http://www.tomwbell.com/writings.html#gambling
Gambling for the Good, Trading for the Future:
The Legality of Markets in Science Claims
Tom W. Bell*
4 CHAPMAN L. REV. __ (2002) (forthcoming; draft v. 2002.04.23)
I. Introduction
Good ideas do not always lead to legal acts. Setting up a market in science claims,1 for
instance, certainly sounds like a good idea. Such a market could effectively open a shortcut to the future, giving us the means to answer crucial scientific questions more quickly, accurately, and cheaply than we can at present. Notwithstanding their salient benefits, however, U.S. law does not clearly approve of markets in science claims. They do not fit neatly into any category created by common law, statute, or regulation, and their legal status remains untested by the courts. This article aims to dispel some of the legal uncertainty surrounding markets in science claims and thus to help chart a path toward their implementation.2
* Associate Professor, Chapman University School of Law. B.A., with Honors, University of Kansas; M.A., University of Southern California; J.D., University of Chicago. I thank Robin Hanson, Ken Kittlitz, Denis Binder, and Stuart Benjamin for commenting on drafts of the paper; Carl A. Royal, esq., for sharing his knowledge of commodity futures law; and Donna G. Matias for editorial comments. Copyright 2001, Tom W. Bell. All rights reserved.
1 In very brief, a “science claim” constitutes a statement provable within a specified and finite period of time by
authoritative means. For details, see infra, Part II.
2 By way of full disclosure, I note that I have an interest in seeing markets in science claims made legal because I
would like to see one established in honor of the late Dr. Julian L. Simon. Toward that end, I have won the permission
of his widow, Dr. Rita A. Simon, to research the possibility of creating the Simon Market in Science Claims. See
Chapman Law Review [Vol. 4:1
draft v. 2002.04.23 2
Given that they remain almost wholly untried, and thus largely unknown, Part II offers a
concise introduction to markets in science claims. Part III then compares the transactions
supported by such a market with their closest analogs in extant U.S. law: gambling and
commodity futures trading.3 That comparison finds the policies behind such laws generally more
sympathetic to markets in science claims than the laws themselves, though even the latter offer
some hope. Nonetheless, recognizing that some people refuse to let bad laws stand in the way of
good acts, Part IV considers a few alternative strategies for implementing fully functional, if
somewhat less than fully public or legal, markets in science claims.
II. The Why and What of Markets in Science Claims
Scientific progress has given us increasingly healthy, wealthy, and well-informed lives.4
A chorus of critics, however, warns that our modern lifestyles threaten to repay us with
nightmares such as rising sea levels, genetically engineered monsters, and nano-terrorism.5
Doomsayers often err on the dramatic side, of course. Paul Ehrlich once predicted, for instance,
that the human race would run out of food by the year 1977.6 But the press loves a good horror
story, legislators cannot ignore public fears, and none of us can risk misjudging a potential
generally The Simon Market in Science Claims, Quantifying the Current Consensus, at http://www.simonmarket.org
(last visited Jan. 11, 2002).
3 This article concerns only the law of the United States, though of course some general observations may well hold
true of the law of other countries.
4 In the interest of brevity, “science” herein covers both the theoretical and applied—or what might be called
“technological”—aspects of science.
5 See, e.g., Bill Joy, Why the Future Doesn’t Need Us, WIRED, Apr. 2000, available at
http://www.wired.com/wired/archive/8.04/joy.html.
6 See PAUL R. EHRLICH, THE POPULATION BOMB 36-40 (1968).
Gambling for the Good, Trading for the Future
draft v. 2002.04.23 3
disaster. How, then, can we accurately resolve public policy questions that turn on disputed
scientific claims?
Current means of publicly debating science questions do not work very well. The mass
media too often dish up sensationalized and overly simplified reports. Official investigations
move slowly, rely on “official” opinions, and favor mushy committee-speak over hard truths.
Studies produced by think tanks and policy institutes raise questions of bias.7 Clearly, we need a
better mechanism for resolving scientific disputes.
A better mechanism would ideally give honest, accurate, and timely answers to complex
scientific questions. It would generate a precise numerical measurement of the current expert
consensus about any given issue. Far from elitist, it would reward innovative and accurate
predictions from any and all sources. Such an epistemic mechanism would look still better if it
stimulated public interest in scientific and technological issues, generated its own funding, and
lay ready at hand. Markets in science claims, a type of “idea futures” market, offer just such a
means of tackling difficult and important questions.8
7 Such questions arise because think tanks and policy institutes typically rely on continuing contributions from their
supporters, most of whom expect such organizations to favor particular points of view.
8 Robin Hanson apparently coined the term “idea futures” and has written several groundbreaking papers on markets in
such instruments. See, e.g., Robin Hanson, Could Gambling Save Science? Encouraging an Honest Consensus, SOC.
EPISTEMOLOGY, Jan. 1995, at 3, available at http://hanson.gmu.edu/gamble.html [hereinafter Hanson, Could Gambling
Save Science?]; Robin D. Hanson, Decision Markets, IEEE INTELLIGENT SYSTEMS, May/June 1999, at 16, available at
http://hanson.gmu.edu/decisionmarkets.pdf [hereinafter Hanson, Decision Markets]; Robin Hanson, Idea Futures:
Encouraging an Honest Consensus, EXTROPY, Winter 1991-92, at 7, available at http://hanson.gmu.edu/ifextropy.html
[hereinafter Hanson, Encouraging an Honest Consensus]; Robin Hanson, Idea Futures: How Making Wagers on the
Future Can Make It Happen Faster, WIRED, Sept. 1995, at 125, available at http://hanson.gmu.edu/ifwired.html;
Robin Hanson, Shall We Vote on Values, But Bet on Beliefs? (2000) (unpublished working paper, George Mason
University, Department of Economics), available at http://hanson.gmu.edu/futurachy.pdf [hereinafter Hanson, Vote on
Values].
I use “markets in science claims” herein because I intend to discuss a market hosting only those sorts of claims that
will give it the best case for legality, whereas Hanson describes “idea futures” markets largely in functional terms,
without barring them from hosting claims more likely to fall within the scope of gambling or commodity futures
trading laws.
Chapman Law Review [Vol. 4:1
draft v. 2002.04.23 4
I will here briefly outline the features of such a market in science claims by way of a
simple example, drawing heavily on the work of Professor Robin Hanson.9 Although drawing
analogies to gambling and futures trading helps to explain how such markets function, careful
readers should resist letting those pedagogical tools unduly sway them. As argued in Part III, the
type of market in science claims described here differs in some important respects—important
legal respects—from gambling or futures trading. It also bears keeping in mind that the
following example keeps details fairly thin and prices unrealistically low in the interest of
simplicity.
Suppose that you have a theory, highly unorthodox but well reasoned and consistent with
the available evidence, about the correlation between heat waves and earthquakes.10 Not having
an advanced degree in geophysics or a reputation in the field, you find it hard for anyone to take
your theory seriously. To demonstrate your confidence—and perhaps turn a profit in the
process—you turn to a market in science claims.
