The United States bans online gambling in US based markets, so prediction markets are common and involve the use of play money. Betting markets and spread betting are much higher risk and involve bets placed with real money, accounting for potentially large gains or losses.

1. Prediction Markets
Part II
By: M Danielson
http://www.financialtrading.com/

2. Recap

Prediction markets are a tool for
collecting group opinion using market
principles.
◦ They are a way to bring together people’s
opinions.

Public opinions are expressed by
buying and selling stocks that
represent possible answers to a
question being posed.

3. Google

Google’s prediction markets were launched in
April 2005 and are patterned after the Iowa
Electronic Markets.

In Google’s terminology, a market asks a
question (“How many users will Gmail
have?”) that has 2‐5 possible mutually
exclusive and completely exhaustive answers
(“Fewer than X users”, “Between X and Y”,
and “More than Y”).
◦ Each answer corresponds to a security that is
worth a unit of currency (called a “Gooble”) if the
answer turns out to be correct (and zero
otherwise).

4. Google

Each quarter, about 25‐30 different markets were created.

Participants received a fresh endowment of Goobles which
they could invest in securities.
◦ The markets’ questions were designed so that they could all be
resolved by the end of the quarter.

At the end of the quarter, Goobles were converted into raffle
tickets and prizes were raffled off.
◦ The prize budget was $10,000 per quarter, or about $25‐100 per
active trader (depending on the number active in a particular
quarter).

Participation was open to active employees and some
contractors and vendors; out of 6,425 employees who had a
prediction market account, 1,463 placed at least one trade.

5. Google
Prediction markets at Google
Type
Example
Share of markets
Demand forecasting
# of Gmail users at end of quarter
20%
Performance
Google Talk quality rating
15%
Company news
Russia office to open
10%
Industry news
Will Apple release an Intel‐based Mac?
19%
Decision markets
Fun
Unique participants
Will users of feature A users use feature B
more?
How many "rotten tomatoes" will Episode
III get?
1,463
Orders
253,192
Trades
70,706
Markets run (questions)
Securities (answers)
270
1,116
2%
33%

6. Google

Google works as a search engine because it collects
information that is naturally dispersed across the web.
◦ The internal prediction markets are based on the same principle:
Googlers from across the company contribute knowledge and
opinions that are collected into a forecast by the market.

In addition to making predictions, internal prediction can
provide insight into how organizations process
information.

Prediction markets provide employees with incentives
for truthful revelation and can capture changes in
opinion at a much higher frequency than surveys,
allowing one to track how information moves around an
organization and how it responds to external events.

7. Betting Market

A betting exchange is an entity which
provides “trading” facilities for retail or
bookmaker customers to buy and sell
contracts.

Betting markets are used extensively
in wagers made on horse racing and
sports markets.
◦ Also include elections and current event
markets.

8. Prediction vs. Betting Market

The United States bans online
gambling in US based markets, so
prediction markets are common and
involve the use of “play” money.

Betting markets and spread betting
are much higher risk and involve bets
placed with real money, accounting for
potentially large gains or losses.

9. Spread Betting

The idea of spread betting was
invented by Charles K. McNeil, a
mathematics teacher from Connecticut
who became a bookmaker in Chicago
in the 1940s.

The idea became popular in the
United Kingdom in the 1970s and
1980s.

10. Spread Betting

Spread Betting officially came to the UK in 1974.

Stuart Wheeler, a young unemployed stock broker, had
the idea to start people trading on gold prices.
◦ This idea was to create an index that would give investors
the opportunity to bet on the movement of gold, without
having to actually buy or sell the physical commodity in the
market.

Wheeler and friends called this company the Investors
Gold Index - until the Bank of England objected to it
trading under that name and it became IG Index.
◦ The IG soon extended its product range to include foreign
exchange and commodities.

11. Spread Betting

Spread betting is defined as wagering on the
outcome of an event.

The payoff is based on the accuracy of the
wager, rather than on a simple “win or lose”
outcome.
◦ The spread is a range of outcomes, and the bet
is whether the outcome will be above or below
the spread

Purpose: to create an active market for both
sides of a binary wager, even if the outcome
of an event may appear to be biased to one
side or the other.

12. Spread Betting

There is almost always a favorite and an
underdog in every sporting event.
◦ The odds are too biased towards the favorite
when bets are placed on a simple “Who will
win?” wager.

Point spread is essentially a handicap
towards the underdog.

With spread betting, the question now
becomes, “Will the favorite win by more
than the point spread?”

13. Example

The bookmaker advertises a spread of 4 in a
certain game.
◦ If the gambler bets on the underdog, he will “take
the points” and win if the underdog’s score PLUS
the spread is greater than the favorite.
 Underdog 8, Favorite 10: 8+4>10 … gambler wins
 Underdog 8, Favorite 13: 8+4<10 … gambler loses
◦ If the gambler bets on the favorite, he will “give
the points and win if the favorite’s score MINUS
the spread is greater than the underdog.
 Underdog 5, Favorite 10: 10-4>5 … gambler wins
 Underdog 8, Favorite 10: 10-4<8 … gambler loses

14. Spread Betting

Bookmakers can move the point spread to
any level to create and equal number of
participants on each side of the wager.

