Ah, ultimately, prediction market hedging had to meet Insider trading and corporate bonuses
Prediction markets are increasingly accused of offering "silly" bets (mention markets, etc) #1556891... Tradfi, regulated market Cboe went, "HOLD MY BEER!"
Cboe wants to list options on KPIs for public companies, things like net income or revenue or, in the case of a car company, how many cars it makes. These KPIs tend to demonstrate how well the company is creating shareholder value, and so they correlate with stock price
One purpose of KPIs is to measure and reward employee performance: You figure out what you want from a division manager, you set some KPIs to reflect those goals, and then if she hits those KPIs you pay her a bonus. Senior corporate executives will often get bonuses based on achieving company-wide KPIs like revenue growth or profit margin. Elon Musk gets a bonus at Tesla Inc. for delivering a million robotaxis.
Amazing, company hedging out its own success vs paying executive bonus: #1525792, #1527191
STUPID, says Matt Levine:
- company is not indifferent between hitting KPI and not... they're literally there and set because company (board, shareholders) THINK it'd be better for the business to hit them
- "obviously shouldn't be" indifferent!
The company wants to sell a million cars. Selling a million cars is good: The company set “sell a million cars” as a goal because it thought that would be correlated with increasing shareholder value. The reason the company promised to pay its CEO a $20 million bonus for selling a million cars, and $0 for failing to sell a million cars, is because the company expected to be better off, financially, in the state of the world where it sells a million cars, even after paying the bonus.
The executive’s bonus is, itself, the hedge. The executive costs the company more in good states of the world (for the company), and less in bad states of the world. Why go to prediction markets to reverse that?
Apparently Louisiana State University, via some third-party financial hedging service related to payments of bonuses of coaches and teams has hedged a future successful football season:
the main thing that bugs me here is: Why should LSU hedge this risk? Surely LSU wants to have a successful college football season? Surely winning the national championship would be good for LSU? Like, economically? I am not an expert in the economics of college sports, but I gather that if you win national championships that helps you recruit tuition-paying students, and extract donations out of alumni, and get lucrative television contracts. The reason that you offer a celebrity coach a cash bonus for winning the national championship is that you expect a national championship to bring in more money. Why do you need to hedge that?
Next story is then, obviously, insider trading
Because LSU -- or a hypothetical car company of your choice... -- has non-public material information about future success that the market doesn't. Or?!
- It would be illegal if the company was trading its own stock, or its own stock options: Companies are not allowed to trade their own stock using material nonpublic information, on the theory that this violates their fiduciary duties to their shareholders. [4] The same rule applies to stock options. What we discussed last week is that Cboe wants to list these sorts of KPI binaries as, essentially, stock options: The theory is that a contract that pays $1 if a company’s earnings or revenue or car deliveries exceed X, and $0 if they don’t, is close enough to a bet on its stock that it should be listed on a stock options exchange, regulated by the US Securities and Exchange Commission, and treated like a stock option. If that’s correct — if the SEC lets Cboe list these KPI binaries — then the same insider trading rules might apply, and it would be illegal for the company to bet on its KPIs using inside information.
It wouldn't be insider trading for e.g., an oil company to bet/take positions on the future price of oil, under -- as far as I understand -- the theory that an individual oil company doesn't control/has the ability to affect the world price of oil. Or even have better-than-the-market information about what Brent will trade next year. NOT QUITE the same for e.g., a car company or LSU.
Amazing.
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Let the degens have their bets. An interesting question I have, though is who they expect to take the other side of these KPi bets -- I mean it's not magic money. Who is going to be the chump who lines upbon the other side of this? If not a chump, who says they will give very good odds?
We don't know in advance who's on the same side as the insider. If we did, then there'd be no point to the insider. So, absent insider information the market should just trade based on the information available and you hope you end up on the correct side (whether that's at time of resolution or at time of insider revelations).
isso!
I bet if she were a man they'd let her choose her own KPI's.