For decades I have been badgering my friends and anyone else who will listen with my view that Wall Street is nothing but another form of gambling. In fact, I say that it is a fixed form of gambling. Having spent fifty years as an attorney in the regulated commercial casino industry, I have insisted that if Wall Street was run like regulated casinos are run, Wall Street would be closed down in two weeks. That may be hyperbole, but it’s fundamentally true.
I could go on for pages about why this is so, but for now I’ll just explain it this way. Even though stock prices are connected in name to particular companies, their prices do not have to be a function of the success or failure of those companies. Stock prices vary based on how much someone is willing to pay for them. That buyer’s willingness to make that purchase need not depend on the performance of the company. Most often, instead, it depends on the expectation of the future performance of the company. If analysts and other windbags say that a particular financial product looks like it is going to perform well, then more people want to invest in it, and when more people then invest in it, it’s price goes up. This is true whether or not the company in whose name the financial product is based actually perform well or not. It would be as if you bet on the Yankees to win the World Series and whether you win that bet does not depend on whether the Yankees actually win. Rather it depends on how many other people also bet the same way.
And I say that Wall Street is a “fixed” casino because the number of investors in a particular financial product can be a function of what the big institutional traders do. Their trades “move the market” (a euphemism for “manipulate”). These investors are unquestionably allowed to do this while, on the other hand, Pete Rose had his life and legacy destroyed on the assumption that he had done exactly the same thing with regard to baseball games.
And now we have new financial products that have exposed the true nature of the Wall Street casino. These things are called, “Prediction Markets.”
Here’s how Prediction Markets work. The “investor” can buy “contracts” on future events. The “contracts” offer a binary choice of “yes” or “no” on whether the event will occur. For example, you can buy a “contract” that the Yankees will win the World Series. The price of that “contract” will vary depending on how many people also want to buy it at a particular price. All pricing is based on one dollar, so the Yankee contract may sell at forty-five cents, meaning that people think that the Yankees have a 45% chance of winning. If the Yankees win, you get a dollar and make a fifty-five-cent profit. Of course, you can buy thousands of those contracts. In the meantime, if someone else thinks the Yankees have a better chance, then they can buy your “contract” from you at a higher price than you bought it, and you will then make a profit from that sale.
Again, like the stock market, it is the expectation of the Yankee’s possible success that drives the price, not whether they actually succeed.
You can buy contracts on just about anything, not just sports – politics, the Academy Awards, and so on. One “investor” recently made over $400,000 by buying a contract that Nicolas Maduro would be overthrown.
Now, can you tell me how that is different from gambling on those events? Can you tell me how buying a “contract” on the expectation that the Yankees will win the World Series is different from “betting” on the expectation that the Yankees will win the World Series?
Well, even if you can’t, the Commodity Futures Trading Commission (“CFTC”) thinks it can.
The CFTC people are the ones who regulate futures markets. If you ever saw the movie, “Trading Places”, that was about futures markets (and how easily manipulated they are). But if you didn’t see the movie, a futures market is a place where you can buy or sell a contract to buy an asset at a predetermined price at a future date. In other words, you are “investing” (a.k.a “betting”) that the price of that asset will fluctuate in your favor by the time the contract comes due. For example, if I think gold prices are going to rise, I can buy a contract from you that obligates me to buy from you an ounce of gold at present prices two months from now. Today the present price is $4,500 an ounce. If my expectation is right and if, when my contract comes due, gold prices have gone up to $5,000 an ounce, the other guy has to pay me $5,000 and I make a five-hundred-dollar profit. Also, in the course of those two months, I could sell my contract to anyone else who has a higher expectation about the price of gold. Of course, these contracts are also sold in multiples.
The law says that there are three elements to a gambling transaction – consideration, risk, and prize. “Consideration” means that something of value is involved. “Risk” means that you are in peril of losing your something of value, and “Prize”, of course, means that at the end of the day, you can win something. In a futures contract, I am putting value (my money) in peril (risk) in the hope that I can win a prize (more money).
Any rational mind can see that futures markets are gambling. So is every stock trade. Unfortunately, the law in this area is anything but rational. Although the issue is now in court, the law presently says that futures markets, like stock markets, are not gambling.
In “Oliver Twist,” Mrs. Bumble says, “If the law supposes that, the law is a ass.”
Mrs. Bumble was not talking about financial markets, but she might as well have been.
We were right 