Why the Law Hates Speculators: Regulation and Private Ordering in the Market for OTC Derivatives

A wide variety of statutory and common law doctrines in American law evidence hostility towards speculation. Conventional economic theory, however, generally views speculation as an efficient form of trading that shifts risk to those who can bear it most easily and improves the accuracy of market prices. This Article reconciles the apparent conflict between legal tradition and economic theory by explaining why some forms of speculative trading may be inefficient. It presents a heterogeneous expectations model of speculative trading that offers important insights into antispeculation laws in general, and the ongoing debate concerning over-the-counter (OTC) derivatives in particular. Although trading in OTC derivatives is presently largely unregulated, the Commodity Futures Trading Commission recently announced its intention to consider substantively regulating OTC derivatives under the Commodity Exchange Act (CEA). Because the CEA is at heart an antispeculation law, the heterogeneous expectations model of speculation offers policy support for the CFTC\u27s claim of regulatory jurisdiction. This model also, however, suggests an alternative to the apparently binary choice now available to lawmakers (i. e., either regulate OTC derivatives under the CEA, or exempt them). That alternative would be to regulate OTC derivatives in the same manner that the common law traditionally regulated speculative contracts: as permitted, but legally unenforceable, agreements. By requiring derivatives traders to rely on private ordering to ensure the performance of their agreements, this strategy may offer significant advantages in discouraging welfare-reducing speculation based on heterogeneous expectations while protecting more beneficial forms of derivatives trading

Prediction Markets:A literature review 2014

In recent years, Prediction Markets gained growing interest as a forecasting tool among researchers as well as practitioners, which resulted in an increasing number of publications. In order to track the latest development of research, comprising the extent and focus of research, this article provides a comprehensive review and classification of the literature related to the topic of Prediction Markets. Overall, 304 relevant articles, published in the timeframe from 2007 through 2013, were identified and assigned to a herein presented classification scheme, differentiating between descriptive works, articles of theoretical nature, application-oriented studies and articles dealing with the topic of law and policy. The analysis of the research results reveals that more than half of the literature pool deals with the application and actual function tests of Prediction Markets. The results are further compared to two previous works published by Zhao, Wagner and Chen (2008) and Tziralis and Tatsiopoulos (2007a). The article concludes with an extended bibliography section and may therefore serve as a guidance and basis for further research. (250 WORDS

An FDA for Financial Innovation: Applying the Insurable Interest Doctrine to Twenty-First-Century Financial Markets

The financial crisis of 2008 was caused in part by speculative investment in complex derivatives. In enacting the Dodd-Frank Act, Congress sought to address the problem of speculative investment, but merely transferred that authority to various agencies, which have not yet found a solution. We propose that when firms invent new financial products, they be forbidden to sell them until they receive approval from a government agency designed along the lines of the FDA, which screens pharmaceutical innovations. The agency would approve financial products if they satisfy a test for social utility that focuses on whether the product will likely be used more often for hedging than for speculation. Other factors may be addressed if the answer is ambiguous. This approach would revive and make quantitatively precise the common-law insurable interest doctrine, which helped control financial speculation before deregulation in the 1990s

The Possibilities and Limitations of Private Prediction Markets

We consider the design of private prediction markets, financial markets designed to elicit predictions about uncertain events without revealing too much information about market participants' actions or beliefs. Our goal is to design market mechanisms in which participants' trades or wagers influence the market's behavior in a way that leads to accurate predictions, yet no single participant has too much influence over what others are able to observe. We study the possibilities and limitations of such mechanisms using tools from differential privacy. We begin by designing a private one-shot wagering mechanism in which bettors specify a belief about the likelihood of a future event and a corresponding monetary wager. Wagers are redistributed among bettors in a way that more highly rewards those with accurate predictions. We provide a class of wagering mechanisms that are guaranteed to satisfy truthfulness, budget balance on expectation, and other desirable properties while additionally guaranteeing epsilon-joint differential privacy in the bettors' reported beliefs, and analyze the trade-off between the achievable level of privacy and the sensitivity of a bettor's payment to her own report. We then ask whether it is possible to obtain privacy in dynamic prediction markets, focusing our attention on the popular cost-function framework in which securities with payments linked to future events are bought and sold by an automated market maker. We show that under general conditions, it is impossible for such a market maker to simultaneously achieve bounded worst-case loss and epsilon-differential privacy without allowing the privacy guarantee to degrade extremely quickly as the number of trades grows, making such markets impractical in settings in which privacy is valued. We conclude by suggesting several avenues for potentially circumventing this lower bound

Managing Stakeholder Relationships During the Tatts / Tabcorp Merger Process

Mergers and acquisitions are significant events in the life of corporations, with complicated and disruptive social, economic and political consequences for their stakeholder relationships. PhD research candidate Simon Segal examines the complex balancing of M&A stakeholder management through a case study of the mega-merger of Australia’s two biggest lottery firms. The views expressed are his own

Productivity of Rural Credit: A Review of Issues and Some Recent Literature

The policy intervention in agriculture has been credit driven. This is even more pronounced in the recent interventions made by the State, in doubling agricultural credit, providing subvention and putting an upper cap on interest rates for agricultural loans, the package announced for distressed farmers. We use existing literature and data to argue that the causality of agricultural output with increased doses of credit cannot be clearly established. We argue that Indian agriculture is undergoing fundamental change wherein the technology and inputs are moving out of the hands of the farmers to external suppliers. This, over a period of time may have resulted in the de-skilling of farmers and without adequate public investments in support services and without appropriate risk mitigation products has created a near-crisis in agriculture. Thus, we argue that policy interventions have to be necessarily patient and holistic. Looking specifically at the rural financial markets, using some primary data we argue that it is necessary to understand the rural financial markets from the demand side. We conclude the paper by identifying some directions in which the policy intervention could move, keeping the overall rural economy in view rather than being unifocal about agriculture.

Delegating Up: State Conformity with the Federal Tax Base

Congress uses the income tax to achieve policy goals. States import federal tax policies into their own tax systems when they incorporate by reference the federal income tax base as the starting point for assessment of state income taxes. But federal tax policies reflect national, not state, political choices. This Article calls attention to the practice of tax-base conformity and to its advantages and disadvantages. Conformity conserves legislative, administrative, and judicial resources, and it reduces taxpayers\u27 compliance burdens. At the same time, however, conforming states cede tax autonomy to the federal government, thereby jeopardizing federalism values, such as regulatory diversity and diffusion of power. Conforming states also expose themselves to revenue volatility stemming from the ever-changing federal tax law. Despite these concerns, the administrative and compliance advantages of federal-state tax-base conformity are so significant that states are unlikely to abandon it. Thus, this Article makes only limited recommendations for reducing the adverse impacts of tax-base conformity

Delegating Up: State Conformity with the Federal Tax Base

Congress uses the income tax to achieve policy goals. States import federal tax policies into their own tax systems when they incorporate by reference the federal income tax base as the starting point for assessment of state income taxes. But federal tax policies reflect national, not state, political choices. This Article calls attention to the practice of tax-base conformity and to its advantages and disadvantages. Conformity conserves legislative, administrative, and judicial resources, and it reduces taxpayers\u27 compliance burdens. At the same time, however, conforming states cede tax autonomy to the federal government, thereby jeopardizing federalism values, such as regulatory diversity and diffusion of power. Conforming states also expose themselves to revenue volatility stemming from the ever-changing federal tax law. Despite these concerns, the administrative and compliance advantages of federal-state tax-base conformity are so significant that states are unlikely to abandon it. Thus, this Article makes only limited recommendations for reducing the adverse impacts of tax-base conformity