First, you carefully word your claim to say, in essence, that within twenty years the
professional geophysical community will have embraced your theory. You call your claim
“HeatQuake” and name an impartial, authoritative third party to judge the claim on its own terms
five years hence. Next, you have the science market’s bank print a matched pair of coupons, one
marked “HeatQuake true = $1,” the other, “HeatQuake false = $1.” As those labels indicate, the
holder of the first coupon can redeem it at the issuing bank for $1 if and when the HeatQuake
claim proves true, whereas the holder of the second can do likewise should HeatQuake prove
9 For Hanson's website devoted to such markets, see Robin Hanson, Idea Futures, at
http://hanson.gmu.edu/ideafutures.html (last visited Jan. 5, 2002), and Robin Hanson, Idea Futures Publications, at
http://hanson.gmu.edu/ifpubs.html#Hanson (last visited Jan. 5, 2002), for a collection of related writings.
10 The example comes from Guo Ziqi et al., Spatial Detect Technology Applied on Earthquake’s Impending Forecast
(Nov. 5-9, 2001) (paper presented at the 22d Asian Conference on Remote Sensing), available at
http://www.crisp.nus.edu.sg/~acrs2001/pdf/192Guo.pdf.
Gambling for the Good, Trading for the Future
draft v. 2002.04.23 5
false. The bank sells you the pair of coupons for $1, calculating that because the claim cannot
turn out to be both true and false, it will only have to pay off one of the two coupons.
Finally, you launch trading on the HeatQuake claim by offering to sell the “HeatQuake
false” claim on the science market for $.75. You keep the “HeatQuake true” coupon, looking
forward to redeeming it later. In contrast, a professional geophysicist who hears about your
offer, and thinks your theory ridiculous, snaps up the “HeatQuake false” coupon with the thought
that she will redeem it and make an easy $.25 on the deal. At that point, your HeatQuake (true)
claim trades at $.25 per coupon, showing that those playing the market regard your theory as
twenty-five percent plausible.
That price-per-coupon does not yet mean much, of course, because only one coupon has
swapped hands. But soon other professional geophysicists want to get in on what they regard as
a sure deal. So you return to the bank, buy more coupon pairs, and sell “HeatQuake false”
coupons to those skeptics as well. Their demand convinces you to raise the price of “HeatQuake
false” to $.84 per coupon, and then to $.96 per coupon. In fact, demand grows so great that you
can no longer afford to buy new coupon pairs from the bank. Fortunately, speculators, intrigued
both by the extreme odds and by a paper about your theory that you have published on your
webpage, join your side of the betting, increasing the market’s capitalization and pushing
HeatQuake’s price up from its $.04 per coupon low to $.12 per coupon. At that point trading
slows, your critics having spent as much as they dare and the speculators on your side unwilling
to risk more money on behalf of your theory.
A few months later, however, a Taiwanese researcher publishes a study showing a
statistically significant correlation between heat waves and earthquakes. Some of your former
adversaries become anxious upon hearing the news and offer to sell their “HeatQuake false”
Chapman Law Review [Vol. 4:1
draft v. 2002.04.23 6
claims at a slight loss. That moves HeatQuake’s price to $.19 per coupon, thus reflecting a new
assessment of your theory. More favorable research issues and the price moves again, and so on
and so forth, HeatQuake’s value at any given time quantifying the consensus of all who back up
their opinions with money.
This example skimps on many interesting details, as noted above, and a few very
important ones. Readers should refer to Hanson’s writing for both more complete descriptions
of “idea futures” markets, of which markets in science claims constitute a type, and for pointcounterpoint
treatment of many possible objections. Hanson’s work also describes the many
advantages to such markets: they quantify the current consensus about complicated issues
quickly, cheaply, and accurately; they reward valuable information no matter where it comes
from; they force wildly inaccurate or under-informed pundits to “put up or shut up”; they
generate public interest in current scientific disputes; they allow parties affected by the topics
covered in science claims to hedge against risk; they require no taxes but instead can fund
themselves; and, as the following examples show, they could start operating tomorrow.11
Although no fully functioning market in science claims currently exists, various playmoney
versions and real-money analogs offer illuminating examples. The Foresight Exchange,12
a play-money market designed to test Hanson’s theories, has been operating on the World Wide
Web since 1994.13 It includes hard science claims (such as CFsn, which predicts the success of
11 See supra note 8.
12 Foresight Exchange Prediction Market, at http://www.ideosphere.com/fx/main.html (last visited Jan. 26, 2002). For
a one-time alternative to the Foresight Exchange that has recently stopped active operation, see The U.S. Idea Futures
Exchange, at http://www.usifex.com (last visited Jan. 26, 2002).
13 Robin Hanson et al., The Story of the Idea Futures Web Site, at http://hanson.gmu.edu/if-prix.html (last visited Jan.
26, 2002).
Gambling for the Good, Trading for the Future
draft v. 2002.04.23 7
cold fusion),14 humane science claims (such as F-Pres, which predicts the United States will have
a female president before ),15 and fun claims (such as King, which predicts that Prince
Charles will be crowned the King of England).16 A handful of other web-based markets, because
they function more like popularity contests than measures of objective criteria, prove somewhat
less instructive. These markets include the Hollywood Stock Exchange, on which players use
“Hollywood Dollars” to trade “shares” of actors, movies, and music artists;17 PolitiStock, on
which players use “PolitiStock softMoney” to do much the same with politicians;18 and Wall
Street Sports, which targets athletes for similar treatment.19
Thanks to the proverbial distinction between talking and walking, no market limited to
mere play-money can fully duplicate the incentives generated by a market using real money.
The Iowa Electronic Markets (IEM) offers the best example of the latter.20 The IEM offers a
real-money on-line futures market where real-world events, most notably the outcomes of
14 Foresight Exchange Prediction Market, Claim CFsn - Cold Fusion, at http://www.ideosphere.com/fxbin/
Claim?claim=CFsn (last visited Apr. 1, 2002). As of April 1, 2002, CFsn traded at twelve units, indicating a
current consensus that the claim has a twelve percent likelihood of proving true. Id.
15 Foresight Exchange Prediction Market, Claim F_Pres-Female President Before , at
http://www.ideosphere.com/fx-bin/Claim?claim=F_Pres (last visited Apr. 1, 2002). As of April 1, 2002, F_Pres traded
at forty-one units. Id.
16 Foresight Exchange Prediction Market, Claim King - Prince Charles Remains Heir, at
http://www.ideosphere.com/fx-bin/Claim?claim=King (last visited Apr.1, 2002). As of April 1, 2002, King traded at
eighty-three units. Id.
17 Hollywood Stock Exchange, at http://www.hsx.com/ (last visited Jan. 6, 2002). It bears noting, however, that the
value of some items traded on the Hollywood Stock Exchange (such as MovieStocks) relates directly to an objective
measure (such as box-office receipts). See Hollywood Stock Exchange, Glossary, at
http://www.hsx.com/help/glossary/ (last visited Mar. 26, 2002); see also Laura Pedersen-Pietersen, The Hollywood
Stock Market: You Can’t Lose, J. REC. (Okla. City), Jan. 13, 1998, available at 1998 WL 11956867 (“HSX is designing
a system in which its traders can invest real money in film projects. Keiser [one of HSX’s creators] said the idea,
which is geared to cash-hungry independent film producers rather than big studios, will soon be before the SEC for
approval.”).
