Online Exchange Chooses Turmoil As a Commodity --- In Bizarre U.S. Project, 
Traders To Bet on Events in Middle East; Some Democrats Oppose Plan 

By Shailagh Murray 

29 July 2003
The Wall Street Journal 
C1 

Washington -- A NEW PENTAGON project that crosses unrest in the Middle East 
with Wall Street investing seems too bizarre to be true: an online futures 
exchange where the "commodities" are possible events such as the 
assassination of political leaders. 

The intent of the project, called the Policy Analysis Market, is to use 
"market-based techniques for avoiding surprise and predicting future 
events," according to a Pentagon report to Congress. One question posed in 
the Pentagon report: "Will terrorists attack Israel with bioweapons in the 
next year?" Traders would be those willing to bet their own money on whether 
or not the events will occur. 

Senate Democrats blasted the venture. Such a commodities market is 
"effectively an Internet casino," said Sen. Byron Dorgan (D., N.D.). He is 
seeking, along with colleagues, to thwart a Pentagon effort to secure $8 
million to expand the project; the Pentagon already has spent about $750,000 
to cover start-up costs. 

The effort is loosely based on the Iowa Electronic Markets, a futures 
exchange run by the University of Iowa College of Business that anticipates 
U.S. election results and Federal Reserve decisions. "You're sort of making 
up a form of commerce," says Charles Polk, president of Net Exchange, a 
10-person concerm founded by California Institute of Technology faculty 
members who designed the Middle East exchange and will operate it. 

The Department of Defense's Defense Advanced Research Projects Agency is 
funding the project but said it won't have access to traders' identities and 
funds. Mr. Polk said Net Exchange would acquire the underlying data from the 
Economists Group's Economist Intelligence Unit. The London-based Economists 
Group publishes the Economist magazine. 

Here's how it would work. Traders could purchase one-year futures contracts 
that would assess possible economic, civil and military events in Egypt, 
Jordan, Iran, Iraq, Israel, Saudi Arabia, Syria and Turkey. As benchmarks of 
how well or poorly a country is faring, traders can nominate events, such as 
the overthrow of the king of Jordan or the assassination of Yasser Arafat. 
The contracts would set a date by which the event must occur, and traders 
would buy and sell based on what they think will happen. One example cited 
on the project's Web site: The U.S. will recognize Palestine in the first 
quarter of 2005. 

Darpa said the project would remain small for now and said it is a 
potentially valuable tool. "Futures markets have proven themselves to be 
good at predicting such things as elections results; they are often better 
than expert opinions," the statement said. Darpa said it would re-evaluate 
the program before committing funds beyond fiscal year 2003. 

Anyone can trade, according to the Web site, provided they register and 
deposit funds in a trading account. Organizers are keen to attract people 
with special knowledge or interest in the Middle East. "Whatever a 
prospective trader's interest . . . involvement in this group prediction 
process should prove engaging and may prove profitable," says the Web site, 
www.policyanalysismarket.org. 

Democratic critics called the requirements for traders far too loose, 
possibly tempting terrorists to sign up. "It seems that terrorists even may 
be able to be protected as they play," said Sen. Ron Wyden (D., Ore.). "So 
the question is: Why wouldn't terrorists just hop online and start betting 
if they couldn't either mislead American authorities about their plans or 
make money to fund more al Qaeda operations?" 

Darpa aims to sign up 10,000 traders by next January. While the Pentagon 
won't know the names of the traders, Net Exchange will -- and would report 
any suspicious activity, said Mr. Polk. Net Exchange hopes to line up 100 
people to launch the service this fall. It will provide $100 to each of the 
founding traders to start an account. There will be one big difference from 
traditional futures markets. No leverage will be allowed -- all trades must 
be fully funded when they are made, Mr. Polk said. Having fretted that 
interest would be low, he was bombarded with inquiries following a news 
conference yesterday by Sens. Wyden and Dorgan.