What happened when a political market went wrong?

One of the biggest challenges running a betting market on events in the news is finding a mechanism that defines how the bet will be settled. With elections that is easy but with other markets problems can emerge as a big row involving the Dublin-based betting exchange, Tradesports, has shown.

For at the start of July, until it was overshadowed by the tragic events in the Middle East, the main international story was the launch by the North Koreans on American Independence Day of a long-range missile by the North Koreans.

The possiblity that such a move would happen had been the subject of a Tradesport market, established a fortnight earlier for or against the probability that North Korea would “launch a test missile leaving its airspace by the end of July 2006”.

You might think that those who had bet “Yes” would end up winners while those who had bet “no” would have lost. Wrong! For because of the way Tradesport interpreted the rules of the market the test did not happen and it was the “No” punters who won.

Tradesports stuck by the detailed requirements of the bet that “the source used to confirm a test missile being launched and leaving North Korean airspace will be the U.S. Department of Defense.”

So statements on July 4, by the White House Press Secretary, Tony Snow, and the National Security Advisor Steve Hadley, that there had been multiple launches did not suffice.

According to the SmartMoney site Tradesports spokesman Matt Bonner, said they made “numerous efforts to receive direct confirmation from the DoD” but were told “no statement involving the missile test and North Korean airspace would be forthcoming, as those specifics are considered a matter of national intelligence/security.”

So what it came down to was what punters were betting on was whether the US Department of Defense would produce a statement of confirmation – not whether the North Koreans would fire a missile.

In these cases the betting exchange sits between two sets of punters – those who bet one way and those who bet the other. If it had ruled the other way then the “No” backers could have argued that the strict terms of the bet they had entered into had not not been met.

TradeSports made this statement “..We apologise for any inconvenience caused. In particular we apologise to those members who interpreted a ‘contract intention’ without having assimilated the Contract rules before they traded…”. The firm promised to make some changes to the way it settles markets like this.

If Tradesport had been a UK-based exchange then punters could have complained to IBAS which has a procedure for dealing with disputes of this nature.

I am grateful to Chris Masse who runs the excellent Blog of Prediction Markets for assistance in preparing this article.

Mike Smithson