18 See PolitiStock, The Political Stock Exchange, at http://www.politistock.com/ (last visited Jan. 26, 2002); see also
PolitiStock, PolitiStock FAQ, What is softMoney?, at http://www.politistock.com/about/faq.shtml#whatissoftmoney
(last visited Mar. 26, 2002).
19 See Wall Street Sports, at http://www.wallstreetsports.com/ (last visited Jan. 26, 2002).
20 See IEM, Iowa Electronic Markets, at http://www.biz.uiowa.edu/iem/ (last visited Jan. 26, 2002).
Chapman Law Review [Vol. 4:1
draft v. 2002.04.23 8
political elections, determine contract payoffs.21 Even though the IEM limits accounts to five
hundred dollars,22 it has proven more accurate, on average, than polls in predicting election
results.23
Unfortunately, for all its help as an example of what a market in science claims might
accomplish, the IEM offers little help in clarifying the law generally applicable to real-money
idea futures markets. As discussed below, IEM operates by the grace of a special “no action”
letter issued by the Commodities Futures Trading Commission (CFTC), which states “that as
long as the IEM conforms to certain guidelines, the CFTC will take no action against it.”24 Even
if it wanted similar treatment, a market in science claims could not count on getting it.25 Absent
that one lucid statement by the CFTC, however, and as Part III reveals next, U.S. law does not
speak clearly for or against markets in science claims.
III. The Uncertain Legal Status of Markets in Science Claims
With regard to each area of law discussed in this Part, theory proves more forgiving than
practice. The policy goals that justify banning all but a few carefully circumscribed forms of
gambling and commodity futures trading do not convincingly justify placing identical constraints
21 See IEM, Iowa Electronic Markets, Frequently Asked Questions, at http://www.biz.uiowa.edu/iem/faq.html (last
visited Jan. 7, 2002).
22 See IEM, Iowa Electronic Markets, IEM Basics, Applying for an Account, at
http://www.biz.uiowa.edu/iem/trmanual/IEMManual_1.html (last visited Jan. 26, 2002) [hereinafter IEM, Applying for
an Account].
23 See IEM, Iowa Electronic Markets, Previous Market Performance (Graphs), IEM Accuracy Compared to Polls, at
http://www.biz.uiowa.edu/iem/media/previous.html (last visited Jan. 26, 2002).
24 IEM, Iowa Electronic Markets, Frequently Asked Questions, Is It Legal?, at http://www.biz.uiowa.edu/iem/faq.html
(last visited Jan. 26, 2002) [hereinafter IEM, Is It Legal?].
25 See discussion infra Part III.B.2.
Gambling for the Good, Trading for the Future
draft v. 2002.04.23 9
on a market in science claims. But the laws passed to enforce those policy goals, evidently not
having been written with a science claim market in mind, risk crushing it.
A. Science Claims as Gambling
Although a market in science claims would come close to qualifying as a gaming service,
it would arguably differ from traditional types of gambling on both legal and policy grounds.
The legal question presents the closest shave because answering it requires a somewhat
metaphysical—and therefore uncertain—inquiry into whether chance predominates over skill in
predicting the outcome of scientific disputes. The policy question proves less problematic, since
none of the reasons for outlawing or heavily regulating gaming appear to apply to markets in
science claims. This section discusses each question in turn.
1. Gaming Law
Although gaming remains largely the province of state law,26 which varies from state to
state, the common law generally requires proof of three elements to establish the existence of a
26 Although several federal statutes apply to gambling, they typically rely on state law for substantive definitions. See,
e.g., 18 U.S.C. § 1955(b)(1)(i) (2000) (defining “illegal gambling business” as one in “violation of the law of a State or
political subdivision in which it is conducted”); see also Racketeer Influenced and Corrupt Organizations Act (RICO),
id. § 1961(6) (defining “unlawful debt” in part by reference to state gambling laws); Indian Gaming Regulatory Act, 25
U.S.C. § 2703(7)(A)(ii) (1995) (defining “class II gaming” in terms of state law). Other federal statutes assess
criminality based on state gambling laws. See, e.g., Transportation of Gambling Devices Act, 15 U.S.C. § 1172(a)
(1997) (exempting from illegality transport of gambling devices to any state or state subdivision that has legalized the
gambling device in question); Interstate Horseracing Act of 1978, id. § 3002(3) (defining “interstate off-track wager” in
terms of state law); Wire Transfer Act, 18 U.S.C. § 1084(a) (making illegal under federal law the use of interstate
telecommunications facilities for placing wagers illegal in either the sender or recipient’s state); Charity Games
Advertising Clarification Act of 1988, id. § 1301 (excusing from illegality interstate transport of lottery tickets
permitted by authorities of affected states); Racketeering Act, id. § 1953(b) (excusing from illegality interstate
transport of wagering paraphernalia if legal under state law).
Chapman Law Review [Vol. 4:1
draft v. 2002.04.23 10
gambling transaction: prize, chance, and consideration.27 The first and third elements would
indisputably apply to a fully functioning market in science claims. With regard to the prize
element, a market participant would profit after having beat others in predicting the outcome of
any particular controversy. Indeed, the prospect of such a prize, together with the bragging
rights that come with it, serves as a vital incentive to draw players, and the information they
bring with them, into the market. With regard to the consideration element, a market participant
would have to buy into one side of a particular claim, via purchase of a “yes” or “no” coupon, in
order to qualify for the prize.
Whether a market in science claims would qualify as a gambling service thus turns on the
second of the three elements: chance. Here, the law grows murky. It cannot be that any element
of chance, when combined with prize and consideration, suffices to create a gambling
transaction; otherwise the most routine sort of business would likewise qualify. Even annuities,
treasury bonds, and certificates of deposit, though they qualify as safe investments, present some
risk of loss. So goes life.28 The question thus becomes: how much chance does it take to qualify
a transaction as gambling?
Authorities generally agree that under U.S. law, gambling arises when chance
predominates over skill or knowledge in determining whether one who has offered consideration
27 Ronald J. Rychlak, The Introduction of Casino Gambling: Public Policy and the Law, 64 MISS. L.J. 291, 294
(1995); Roland J. Santoni, An Introduction to Nebraska Gaming Law, 29 CREIGHTON L. REV. 1123, 1129 (1996); see
also State v. One Hundred & Fifty-Eight Gaming Devices, 499 A.2d 940, 951 (Md. 1985) (describing three elements of
gambling as “consideration, chance and reward”); State v. One ‘Jack and Jill’ Pinball Machine, 224 S.W.2d 854, 860
(Mo. Ct. App. 1949) (“(1) consideration or risk, (2) chance and (3) reward or prize”); Commonwealth v. Two
Electronic Poker Game Machines, 465 A.2d 973, 977 (Pa. 1983) (“consideration, a result determined by chance rather
than skill, and a reward”).
States also criminalize or regulate by statute a wide variety of games of chance. See, e.g., CAL. PENAL CODE §
330b (West 2001) (outlawing slot machines). They do not, however, frown on games of skill as a general matter. See,
e.g., id. § 330b(4) (exempting “predominately games of skill” from scope of statute). No state appears to have
specifically targeted idea futures markets for the same treatment they have given, say, poker.
