The Associated Press May 1, 2008, 2:12PM ET

Regulators may look over the shoulder of predictive markets 

By DIBYA SARKAR

WASHINGTON -- The rising popularity of markets where guesses are wagered on the outcome of everything from presidential elections to celebrity marriages has led to a situation that, well, many had predicted.

The Commodity Futures Trading Commission on Thursday said it is considering whether these markets should be regulated, and how.

"Event markets are rapidly evolving, and growing, presenting a host of difficult policy and legal questions," Walt Lukken, the commission's acting chairman, said in a release. "What public purpose is served in the oversight of these markets and what differentiates these markets from pure gambling outside the CFTC's jurisdiction?"

As part of its review, the commission requested input from the public.

Academics who study such event, or prediction, markets said they expected the CFTC's action as the popularity of such markets has grown. But they said it's an area that should be allowed to flourish because it's an important tool for collecting data that could improve decision-making in the private and public sectors.

"Financial regulation is a big hindrance to financial innovation," said Robin Hanson, an economics professor at George Mason University. "This is one of the main forms of innovation showing up recently that deserves exploration."

It's unclear just how many traders participate in such real-money markets globally.

Prediction market Intrade.com, based in Dublin, Ireland, lets people wager real money on future events, such as whether European countries will boycott the Beijing Olympics or if the U.S. economy will go into a recession.

In the United States, the Iowa Electronic Markets, run by the University of Iowa business school, is one of the better-known markets in operation. It has about 1,000 traders at any given time, who can invest up to $500 to trade on a variety of contracts, including the outcome of the presidential elections.

In 1993, the CFTC granted an exemption to IEM, which is primarily used for research and teaching purposes, said the market's director, Joyce Berg, who is also an accounting professor.

These markets provide value, she said, because they are another way of forecasting events.

Polls are the main tools used to predict presidential winners, but Berg is not convinced that random samples of people who give their opinion at a certain point in time are the best predictors.

In contrast, IEM's traders, who are mostly college-educated white males with above-average incomes, have a financial incentive to collect data in order to make a better decision, Berg said. Since 1988, IEM has correctly predicted the presidential candidates who received the most popular votes in four out of the last five elections, Berg said.

She said some guidance is definitely needed to make a distinction between these markets and gambling, but doesn't want to see such markets regulated out of existence.

When asked if there is a contract on whether future regulation is possible, Berg said, "Yeah, probably some where there is."