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| House of trade or house of cards? |
| Technology breaks barriers. With recent technological advancements in software, servers and the Internet, setting up a trade-matching engine - what some might call an exchange - has become almost a turn-key operation. |
| Of course, implementing the technology is the easy part. It's the regulatory red tape that trips up most would-be exchanges. Just ask FutureCom, the Internet-based livestock exchange that received its contract market designation on Dec 21, 2000, but still has not met all of the conditions for trading, according to the Commodity Futures Trading Commission (CFTC). So, to speed things up a bit, some entities have a workaround, they eschew CFTC regulation. |
| The trading interfaces of these Internet "exchanges" look much like those of online futures brokers, and in some cases are even more user-friendly. Some operate as market-makers, charging no commissions but quoting wide spreads that they happily pocket. Others perform a more traditional exchange role, providing an electronic platform for matching participants' trades but booking a per-trade, per-position fee. |
| An example of the latter is TradeSports, which does more than recognise the similarities between its product and futures contracts traded on regulated exchanges. It insists upon it and advertises it. In fact, a major target market of the Ireland based company has been the denizens of trading floors in Chicago and New York. TradeSports has pursued business with vigor, sponsoring live demos, catered events and other marketing ploys in and near exchange buildings. |
| "Sports and all the associated industries contribute more to the US gross national product than agriculture," TradeSports President John Delaney says. "Sports are hugely important and valuable and there isn't an exchange for the efficient management of risk associated with that part of the GNP. |
| TradeSports offers forward contracts based on the outcomes of sporting contests, lately adding political events to its quote board. The markets work simply enough. If one team wins, the contract settled at 100, or full face value. If the other team wins, the contract settles at 0. All contracts have a value of $10 and margin is 100%, except for some long-term contracts. From the start of trading until the event is over, the market can trade anywhere in between. Political events are similar, setting at 100 of the events occurs, 0 if it doesn't. Listed political contracts as of late October were based on the November U.S. elections and the possible ouster of Saddam Hussein as Iraqi president. |
| U.S. based organizations have used this model before, and have done so without drawing the ire of U.S. regulators. Probably the most well-known is the Iowa Electronic Markets, run by the University of Iowa. However, the Iowa Electronic Markets, which mostly provides markets for outcomes of political elections, does so in the context of educating the university's student body. TradeSports doesn't carry such pretensions and is clearly a profit-seeking venture: it charges $0.04 for each matched order. |
| Delaney insists that TradeSports is on solid legal ground because it is
not a bookmarker under Irish, U.K. of U.S. law. "We are an exchange. We list loads of contracts. We are registered and regulated in Ireland," Delaney says. He acknowledges that there may be a gray area involving U.S. based customers of the Web site. "If America has certain laws that prohibit you or anyone else from a becoming a member of this site, then it behoves you not to become a member of this site". |
| Delaney says he has not decided whether to seek registration with the CFTC but does not rule it out. "At this stage of our development it isn't the right thing to do, " he says. "We want to ensure that this is a valid and robust business model and then if some regulatory stamp allows people to perceive the exchange in a different way, than that is something we would be willing to do." |
| To some, that might sound like good business sense. To others, that might sound like a bookie saying he has no problem going legit as long as the feds won't squeeze his vig. |
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The speculative interest in sporting events is well established. For broad acceptance, however, TradeSports will need to attract hedgers. Those with a need to hedge sports-related risk, according to Delaney, include sports franchises, stadium authorities, vending operators and apparel makers. A TradeSports spokesman says other legal non-U.S. bookmakers who actively use the system; they have met with professional franchise representatives to gauge their interest. |
| "We presented some ideas to professional sports teams and their reception to what we have has been very positive. In some cases, the contracts were not quite what they wanted, but they see an economic justification for this," the spokesman says. |
| While the regulatory and hedging hurdles are huge, TradeSports' technology is solid. Delaney calls its matching engine "bullet proof" with the capacity to match 10 million transactions a day. The technology was built by Intrade, the same designers of the London Stock Exchanges' matching engine and the database was created by Sun Microsystems. |
| Despite similarities - Delaney contends customers funds are segregated, as with U.S. futures commission merchants (FCM)- the public in general and traders in particular must realise that these companies aren't regulated to the same rigor as traditional exchanges, aren't accredited by U.S. government authorities and don't have their books audited by a regulatory body in the same manner FCMs do. Bids are lifted, spreads fluctuate and historical prices can be charted just like those of traditional markets, but whether those prices are as real as those on your Globex screen, well, you'll have to take their word for it. |
| Futures Magazine |