Gambling for the Good, Trading for the Future
draft v. 2002.04.23 11
wins a prize in return.29 It is hard to specify, in the abstract and in general, how a market in
science claims would fare under that test. Participants in a such a market—especially successful
ones—would no doubt aver that they rely far more on talent than chance, and it does seem
plausible that intelligence and education would determine who wins most claims. The notion
that relatively ignorant participants might unwisely rely on luck when trading on the market
would not prove the contrary. As the California Court of Appeals has explained, “It is the
character of the game rather than a particular player’s skill or lack of it that determines whether
the game is one of chance or skill.”30
Nonetheless, the ultimate determination of whether chance predominates over skill or
knowledge would probably depend on the science claim in question—and on the judge or jury
making that determination. Consider the variety of claims currently at play on the Foresight
Exchange, a web-based play-money idea futures market.31 At one extreme fall claims like
NDSen, which asserts that before 2012, there will be a U.S. Senator not affiliated with either the
Democratic or Republican parties,32 and Ms.A, which asserts that before 2006, a woman will
28 For a delightfully philosophical judicial disquisition on the matter, see United States v. McDonald, 59 F. 563, 565-66
(N.D. Ill. 1893).
29 See Johnson v. Phinney, 218 F.2d 303, 306 (5th Cir. 1955) (“With respect to the element of chance, the authorities
are in general agreement that if such element is present and predominates in the determination of a winner, the fact that
players may exercise varying degrees of skill is immaterial; and the game or device is a lottery.”); Opinion of the
Justices, 795 So.2d 630, 635-36 (Ala. 2001) (collecting authorities elucidating the “American Rule,” under which a
scheme is a lottery if chance is the dominant factor in determining the result of the game even if skill or knowledge
plays some role); Finster v. Keller, 96 Cal. Rptr. 241, 246 (Cal. Ct. App. 1971) (“The test is not whether the game
contains an element of chance or an element of skill, but which of them is the dominating factor in determining the
result of the game.”). But see United States v. Rich, 90 F. Supp. 624, 629-30 (E.D. Ill. 1950) (finding bookmaking
scheme not a lottery, gift enterprise, or similar scheme under federal law on grounds, “there is always present
something more than a mere guess and there is nothing which resembles the distribution of prizes by lot”).
30 Finster, 96 Cal. Rptr. at 246.
31 See Foresight Exchange Prediction Market, supra note 12.
32 Foresight Exchange Prediction Market, Claim NDSen - Indie Senator by 2011, at http://www.ideosphere.com/fxbin/
Claim?claim=NDSen (last visited Jan. 26, 2002).
Chapman Law Review [Vol. 4:1
draft v. 2002.04.23 12
play in a professional major league sports game.33 Though they hardly pose the same odds as
roulette, winning those kinds of claims will require a significant, and arguably a predominant,
share of luck. At the other extreme fall claims like GBch and Neut.34 GBch asserts that
Goldbach’s Conjecture, which posits that every even number less than three is the sum of two
primes, will be settled by 2021.35 Neut asserts that the “rest mass of the electron neutrino is
greater than 0.01 eV in ordinary space.”36 A mathematician or theoretical physicist could surely
resolve those claims solely by dint of talent.37 Other claims fall at various points along the
spectrum that stretches from pure chance to pure skill. The parties responsible for operating a
real-money idea futures market would face the difficult and somewhat risky job of categorizing
which claims fall on the gambling side of the law.
It thus remains uncomfortably uncertain whether an aggressive prosecutor would allege
that a market in science claims constitutes gambling. Although in recent decades gambling has
won legal status in an increasing number and variety of real-space locales38—albeit under very
heavy regulatory burdens—that fact offers scant solace to an enterprise that almost certainly
33 Foresight Exchange Prediction Market, Claim Ms.A - Woman Major-Leaguer By 1/1/06, at
http://www.ideosphere.com/fx-bin/Claim?claim=Ms.A (last visited Jan. 26, 2002).
34 Foresight Exchange Prediction Market, Claim GBch - Goldbach Conjecture by 2020, at
http://www.ideosphere.com/fx-bin/Claim?claim=GBch (last visited Jan. 29, 2002); Foresight Exchange Prediction
Market, Claim Neut - Neutrino Mass >0, at http://www.ideosphere.com/fx-bin/Claim?claim=Neut (last visited Jan. 21,
2002).
35 Foresight Exchange Prediction Market, Claim GBch - Goldbach Conjecture by 2020, at
http://www.ideosphere.com/fx-bin/Claim?claim=GBch (last visited Jan. 29, 2002).
36 Foresight Exchange Prediction Market, Claim Neut - Neutrino Mass >0, at http://www.ideosphere.com/fxbin/
Claim?claim=Neut (last visited Jan. 26, 2002). Physicists define an eV (electron-volt) as the kinetic energy
acquired by an electron losing one volt of potential. See About, Definition of Electron-Volt, at
http://physics.about.com/library/dict/bldefelectronvolt.htm (last visited Mar. 26, 2002).
37 Indeed, one probably would have done so long ago were a sufficient amount of real money at stake.
Again, it makes no legal difference whether some participants in the market for such claims rely on luck rather
than the expertise of a mathematician or physicist. “It is the character of the game rather than a particular player’s skill
or lack of it that determines whether the game is one of chance or skill.” Finster v. Keller, 96 Cal. Rptr. 241, 246 (Cal.
Ct. App. 1971).
38 Rychlak, supra note 27, at 303 (“As more and more states seek to take advantage of the enormous profits that can be
derived from legalized gambling, new games, locations, and variations have swept across the nation.”).
Gambling for the Good, Trading for the Future
draft v. 2002.04.23 13
would have to operate over the Internet were it to operate effectively at all.39 Fortunately, courts,
as a rule, interpret criminal statutes narrowly.40 Regardless, the broad language of statutes that
outlaw gambling and the penalties that they impose41 might well give pause to anyone interested
in operating or entering a market in science claims.
2. Gaming Policy
In contrast, it appears quite plain that a market in science claims, as a matter of policy,
would differ crucially from gambling enterprises. Lawmakers have outlawed or heavily
regulated gambling purportedly because it presents an avoidable risk42 of social harm43 and offers
39 See discussion supra Part II (describing web-based operation of exemplar markets); see also discussion infra Part
III.A.2 (describing the policy concerns that generally fuel suspicion of web-based operations versus real-space locales).
40 See United States v. Lanier, 520 U.S. 259, 266 (1997) (“[T]he canon of strict construction of criminal statutes, or rule
of lenity, ensures fair warning by so resolving ambiguity in a criminal statute as to apply it only to conduct clearly
covered.”). This rule has particular salience in cases presenting entirely new facts to a court, as would be true of a
court analyzing the legality of a market in science claims for the first time. Id. (“[D]ue process bars courts from
applying a novel construction of a criminal statute to conduct that neither the statute nor any prior judicial decision has
fairly disclosed to be within its scope . . . .”).
41 See for example, CAL. PENAL CODE § 337a (West 1999), specifying penalties for:
Every person, . . . [w]ho, whether for gain, hire, reward, or gratuitously, or otherwise, at any time
or place, records, or registers any bet or bets, wager or wagers, upon the result, or purported result,
of any . . . contest, or purported contest, of skill . . . or upon the result, or purported result, of any
lot, chance, casualty, unknown or contingent event whatsoever; or . . . [w]ho lays, makes, offers or
accepts any bet or bets, or wager or wagers, upon the result, or purported result, of any . . . contest,
or purported contest, of skill . . . is punishable by imprisonment in the county jail for a period of
not more than one year or in the state prison.
