Why 'Terrordaq' will come - if the Pentagon likes it or not

By Giles Wilson
BBC News Online

Plans to set up a stock market for tip-offs about terrorism have been shelved by the US Government. But that won't stop someone else setting it up - and may not even stop Osama bin Laden being able to make cash out of betting on his own whereabouts.

The disgust was impossible to avoid. A leaked report from a unit within the Pentagon which had the job of finding imaginative solutions to the threat of terrorism had proposed setting up a market which traded in tips, whispers and sensitive intelligence.

The thinking went that if someone knew something useful, they might try to make money out of it. Sure, it might be a bit tasteless, but at least their information would be out in the open, where something could be done about it.

The theory was that the free market might have ways of winkling out sensitive information that conventional sources could not.

THE BASICS People bet on the likelihood of an event, eg an attack With better information, traders are more likely to make money It's in traders' interests to find inside tips, secret sources etc Authorities could monitor sudden movements in the market, and take action if necessary Pentagon axes online terror bids

But the backlash to the idea came almost before the lash itself. "Ridiculous and grotesque" said one US senator. Another claimed he couldn't convince people it wasn't a hoax. The plug was pulled on the screens at the innocuously titled Policy Analysis Market before it was even open for business.

There were other objections too. Wouldn't it mean that terrorists could get a financial reward from betting on their own activities? What if the authorities took a tip so seriously they intervened to stop the event, depriving the source of their profit?

A traditional futures trader: is trading on terror just a logical extension?

But amid all this revulsion, questioning and debate, a market in trading on exactly the kind of future events the Pentagon envisaged has already been flourishing.

Think you know when WMDs will be found? Why not bet against someone who thinks you don't. Think you know when Osama bin Laden's number will be up? Fancy betting against someone who thinks you are wrong. Who knows, maybe you're betting against the man himself.

The idea of a federal betting parlour on atrocities and terrorism is ridiculous and it's grotesque Ron Wyden, Democratic Senator

And if those are too exotic for your tastes, how about speculating on whether Tony Blair is going to resign? You can do that too (but judging by the fall in the price for that particular prospect since the start of the week, the prime minister is finishing the week better than he started it).

The key to the growth in trading such prospects over the last 18 months, according to one of the UK's foremost experts on betting, is the internet's ability to link people who are prepared to bet against each other. It is like sexed-up spread-betting on a Test match - and it's only yet in its early stages.

Bin Laden: Information about his whereabouts could leak

Professor Leighton Vaughan Williams, director of the betting research unit at Nottingham Trent University has been researching the accuracy of the predictions on websites which trade event-based futures, such as the Ireland-based Tradesports.com which happily takes bets on the fortunes of both Saddam Hussein and the Tampa Bay Buccaneers.

And his conclusion? When real money's at stake, the predictions are very accurate indeed - and significantly more correct than the results of shadow markets such as the BBC's Celebdaq which use pretend money.

Indeed so accurate are the predictions, he maintains, that people reading newspapers in the run-up to the Iraq war had "much lesser insight" into when fighting would start than people who were keeping an eye on what trades were going on.

Insights

So where do these insights come from?

"No-one knows who it is who trades on these markets but there's lots of money at stake," he says.

"Pundits in the media can say something because they think it's the thing to say, or because they want to believe it, or because there's a particular editorial control put over them. Trading markets however are from an outside point of view, you don't know where the market's coming from.

"It could be somebody who's heard something, it could be somebody in Iraq. It could even be the guy who was paid the cash for identifying where Saddam was," he says.

In the run-up to 11 September, these markets might have detected an increase in the chance of an attack, he says. "How about a CIA operative who had got information but couldn't get their bosses to take notice? What if they decided to try and make some money on it instead?"

Research indicates that markets are extremely efficient, effective and timely aggregators of dispersed and even hidden information US Defence Department, defending the idea on Monday

The development of trading into sensitive information can be seen as a natural extension of both traditional city trading and gambling. But Prof Vaughan Williams believes the markets will develop more - and it will be private organisations, not bodies like the Pentagon, running things.

As for the markets currently running, he says: "I'm sure the security services are monitoring them already."

Mr Blair, whose fortunes improved throughout the week, according to traders

It won't be long, he says, before people can hedge bets on their own job security. "For instance if you were a British Airways employee, and you thought you might lose your job, you would be able to trade on the possibility of losing your job. You hedge your job prospects, not in the traditional way by trading shares in the company, but by trading on how many jobs you think will be lost.'

So you might lose your job, but you would make some money.

"What people trade on is irrelevant," he says. "It makes no difference if you're trading on how much gold is, or betting on how many goals there are.

"I never used to know whether to call it betting or trading. But it's both."

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Add your views on this story, using the form below:

The whole idea is so stupid and unethical, the mind boggles that it is even being given news time. The terrorists themselves will profit from it, and some corrupt individuals will profit from insider information. Far better to deal with the sources of terrorism.
Alex, London

Well the fundamentals are right: the market knows more than any individual and the social dynamics creates events in a way that is still little understood. But as ever the dead hand of officialdom is thinking up ways to organise that market on a traditional model that they can control. I have news for you boys. The genie got out of the bottle long ago. You need to make a bigger mental leap than this one. But keep trying. The direction is right.
Alastair, Aberdeen

I think this is a great idea...after all, people have been speculating on the price of oil for years, and it is very sensitive to global conditions, and the threat of conflict. Anything that might help give an indication of major events is surely worth trying.
Robert Cumming, Dunfermline

The details of the abnormal "put" options on both United Airlines and American Airlines immediately prior to 11-SEP-01 are available to both the SEC and the US Government/Intelligence agencies. The fact that they have neither been pursued nor published proves that there is no serious intent to pursue crime if it leads in the "wrong" direction.
Fred, Hungerford

Surely for every spook with a hot tip, there will be a million fools who believe whatever spin the government puts about, and this will inevitably distort the price, no?
Nik, London

TerrorBet.com has already opened for preregistration for trading in December. Far from being in bad taste, innovative ideas of needed to provide a much needed breakthrough in combatting the new forms of threat we all face. The core is improved statistical analysis not profit. After hype of the headlines, many market players are beginning to appreciate the solid basis behind the idea.
Chad Noble, London

Why not? The terrorist falls off the fine line between madman and genius. That madman/genius never works alone. His minions / lemmings/ sheep, whatever, are stupid. Stupidity leads to mistakes like the desire for easy money. If a bet provides accurate information allowing a move to avert another 9/11 bring it on!
CJ Smith, Belfast

2000 people die after an attack on the Twin Towers. Hooray! I won £5000! Something wrong isn't there?
Andrew, London

Tradesport are trading a contract on whether Admiral Poindexter (the guy who touted this idea from the Pentagon) will keep/lose his job over the coming months. LOL!
Chris Lane, UK