More on "Invest in Mideast futures"

San Diego Union-Tribune
http://tinyurl.com/ie93

July 29, 2003

A San Diego company is working with the Pentagon on a futures market that
would allow anonymous speculators to bet on assassinations and terrorist
attacks.

The online market, which is set for a trial launch on Friday, is meant to
help the government predict political and economic events in eight Middle
East countries. Traders would buy contracts that would pay off if, for
example, the Jordanian government were overthrown in the fourth quarter of
2004.

Two senators who revealed the plan yesterday called it "wasteful" and
"repugnant."

"The American people want the federal government to use its resources
enhancing our security, not gambling on it," said Sen. Ron Wyden, D-Ore.

Hours after Wyden and Sen. Byron Dorgan, D-N.D., expressed outrage about the
idea, the Pentagon said it would "continue to re-evaluate the technical
promise of the program before committing additional funds beyond fiscal year
2003."

The idea, called the Policy Analysis Market, is being developed by Net
Exchange, a San Diego consulting firm that has created market systems for
such companies as Sears, Roebuck and Co. The market will be managed by the
Pentagon’s Defense Advanced Research Projects Agency, known as DARPA.

Charles Polk, president of Net Exchange, said it should be regarded as
little more than an analytical tool.

"It has a good chance of providing an interesting and independent source of
information that policy analysts and policy makers can assess as they will,"
Polk said. "I don’t think anybody will make any major winnings."

In gathering information and pooling opinions, the market is billed as an
alternative to committees, polls or experts’ surveys. It would operate
somewhat like the Chicago Mercantile Exchange, only instead of corn and
beef, traders would place bets on variables such as the economic health of
Turkey in the second quarter of 2004.

The idea of using an online futures market to predict political events is
not new. Professors at the University of Iowa have run an electronic futures
market since 1988 that aims to predict the popular vote in presidential
elections. Various Web sites, such as Tradesports.com, have used futures
market-like mechanisms to enable people to bet on questions such as whether
Saddam Hussein will be alive a month from now.

Wyden explained it this way : "For instance, you may think early on that
Prime Minister X is going to be assassinated, so you buy the futures
contracts for five cents each. As more people begin to think the person’s
going to be assassinated, the cost of the contract could go up to 50 cents.

"The payoff if he’s assassinated is a dollar per future. So if it comes to
pass, and those who bought at 5 cents make 95 cents. Those who bought at 50
cents make 50 cents."

** The senators also suggested that terrorists themselves could take part
because the identities of the traders will be unknown.

** "This appears to encourage terrorists to participate, either to profit
from their terrorist activities or to bet against them in order to mislead
U.S. intelligence authorities."

The Pentagon, in defending the program, said that such futures trading has
proven effective in predicting events such as oil prices, elections and
movie theater box office.

"Research indicates that markets are extremely efficient, effective and
timely aggregators of dispersed and even hidden information," said a
Pentagon statement. "Futures markets have proven themselves to be good at
predicting such things as election results ; they are often better than
expert opinions."

Polk said his six-person company was one of a number of firms to bid on the
project and was awarded a DARPA contract in summer 2001. Net Exchange first
proposed a broader market that included more variables and a larger
geographic area, Polk said, but revised its plan to focus on the Middle East
after the Sept. 11 attacks.

Net Exchange received an initial $100,000 for the project through DARPA’s
Small Business Innovation Research Program, Polk said, and has been awarded
a $750,000 contract to complete the second phase.

Traders can register for the Policy Analysis Market starting Friday, and
trading will start two months later. The trial will at first be limited to
100 participants who will be credited $100 with which to trade. The trial is
intended more to catch bugs in Net Exchange’s system than it is to predict a
rebel coup.

A broader public launch is planned for January. Polk said traders will have
to deposit between $200 and $1,000 and he suggested graduate students and
think-tank researchers will be likely participants.

The initiative has become the latest problem for DARPA, a Pentagon operation
that has ran into controversy for the Terrorism Information Office, a
sweeping electronic surveillance plan once described as a way of
forestalling terrorism by tapping into computer databases to collect
medical, travel and credit records as well as financial data.

Worried about the reach of the electronic surveillance program, Congress
earlier this year prohibited what was then called the Total Information
Awareness program from being used against Americans. Its name was later
changed to the Terrorism Information Awareness program.

The senators who revealed the market program said it fell under the control
of Adm. John M. Poindexter, a former top national security adviser under
President Ronald Reagan. Poindexter was convicted of lying to Congress about
weapons sales to Iran and illegal aid to Nicaraguan rebels, but the
conviction was later reversed on the grounds that he had been given immunity
for testimony in which he lied.

The market’s Web site says it will focus initially on the economic, civil,
and military futures of Egypt, Jordan, Iran, Iraq, Israel, Saudi Arabia,
Syria and Turkey and the impact of U.S. involvement with each.

The value of the contracts will be based on data developed by the Economist
Intelligence Unit, which is an arm of The Economist Group, which publishes
the Economist magazine.

Net Exchange was founded in San Diego in 1994 by a team of researchers from
the California Institute of Technology. Polk received his Ph.D. from Caltech
in 1993 and John Ledyard, the company’s chairman and chief executive, is a
professor of economics at the university and chairman of the Division of the
Humanities and Social Sciences.

Net Exchange generates about $1 million in revenue each year, Polk said,
most of it coming from private sector contracts. Net Exchange also built the
ACE Emissions market for trading emissions in the Los Angeles Basin, in
addition to BondConnect, a system for trading bond portfolios.