42 Rychlak, supra note 27, at 298. Early American colonists objected to gambling largely because it represented a
discretionary and wasteful diversion from more important projects. Id.
43 E.g., John Warren Kindt, The Economic Impacts of Legalized Gambling Activities, 43 DRAKE L. REV. 51, 60-70
(1994) (relating evidence of social harm caused by legalized gambling). But see ROGER DUNSTAN, GAMBLING IN
CALIFORNIA IX-12 (1997) (“Any Attempt to Quantify Social Costs is Highly Speculative”); Mike Roberts, The
National Gambling Debate: Two Defining Issues, 18 WHITTIER L. REV. 579, 590-99 (1997) (offering skeptical review
of claims about relationship between gambling and crime); id. at 599-608 (offering skeptical review of claims about
harms suffered by compulsive and underage gamblers).
Chapman Law Review [Vol. 4:1
draft v. 2002.04.23 14
few if any social benefits in return.44 None of those three blameworthy features appear likely to
attach to markets in science claims.
First, a market in science claims would not create risks solely for the sake of
entertainment; rather, it would aim to quantify unavoidable risks already present in the world. In
other words, whereas a casino manufactures chance, a market in science claims would merely
report it. Second, the dry subject matter and slow pace of a market in science claims seems quite
unlikely to encourage the sort of compulsive or underage gambling that worries critics of the
gaming industry.45 Third, and most important, a market in science claims would offer significant
social benefits. The prices of its claims, because they would quantify current consensus views
about complex and often important scientific issues, would constitute a positive externality
capable of enriching the understanding of interested laypeople, policy makers, and the public at
large.46 Whereas legalized gambling at best diverts us from life’s woes and eases our taxes,47
markets in science claims promise to help us see into the future.
B. Science Claims as Commodity Futures Trading
Several ramifications, most of them somewhat discouraging, would follow if dealing in
science claims qualified as commodity futures trading subject to the Commodity Exchange Act
44 See Kindt, supra note 43, at 51-60 (criticizing claims made on behalf of economic benefits of legalized gambling);
id. at 81-83 (criticizing claims that legalizing gambling captures taxes otherwise lost on illegal gambling activities).
But see DUNSTAN, supra note 43, ch. IX (analyzing economic benefits of legalized gambling, both generally and with
particular regard to California).
45 See Hanson, Could Gambling Save Science?, supra note 8, at 11 (“[S]cience questions are generally too long term to
be a problem, offering no more ‘action’ than long-term stock investments.”).
46 See Hanson, Decision Markets, supra note 8, at 16-17.
47 See GUY CALVERT, GAMBLING AMERICA: BALANCING THE RISKS OF GAMBLING AND ITS REGULATION (Cato Policy
Analysis No. 349, 1999) (describing benefits of gambling). Calvert objects to state gaming monopolies, however, on
grounds that they unfairly and inefficiently shift tax burdens onto gamblers’ shoulders. Id. at 11.
Gambling for the Good, Trading for the Future
draft v. 2002.04.23 15
(CEA),48 the federal statute that establishes the authority of the CFTC to regulate such trading.
In that case, the parties who wanted to start a market in science claims would either have to
convince the CFTC that they had surmounted the relevant—and hardly trivial—regulatory
hurdles or that the CFTC should grant them a special exemption from regulation.49 Neither
option would prove easy, and failure to successfully pursue either would cast doubts on the
legality of any science claims market subject to the CEA.50 There remains a third option,
however, that would raise relatively few legal difficulties: instead of creating a freestanding
specialized market, convince an exchange already regulated by the CFTC to start listing science
claims. This section will explore each of those three options in turn. First, though, it must
grapple with the preliminary question of whether dealing in science claims indeed falls within
the scope of the CEA.
1. Do Science Claims Fall Within the Scope of the CEA?
Would the transactions supported by a market in science claims qualify as commodity
futures trading subject to the CEA? Here, as in the discussion of gambling law above, a firm
answer proves elusive. It at least seems safe to say that the intangible nature of science claims
would not alone suffice to remove a market in them from the scope of the CEA. The CEA
48 7 U.S.C. §§ 1-27f (1999).
49 See discussion infra.
50 See, e.g., 7 U.S.C. § 2(a)(1)(A) (granting the CFTC exclusive jurisdiction over “accounts, agreements . . . and
transactions involving contracts of sale of a commodity for future delivery, traded or executed” on markets subject to
CFTC regulation); id. § 6(a) (providing that, absent an exemption by the CFTC, “it shall be unlawful for any person to .
. . [deal] in . . . a contract for the purchase or sale of a commodity for future delivery (other than a contract which is
made on or subject to the rules of a board of trade, exchange, or market located outside the United States, its territories
or possessions) unless” in connection with a CFTC-regulated exchange); id. § 6c(b) (prohibiting transactions in
commodity futures in violation of CFTC regulations).
Chapman Law Review [Vol. 4:1
draft v. 2002.04.23 16
defines “commodities” so broadly as to include “all services, rights, and interests in which
contracts for future delivery are presently or in the future dealt in.”51
The CFTC might thus argue that a market in science claims deals in contracts for the
future delivery of rights, each such right embodied in a coupon purchased at a value between $0
and $1 when its associated claim remains unresolved and redeemable at $0 or $1 when the claim
settles.52 The CFTC would arguably err in that characterization, however. A more accurate
account might have it that a market in science claims deals in contracts for the present delivery
of rights, as embodied in coupons redeemable at $1 each in the event a particular claim holds
true.53 To put it more concisely, and no less accurately, a science claim market deals in the spot
purchase and sale of the coupons themselves.
The subtle distinction between those two characterizations makes a significant legal
difference. As both a matter of policy and law, the CEA does not cover contracts that settle with
the delivery of the underlying commodity. The CEA draws the justification for its very existence
from the notion that buying and selling contracts for the future delivery of a commodity, rather
than buying and selling commodities intended for actual delivery, invites dangerous
speculation.54 In essence, “[a] futures contract enables an investor to hedge the risk that the price
of the commodity will change between the date the contract is entered and the date delivery is
due—without having to take physical delivery of the commodity.”55 The CEA does not cover
51 7 U.S.C. § 1a(4) (2001).
52 See discussion supra Part II (describing how decision markets function).
53 One of Robin Hanson’s earliest works on decision markets included, as an illustrative insert, a green coupon payable
in the event a nanocomputer having particular specifications exists by the year 2020. See Hanson, Encouraging an
Honest Consensus, supra note 8.
54 See Lynn A. Stout, Why the Law Hates Speculators: Regulation and Private Ordering in the Market for OTC
Derivatives, 48 DUKE L.J. 701, 721-24 (1999).
55 Commodity Futures Trading Comm’n v. Noble Metals Int’l, Inc., 67 F.3d 766, 772 (9th Cir. 1995); see also Stout,
supra note 54, at 722 (CEA does not apply “to contracts that are intended to be settled by delivering the underlying
good or service.”).