As long as the total amount wagered on each
side is roughly equal, bookmaker is
unconcerned with actual outcome.
◦ They profit from commissions.

Bookmaker also profits by paying one (or
both sides) less than the amount collected
from betters.

15. Spread Betting

Push: when the final bet results in a
tie.
◦ This results in a “no action” game when
no money is won or lost.
◦ This is not favorable because the book
ends up losing money on overhead costs.
◦ Sports books are permitted to state “ties
win” or “ties lose” to avoid refunding every
bet.

16. Spread Betting

Total over/under (or O/U): bet on the
total number of points scored by both
teams.
◦ The total is popular because it allows
gamblers to bet on their overall perception
of the game (high-scoring offensive show
or defensive battle) without needing to
pick the actual winner.

17. Example

Suppose the Chicago Bears are
playing the Eagles and the total is set
to 44.5 points.
◦ If the final score is Bears 24, Eagles 17,
the total is 41 and bettors who took the
under will win.
◦ If the final score is Bears 30, Eagles 31,
then the total is 61 and bettors who took
the over will win.

18. Financial Spread Betting

Largest part of spread betting in the UK deals
with financial instruments and financial
markets.
◦ Sports operations are much less significant and bring
in less revenue.

Unlike fixed-odds betting, the amount won or
lost can be potentially unlimited.
◦ It is usually possible to negotiate limits with
the bookmaker:
 A stop loss or stop will automatically close the bet if the
spread moves against the gambler by a specified amount.
 A stop win, limit or take profit will close the bet when the
spread moves in a gambler's favor by a specified amount.

19. Dangers of Spread Betting

According to an article in The Times dated 10 April 2009
it is indicated that approximately 30,000 spread bet
accounts were opened last year.

The largest study of gambling in the UK on behalf of the
Gambling Commission found that serious problems
developed in almost 15% of spread betters compared to
1% of other gambling.
◦ A report from Cass Business School found that only 1 in 5
punters ends up a winner.

Although financial spread betting in the UK is regulated
by the Financial Services Authority, spread betting
companies provide little protection for those who run
into trouble.

20. Pros and Cons of Spread
Betting
PROS
CONS

One in the eye for the tax man. The money you
make from spread betting is currently free from
capital gains tax. Of course always be aware tax
rules can change.

Emotion. Spread betting can be addictive and the
unpredictability of market movements can produce feelings
of panic, complacency, euphoria, dejection, infallibility and
failure.

Pay as you go. By using spread betting all the
costs are included in the spread.

Losing streak. As you only have to put up a fraction of your
total exposure, be aware that if things do turn against you,
you can lose more than your original deposit.

No short changing. Investors can 'short' and
make money when share prices.


The world is your oyster. Bets can be placed on
a complete range of global markets and shares,
sectors, commodities and currencies. You can
back anything from Microsoft to metals.
Ignorance. Only fools rush in without understanding how to
play the game. Unless you know how the system works and
you have a carefully prepared plan for success, you will
lose.

No get rich quick scheme. Yes, spread betting is a great
and cost effective way to trade and take positions. If you
make bad investment decisions, it doesn't matter what
method you use to trade. Always do your research, and
don't get carried away.

No perks of the job. You don't pick up the perks of actually
owning the shares. For example you will miss out on gorging
yourself on tea and chocolate biscuits at a company's
annual meeting or getting to vote on shareholder issues.

To sum up, it is important to remember that not every trade
is a winner. Any market matches buyers and sellers. If you
are buying at a certain price, somebody is willing to sell. You
can't both be right.


Going up a gear. You can gear up or leverage
your investment. In other words you only need to
put down a fraction of the value of your trade or
position. For spread betting if you bet say, £10 per
penny movement this is equivalent to trading 1000
shares. In summary you get more bang for your
buck.
This means that you can make more by putting
down less money, but of course as always it is only
fair to point out that you can also lose more.

21. Spread Betting Now

The spread betting industry has come a long way in the past 35
years.
◦ Now a recognized and established investment outlet for individual traders to
make tax free gains trading the stock market.
◦ Many tools for trading that were previously only available to professional
traders are now available to all.

Recent economic turmoil has pushed the financial markets into the
mainstream more than ever before.
◦ Banks failing, shares dropping, and the rise in the price of oil have resulted in
shifts in all markets. This has made people more aware of the impact financial
changes have on our lives.

People are also much more interested in taking control over their
own finances.
◦ This has helped the spread betting industry evolve, leaving investors and
traders with more choice, more tools and more markets than ever before!

22. Works Cited

http://www.financialtrading.com/