Federal Securities Lawyer & Attorney : Porter Wright Law Firm : Securities Exchange Law : Serving Ohio, Washington DC, Florida

As the Presidential primary elections continue, news outlets have been reporting the accuracy of prediction markets used to predict which candidates will win. A prediction market is like a securities exchange; but instead of trading stocks, market participants trade “contracts” that designate whether an unambiguous future event will occur. The contracts trade among market participants with bid and ask prices the same way that stocks trade on a stock exchange. The bid and ask “prices” are typically limited to between 1 and 100 “points,” which represent money on some prediction markets. The 1-100 scale allows market participants to think of the trading price as the percentage likelihood that an event will occur.

For example, one such contract available on RasmussenMarkets.org, which is a prediction market that does not use money, is whether Hillary Clinton will receive the Democratic Presidential nomination in 2008. Currently, this contract is trading at around 60 points, which means that market participants collectively think there is a 60% chance that Clinton will receive the nomination.
The theory of a prediction market is that by giving individuals an incentive (often monetary), they will collectively use the information available to them to predict an accurate outcome. For example, RasmussenMarkets.org accurately predicted that Barack Obama and Mike Huckabee would each win in the Iowa caucuses.

Prediction markets implicate securities laws because the markets are particularly vulnerable to inside information, as evident by the fact that the price of a contract often increases or decreases dramatically in the days preceding a scheduled outcome. If people are trading on inside information, this begs the question of whether the SEC could intervene, which would first require determining that the contracts traded are securities. Interestingly, the Iowa Electronic Markets, a non-profit, research-based prediction market created by faculty at the University of Iowa, uses real money but operates under a “no-action” letter from the Commodity Futures Trading Commission.

Below are some other popular prediction markets:

Inkling Markets
Fluid Innovation
Hollywood Stock Exchange
Intrade

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The NASDAQ Listing Qualifications Department is currently accepting public comment on a new draft of its Marketplace Rules. The Rules, which describe the requirements for listing securities on NASDAQ, have been reorganized, and in some cases rewritten, to make them easier to navigate and understand; however, no substantive changes have been made.

Several improvements have been implemented, including a logical order for the Rules that begins with NASDAQ’s overall regulatory authority, then describes the requirements of each tier of the NASDAQ markets, including Global Select, Global, and Capital Markets, and then addresses corporate governance requirements, non-traditional securities listings, the process for regaining compliance, and fees, in that order.

Other new organizational features include more descriptive headings, a definitions section that precedes the Rules, elimination of sections that have been “reserved” due to deletions over the years, and discrete sections for interpretative materials.

NASDAQ will receive comments until February 1, 2008, and the changes will be filed with the SEC by the end of the first quarter 2008.

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Yesterday it was announced that Nasdaq has reached an agreement with Dubai Bourse to purchase the Nordic OMX Exchange group, a collection of securities exchanges in Sweden, Denmark, Finland, and the Baltics. As part of the deal, Dubai Bourse will end up owning 20% of Nasdaq and 5% of Nasdaq’s voting power. Dubai Bourse also gets the right to buy most of Nasdaq’s 31% stake in the London Stock Exchange, a large block that represents Nasdaq’s failed attempt to buy the London market.

Security concerns have already been raised by President Bush, who announced a national security review of Dubai and its ownership of a major U.S. exchange. Whether these concerns will rise to the level of previous concerns  over Dubai Ports World, a United Arab Emirates company with control of U.S. ports remains to be seen.

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Nasdaq announced earlier this week that it will consider selling its 31% interest in the London Stock Exchange, but most likely not to a single purchaser. The sale would end Nasdaq’s 18 month-long attempt to buy the LSE, a goal that has been continuously opposed by the LSE’s management.

Investors bent on competitive global trading (or at least competitive Euro-American trading) will have to continue to wait for the world’s second trans-Atlantic stock exchange following NYSE Group Inc.’s $14 billion purchase of Paris-based Euronext NV in April. But maybe the wait won’t be too long. Some commentators suggest Nasdaq wants to sell its LSE stake in order to outbid Borse Dubai, owner of two Dubai stock exchanges, for Sweden’s OMX market. The current bid is close to $4 billion.

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Reuters is reporting here that Nasdaq is in talks with the China Securities Regulatory Commission (China’s version of the SEC) to set up an office in Beijing. According to the article, the NYSE is also pursuing a Chinese office, the obvious goal being to secure listings from Chinese companies. Nasdaq has signed memorandums of understanding with the governments of two Chinese provinces to obtain listings and an additional MOU with the Shanghai Stock Exchange, the contents of which have not been disclosed. 

Beijing has recently drafted rules to allow foreign stock exchanges to establish offices in China, but at the same time several reports have indicated that China wants to start its own Nasdaq-style exchange. Commentators predict China, followed by India, will inspire the fiercest competition for listings among numerous overseas exchanges including markets in Germany, Hong Kong, and South Korea.

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The New York Stock Exchange today joined the American Stock Exchange in opposing a proposal by the Nasdaq Stock Market to allow any company with a three-character symbol that transfers its securities to Nasdaq from another domestic market to continue using its existing three-character symbol. Traditionally, companies listed on the New York or American Stock Exchange use one-, two-, or three-letter symbols, whereas companies on Nasdaq use four- and five-letter symbols.

Delta Financial Corporation became the first company with a three-letter symbol (DFC) on Nasdaq when it transferred the listing of its common stock from Amex on March 22, 2007. As reported by American Public Media, DFC’s three-letter switch was approved as a one-time occurrence.  

Nasdaq claims that allowing the portability of symbols will promote competition among exchanges, reduce investor confusion, and allow issuers to evaluate exchanges based on the most efficient trading platform and lowest investor costs without worrying about educating investors on a potential new symbol. 

NYSE and Amex counter that the proposed rule change will cause investor confusion, incorrectly assumes an issuer owns its symbol, and is inconsistent with previous requests by the SEC that the exchanges work together to develop a symbol portability plan. (See the NYSE comment letter here and the Amex comment letter here).

Public comment is now closed on the Nasdaq proposal, and the SEC must now decide whether to approve the proposed rule change or begin proceedings to determine whether the proposed rule change should be disapproved.

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