Gambling for the Good, Trading for the Future
draft v. 2002.04.23 17
contracts intended to effectuate future delivery, much less contracts that effectuate immediate
delivery.56
Understood as a forum for dealing in claim coupons, therefore, a market in science claims
cannot fall within the scope of the CEA. The market could easily manage to ensure not only the
future delivery of claim coupons in satisfaction of participants’ contractual rights, but also the
instantaneous delivery of them. The market might, for instance, cast coupons in digital form,
encrypt them, and download them immediately to purchasers’ computers.57 “Sell” transactions
would function the same way in reverse, with sellers uploading the encrypted certificate. Better
yet, the market could function as a peer-to-peer network wherein coupons transfer directly to and
from participants’ computers via the Internet, without passing through the market’s servers at all.
If that technological account proves unilluminating, it might help to think of claim
coupons as akin to lottery tickets—albeit tickets for a “lottery” where skill or knowledge
predominates over chance in determining which coupons win58—and the market as a place
where people gather to buy and sell their rights to various jackpots. Notably, the CFTC claims
no jurisdiction over transactions in lottery tickets. Nor could the CFTC distinguish between
these cases by claiming that the odds attributed to a science claim fluctuate, given that a lottery’s
odds may vary with the number of tickets sold.59
Admittedly, this line of argument may sound like the legal equivalent of a programming
hack–a trick designed to fool a system into generating unintended or even unwanted results.
56 7 U.S.C. § 2(a)(1)(A) (specifying that the CFTC has jurisdiction over, in relevant part, “transactions involving
contracts of sale of a commodity for future delivery . . . .”) (emphasis added).
57 Compare the analogous technologies used by such digital cash services as PayPal and Javien. PayPal, at
http://www.paypal.com (last visited Mar. 16, 2002); Javien, at http://www.javien.com (last visited Mar. 29, 2002).
58 See supra Part III.A.1 (explaining legal standard for defining gambling transactions).
59 Lottery services thus often include a disclaimer such as this one from the West Virginia Powerball Gameshow: “The
odds of winning will vary, depending on the number of entries received by the Lottery.” West Virginia Lottery,
Powerball The Game Show, at http://www.state.wv.us/lottery/gameshow.htm (last visited Mar. 16, 2002).
Chapman Law Review [Vol. 4:1
draft v. 2002.04.23 18
Courts, like systems administrators, naturally frown on such maneuvering. As the Ninth Circuit
observed, “[S]elf-serving labels that the defendants choose to give their contracts should not
deter the conclusion that their contracts, as a matter of law, [are futures contracts subject to the
CEA].”60 Nonetheless, courts should not read the CEA expansively. The Act specifically
cautions that it shall not be “construed as implying . . . that” transactions specifically excluded
from, exempted from, or otherwise not subject to it “would otherwise be subject to this Act.”61
Suffice it to say that because a market in science claims would neither operate exactly
like nor serve all the same goals as the markets lawmakers evidently had in mind when they
enacted the CEA,62 it remains an open question whether a court would hold that a market in
science claims falls within the scope of that Act. It remains a vital question, too. As the next
subsection illustrates, if markets in science claims do not escape the scope of the Act, they will
almost certainly have to rely on the good will of CFTC regulators to operate within the bounds of
U.S. law.
2. Markets in Science Claims Under the CEA
Suppose for the sake of argument that the sorts of transactions supported by a market in
science claims fall within the scope of the CEA. Thanks to amendments made by the
Commodity Futures Modernization Act of 2000,63 the CEA now includes loopholes that can save
60 Commodity Futures Trading Comm’n, 67 F.3d at 773 (quoting Commodity Futures Trading Comm’n v. Am. Metal
Exch. Corp., 693 F. Supp. 168, 192 (D.N.J. 1988)) (alteration in original) (quotation omitted). In the transaction
critiqued by the court, the defendants claimed they had delivered metal to investors by transferring title to it, even
though the metal remained in a third-party depository. Id. at 772-73. In that case, there existed a tangible commodity
separate from the title. Id. The intangible nature of science claims, in contrast, ensures that the commodity (the right
to payment contingent on a claim’s settlement) effectively merges with the title (the coupon documenting the right).
61 7 U.S.C. § 2(i).
62 See Hanson, Decision Markets, supra note 8, at 18 (“Accepted functions of markets now include entertainment,
capitalization, and hedging, but not information aggregation,” and explaining that information aggregation is the
primary function of an idea futures market.).
63 Pub. L. No. 106-554, 114 Stat. 2763 (2000).
Gambling for the Good, Trading for the Future
draft v. 2002.04.23 19
even commodities avowedly within its scope from almost all CFTC regulation. Most
pertinently, the CEA now leaves almost untouched64 transactions in “excluded” commodities
entered into on a principal-to-principal basis by eligible contract participants in an electronic
trading facility.65 Yet the CEA defines the relevant terms so as to make even that, the most
promising loophole, a problematic fit for markets in science claims.
It appears at least plausible that any of the claims associated with the coupons traded on a
market in science claims would qualify as an “excluded commodity” under the CEA,66 whether
as an “index based on . . . values, or levels that are not within the control of any party to the
relevant contract,”67 or as a “contingency . . . that is—(I) beyond the control of the parties . . .
and (II) associated with a financial, commercial, or economic consequence.”68 Granted, that
interpretation stretches the statutory language a bit because it is not clear that the values of
science claims would constitute indexes under the former provision, or that their values would be
associated with the sorts of consequences specified in the latter one.69 But commentators have
already concluded that commodity futures based on weather forecasts—instruments already in
64 7 U.S.C. § 2(d)(2) requires only that excluded electronic trading facilities satisfy the applicable requirements of §§
7a, 7a-1, and 7a-3, which in general call for self-regulatory processes.
65 Id. §§ 2(d)(2), (e)(1); see also CHARLES W. EDWARDS ET AL., COMMODITY FUTURES MODERNIZATION ACT OF 2000:
LAW AND EXPLANATION 26-27 (2001). For the definition of “electronic trading facility,” see 7 U.S.C. § 1a(10).
66 It bears noting that in the rather less likely event that the rights traded on a science claims market qualified as
commodities subject to the CEA, but not as “excluded commodities,” they would certainly qualify as “exempt
commodities” under the Act. See 7 U.S.C. § 1a(14) (“The term ‘exempt commodity’ means a commodity that is not an
excluded commodity or an agricultural commodity.”). Were it found to transact in exempt commodities, a market in
science claims would at best qualify for slightly more stringent regulatory burdens than it would under the least
regulatory approach afforded to excluded commodity electronic trading facilities. Id. § 2(h)(3)-(5); EDWARDS ET AL.,
supra note 65, at 28-29.
67 7 U.S.C. § 1a(13)(iii).
68 Id. § 1a(13)(iv).
69 According to one commentator, excluded commodities also impliedly refer to non-finite processes, Louis Vitale,
Comment: Interest Rate Swaps Under the Commodity Exchange Act, 51 CASE W. RES. L. REV. 539, 587 (2001),
whereas the claims on a science market, because they would include judging deadlines, would resolve in a finite
period.
