose some cash. Military strategists might
have gotten something even more valuable - a possible tip-off to upcoming
trouble in the Middle East. The reasoning was some traders would move the market
because they had inside information that certain events were about to unfold.

But the odious notion of the government enabling investors to bet that political
leaders would be killed or that a war might break out was deemed unacceptable.

One day after lawmakers in Congress brought the Pentagon's Policy Analysis
Market to light, a U.S. Defence Department spokesperson said the program had
been terminated.

"The director has determined that this is a program that under further scrutiny
probably doesn't deserve continued support," spokesperson Lawrence Di Rita told
Reuters.

Trading had been scheduled to begin Oct. 1.

Critics of the idea were missing the point, said Charles Polk, president of Net
Exchange, the San Diego company that designed and developed the program. "The
idea is that markets focus information," he said, noting that contracts would
not have been much different from questions debated in the media. For example,
Polk said, a contract might ask if the United States would recognize Palestine
in the second quarter of next year.

Such a market would have been the latest twist on an economic model that makes
it possible to buy or sell things that don't yet exist.

"This is the first time we've tried to do something that's a first-time,
honest-to-God information market," Polk said.

At the Chicago Mercantile Exchange, corn producers can get a price for a crop
they haven't even grown yet. Stock buyers can get a price now on a stock they
don't plan on buying for another six months.

On the Middle East market, futures contracts would have dealt with whether
leaders would be overthrown, possible military engagements or economic health.

The notion that a futures market should trade in terrorism was labelled "absurd"
and "ridiculous" by Leo Melamed, chairman emeritus of the Chicago Mercantile
Exchange. Three decades ago, he helped transform the Merc from an exchange known
for corn and soybeans to one that handles mostly financial products such as
trading in interest rates and currency exchange rates.

"A futures market has to have an economic foundation, not just a political
purpose or even a theoretical purpose," Melamed said. Markets are already about
uncertainty, he said. "Whether it's in stock index futures, or interest rates,
or currency, foreign exchange or crude oil - there are future markets in all
those product lines."

The availability of a futures market is limited only by the willingness of
participants to take on the risk. Energy can be traded, as can wine and
Environmental Protection Agency pollution allowances, which give a company the
right to emit a set level of pollutants. But, until this past week, there was no
discussion about a market that traded specifically in which political leaders in
the Middle East were likely to fall.

John Damgard, president of the Futures Industry Association, also expressed
skepticism about the plan to gather military intelligence by setting up a
specialized futures market.

"It presumes that the people who are causing these events to take place are
doing it for reasons of making money, and there's no evidence to suggest that,"
he said. "They're fanatics."

One of the more nontraditional uses of futures contracts has been at the
University of Iowa, where since 1988 the Iowa Electronic Markets has facilitated
the buying and selling of futures in presidential election results.

It's a way of taking established, proven economic theory and applying it to
social and political science, said George Neuman, professor of economics and
applied mathematics and one of the founders of the program. The markets -
fuelled by the incentive of people involved to prevail by using their experience
and knowledge - can better predict outcomes than a poll of the general
population, he said.

"I go out and ask a random sample of people something, I get answers from people
who aren't interested, who haven't thought about the issue - and they'll still
have an opinion," he said. "In the markets, you get a real selectivity principle
going. Only those who think they know something about trading or about the
underlying fundamental issue come in.

"The principle of putting your money where your mouth isn't doesn't operate in
traditional survey questions, but it does operate here when you have something
at stake."

At Iowa, where futures can also be traded in Federal Reserve monetary policy and
returns in the computer industry, discussion has been underway on creating
markets that a select group of experts would participate in. Those with an
expertise in Russian politics, for example, might trade contracts on who the
leader of that country will be in the third quarter of next year.

While having them use their own money for contracts might not work, they might
be able to trade in cash that could be used for research grants. Neuman said:
"You've got to have some incentive, but it doesn't have to be money."

Neuman said he is convinced the concept of a market established to gather data
will be revisited. "This idea is so fundamentally interesting," he said.
"They'll be back at it."