Chapman Law Review [Vol. 4:1
draft v. 2002.04.23 20
trade70 and not far removed from the sorts of claims in which a science claims market would
traffic—fit the CEA definition.71 Furthermore, CFTC regulations themselves interpret the Act in
terms broad enough to include science claims, explaining that commodities have:
(i) A nearly inexhaustible deliverable supply;
(ii) A deliverable supply that is sufficiently large that the contract is highly unlikely to
be susceptible to the threat of manipulation; or
(iii) No cash market.72
The first two criteria arguably hold true of a science market claim because there exists no
theoretical limit to the number of opposing true/false assessments that might attach to any
particular claim.73 The first two criteria notwithstanding, the third criterion seems sufficient to
bring science claims under the rubric of the CEA because claim coupons are not the sort of thing
you can generally buy and sell on the open market.
A market in science claims would have to satisfy still other statutory definitions,
however, before it could qualify for the loophole that allows certain transactions in excluded
commodities to largely escape CFTC regulation. What about those other terms of art? The CEA
does not define “principal-to-principal,”74 though common sense and common law would
indicate that most transactions on a market in science claims would, or by market rules easily
could, qualify as such because a typical participant—a professional scientist or educated lay
70 See, e.g., Neela Banerjee, When Bad Weather is Good Business, N.Y. TIMES, Aug. 13, 2000, § 3, at 4, available at
2000 WL 25031051 (interviewing Ravi Nathan, portfolio manager of weather derivatives at Aquila Energy, regarding
nature and uses of weather derivatives); Chicago Mercantile Exchange, Weather Products, at
http://www.cme.com/products/index/weather/products_index_weather.cfm (last visited Jan. 9. 2002) (discussing
weather-based futures traded on the exchange).
71 EDWARDS ET AL., supra note 65, at 26.
72 17 C.F.R. § 37.3(a)(1) (2002); see also id. (5) (specifying that commodities meeting those criteria qualify as
“excluded commodities”).
73 See Hanson, Could Gambling Save Science?, supra note 8, at 16-18; Hanson, Vote on Values, supra note 8, at 22-24
(discussing why idea futures markets resist manipulation).
74 EDWARDS ET AL., supra note 65, at 27.
Gambling for the Good, Trading for the Future
draft v. 2002.04.23 21
person—would play the market on his or her own behalf. A market in science claims would also
easily qualify as an “electronic trading facility” as defined by the Act.75
The problem arises with the definition of “eligible contract participants, ” a label that the
CEA generally reserves for financial institutions, financial professionals, or individuals having at
least five million dollars in assets.76 That describes very few scientists or educated lay people,
yet the success of any market in science claims would rely on their participation. The definition
of “eligible contract participants” thus effectively closes the regulatory loophole most promising
for markets in science claims. To put it more precisely, and to introduce the second means of
escaping CFTC regulation of commodity futures falling within the CEA's scope, no scientist or
educated lay person would qualify as an eligible contact participant unless the CFTC specially
judged him or her “eligible in light of the financial or other qualifications of the person.”77 The
CFTC would no doubt have wide discretion in making such a judgment.78
More generally, the CFTC might allow a market subject to its jurisdiction to engage in
futures trading by specially excusing that market from regulation.79 Unlikely though that option
may sound, the CFTC has in fact established something of a precedent for liberating idea futures
markets from its oversight. The only real-money idea futures market operating within the reach
of U.S. law, the Iowa Electronic Market, operates by the grace of a no-action letter received from
75 7 U.S.C. § 1a(10) (2001).
76 Id. § 1a(12).
77 Id. § 1a(12)(C).
78 See Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 843-44 (1984) (holding that an agency’s
interpretation of an ambiguous statute will have controlling weight unless manifestly unreasonable).
79 7 U.S.C. § 6(c) (allowing the CFTC to exempt a class of transactions from its regulations on a finding that it would
serve the public interest). But see id. § 6(c)(2)(B)(i) (allowing such exemption only for transactions between
“appropriate persons”); id. § 6(c)(3) (defining “appropriate persons” largely to include only financial institutions and
professionals). Only one loophole arguably allows the CFTC to exempt from its regulations the sort of science claims
market described herein. Id. § 6(c)(3)(K) (including “other persons that the Commission determines to be appropriate
in light of their financial or other qualifications, or the applicability of appropriate regulatory protections”).
Chapman Law Review [Vol. 4:1
draft v. 2002.04.23 22
the CFTC.80 That letter not only saves the IEM from the running the gantlet of CFTC
regulations but also, thanks to the preemptive force of federal regulation, arguably81 saves the
IEM from liability under state gambling or bucket-shop laws82 that would potentially interfere
with the CFTC’s regulatory authority.83 To win such benefits, however, the IEM had to make a
concession: no individual’s account can exceed five hundred dollars.84
Even if the CFTC were willing to issue another such no-action letter, no market in
science claims could accept a five hundred dollars per account cap without losing some of its
functionality. If the CFTC were willing to impose a less restrictive account limit--high enough,
say, to fund a comfortable living for a renegade but ultimately correct scientist--a market in
science claims might still fulfill much of its promise, of course.85 If the CFTC were furthermore
willing to forego blunt account caps for the more traditional and subtle tools of position limits
80 IEM, Is It Legal?, supra note 24 (“The CFTC has issued a ‘no-action’ letter to the IEM, stating that as long as the
IEM conforms to certain guidelines, the CFTC will take no action against it.”).
81 In fact, neither the CFTC nor the IEM expressly claims that the no-action letter preempts state law, and the precise
legal question appears to remain unresolved. Practically speaking, though, state prosecutors and regulators have left
the IEM in peace.
82 See Kevin T. Van Wart, Preemption and the Commodity Exchange Act, 58 CHI.-KENT. L. REV. 657, 659 n.15 (1982)
(“The term ‘bucket shop’ refers to firms that offer customers the opportunity to bet on changes in futures market prices
without actually entering into futures transactions on the contract market.”).
83 See Am. Agric. Movement, Inc. v. Board of Trade, 977 F.2d 1147, 1157 (7th Cir. 1992) (“State laws specifically
directed towards the futures markets naturally operate in an arena preempted by the CEA.”); Rasmussen v. Thomson &
McKinnon Auchincloss Kohlmeyer, Inc., 608 F.2d 175, 178 (5th Cir. 1979) (“[T]he Commodity Exchange Act
preempts all state laws inconsistent with its provisions.”); Thomas Lee Hazen, Rational Investments, Speculation, or
Gambling?–Derivative Securities and Financial Futures and Their Effect on the Underlying Capital Markets, 86 NW.
U.L. REV. 987, 1013-17 (1992); Van Wart, supra note 82, at 720 (“Congress has vested solely in the CFTC both
authority to determine whether to designate a contract market for a proposed future, and exclusive jurisdiction for the
regulation of such markets after their designation.”); id. at 662-63 (discussing how, before the advent of federal
preemption, states’ “bucket shop” laws restricted the operation of futures markets).
For a preemption provision only very recently added to the CEA, and especially suitable for a science claims
market capable of benefiting from the “excluded commodity” loophole, discussed supra, see 7 U.S.C. § 16(e)(2) (“This
Act shall supersede and preempt the application of any State or local law that prohibits or regulates gaming or the
operation of bucket shops (other than antifraud provisions of general applicability) in the case of . . . an agreement,
contract, or transaction that is excluded from this Act . . . .”) (citation omitted).
84 See IEM, Applying for an Account, supra note 22 (“The minimum investment for U.S. Dollar denominated accounts
is $5.00 and the maximum is $500 per account. Investments may be increased at any time, provided they do not
exceed the maximum $500 limit . . . .”).
Gambling for the Good, Trading for the Future
draft v. 2002.04.23 23
(which restrict the size of any trader’s stake in a particular contract),86 or trading limits (which
restrict the size of particular transactions),87 a market in science claims might operate still more
effectively. Thanks to the Chevron doctrine88 and the CEA’s broad language about such
matters,89 however, the CFTC would have near-absolute discretion to give a market in science
claims as little leeway as it gave to the IEM—or even less.
In summary, a freestanding market in science futures would face several options, each
legally uncertain and none without risk, for accommodating U.S. commodity futures regulations.
First, proponents of a market in science futures might successfully argue that it does not engage
in commodity futures trading, at least not the kind covered by the CEA. In that event, the market
would not win CEA’s protective preemption of state laws, such as those criminalizing or
regulating gambling. Second, should a market in science claims find itself subject to the CEA, it
could attempt to qualify for the “excluded commodity” loophole that would largely free it from
CFTC regulation. It looks highly probable, however, that the CFTC would have wide discretion
to thwart any such attempt. At the least, to judge from precedent, the CFTC would probably not
exclude a market in science claims from its regulations without also imposing crippling
conditions. That makes the third option—seeking a no-action letter from the CFTC—similarly
unattractive.
85 Its hedging functions might suffer, however. If account limits were set at one hundred thousand dollars, for instance,
an insurer could hardly buy claims payable in the event of global warming as a hedge against the losses caused by
rising sea levels.
86 See 7 U.S.C. § 6(a).
87 Id.
88 See Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 843-44 (1984) (holding that an agency’s
interpretation of an ambiguous statute will have controlling weight unless manifestly unreasonable).
Chapman Law Review [Vol. 4:1
draft v. 2002.04.23 24
3. Listing Science Claims on an Existing Market
Although markets in science claims may very well have trouble meeting the CEA’s
requirements if they fall within the scope of that Act, science claims themselves might not face
the same difficulty. The claims would have to find a new home, however, on a market already
approved by the CFTC. Of the five types of exchanges defined by the CEA,90 registered
derivatives transaction execution facilities (DTEFs)91 appear most suitable for hosting science
claims.
The Commodity Futures Modernization Act of 2000 recently amended the CEA to give
trading facilities broad discretion in the types of claims they issue.92 Essentially, when a DTEF
submits a new contract for approval,93 the regulations deem the contract approved unless the
CFTC objects to it as not conforming to CEA standards.94 What standards would the CEA apply
to such contracts? The same standards (among others) already applied above95 in explaining why
science claims qualify as “excluded commodities”: the underlying commodity may have a
nearly inexhaustible deliverable supply, a supply so large as to render the contract highly
resistant to manipulation, or no cash market.96 The Act also separately provides that DTEFs can
89 See 7 U.S.C. § 6(c)(1) (“In order to promote responsible economic or financial innovation and fair competition, the
Commission . . . may . . . exempt any agreement, contract, or transaction (or class thereof)” from most of the
requirements of the CEA.).
90 EDWARDS ET AL., supra note 65, at 21.
91 7 U.S.C. § 7a (establishing DTEFs); see also EDWARDS ET AL., supra note 65, at 31-33 (discussing DTEFs). In
general terms, because DTEFs host trading only in contracts that resist manipulation, they operate under comparatively
little CFTC oversight.
92 See EDWARDS, ET AL., supra note 65, at 21.
93 A “contract” in this context represents the very thing traded on the DTEF: a contract for the payment of a particular
sum contingent on a particular condition. It should thus call to mind the coupons traded on a market in science claims.
94 See 7 U.S.C. § 7a-2(c)-(d); 17 C.F.R. § 40.3 (2001).
95 See discussion supra Part III.B.2.
96 7 U.S.C. § 7a(b) (describing requirements for contracts traded on a DTEFs).
Gambling for the Good, Trading for the Future
draft v. 2002.04.23 25
elect to transact in excluded commodities.97 It thus looks likely that DTEFs could support
trading in science claims.
This is not to say that most people would be able to participate directly in science claims
hosted on DTEFs. Direct participants would in general have to qualify as “eligible traders,” a
term that would fit very few of the people from whom a market in science claims would need
input in order to fulfill its potential.98 By working through a futures commission merchant,
however, professional scientists and educated lay people could indirectly win access to science
claims trading on a DTEF.99
Would a DTEF have any interest in issuing science claims? Such markets exist100 to
make money, after all, and it does not appear extraordinarily likely that the transaction fees
charged for trading in science claims would generate a great deal of revenue.101 Still, it might
generate enough positive public relations to justify some costs, and benefactors interested in
promoting science claims might help out as well. Here, as with regard to markets generally, we
can only guess what services parties would find worth their while to sell.
97 Id. § (g).
98 Id. § (b)(3); see also id. § 1a(12) (defining “eligible contract participant”).
99 Id. § 7a(b)(3)(B); see also id. § 1a(20) (defining “futures commission merchant”). Relying on agents such as futures
commission merchants would plainly disqualify a science claims market from the loophole discussed, supra, in Part
III.B.2, as that loophole requires principal-to-principal transactions.
100 Or, more precisely, would exist; at present, no DTEFs exist. CFTC.gov, Table of Registered DTEFs, at
http://www.cftc.gov/dea/deadtefs_table.htm (last visited Jan. 25, 2002).
Chapman Law Review [Vol. 4:1
draft v. 2002.04.23 26
IV. Alternatives to Fully Public and Legal Science Markets
As the above analysis suggests, it will not be easy for a market in science claims to win
clearly legal status under U.S. law. No discussion of the legality of such markets would be
complete, however, without at least a brief mention of a few more subtle, if sometimes less legal,
approaches to the problem. This Part considers three such strategies, each having a lower costto-
risk ratio than the next.
At the high end of the cost-to-risk spectrum falls the strategy of keeping a science claims
market wholly in-house, open only to the members of a commercial firm. Hewlett-Packard, for
instance, has found that internal idea futures markets consistently beat official forecasts at
predicting printer sales.102 Siemens has experimented with similar markets,103 and the
Department of Defense has invited proposals for the development of limited-access futures
markets for its use.104 The law appears to regard such markets as purely private affairs, not
subject to the regulatory burdens that might attach if the public could participate in them.105
They thus pose little legal risk. A market in science claims would probably not achieve its
potential unless it were open to a very large variety and number of participants, however, and to
try to bring them all within the bounds of a private firm would probably not prove cost-effective.
101 Markets in science claims appear unlikely, after all, to generate the sort of trading volume generated by for-profit
commodities futures markets.
102 Hanson, Vote on Values, supra note 8, at 11.
103 Hanson, Decision Markets, supra note 8, at 19.
104 See Small Business Innovation Research, Department of Defense, Defense Advanced Research Projects Agency
Submission of Proposals, DARPA SB012-012: Electronic Market-Based Decision Support, at
http://www.acq.osd.mil/sadbu/sbir/solicitations/sbir012/pdf/darpa012.pdf (last modified Apr. 30, 2001) (requesting
submissions for proposals to “[d]evelop electronic market-based methods and software for decision analysis, to
aggregate information and opinions from groups of experts,” and to identify “a group of knowledgeable market
participants . . . .”).
10
