I really don't see the harm in prediction markets, even if they are putting together strange derivatives.
The law is obviously imperfect. But the goal --- don't let us pretend we're financing we're just running games --- seems pretty straightforward.
So to my mind, debating the regs that brought down this exchange takes you in one (or more) of three directions:
1. You can believe we shouldn't regulate gambling at all, because people will find ways to gamble, and many people can gamble responsibly. As Levine points out, we might even benefit from the information generated by the gaming activity.
2. You can believe "main street" investors should have access to private company equity and not just large institutional investors.
3. You can believe we should not have "safety and soundness" as a goal for regulating retail financial transactions, and that the SEC/CFTC/&c should not serve a role for the financial system that is similar to the FDA's role for drugs (lots of people also think that the FDA does more harm than good). That is to say: companies should not have to spend large amounts of money to ensure "truth in labeling" for financial products.
I tend to think you probably have to believe all of these things to think what Sand Hill Exchange was doing should have been lawful. For instance: if you think there's value in generating retail exposure to startup equity, there are obviously saner ways to provide it than relaxing regs on derivatives betting exchanges.
[1] (mortgaged backed) = lenders were rubber stamping home loans to people who given their current income would not be able to pay back the loan.
[2] "security derivatives" were created on those mortgages as financial instruments that could be traded like stocks, effectively like allowing a 3rd party to take out insurance on your car and get paid when you get in a crash... a full on BET against the bad mortgages - paying out if the mortgages went into default
[3] https://en.wikipedia.org/wiki/Credit_rating_agencies_and_the... — credit rating agencies, trusted to research, validate and rate the mortgages were for some reason giving the obviously bad and likely to default mortgages ratings on AAA, thus allowing for a greater insurance pay out on the security-derivative bets, creating an incentive for investors to make shit tons of money from defaults on these loans not to mention the repossession of the properties by banks.
TLDR; Unregulated 'prediction markets' seemingly colluded to create loans that could not be payed back, than created insurance on those bad loans - falsely evaluated as safe, inflating the pay out, and effectively fabricated a profitable bet against the entire global economy.
It's quite likely that a completely unregulated market would not have that particular set of incentives.
Another way to put it is that I sort bad regulation below no regulation: good regulation, no regulation, bad regulation.
Just because the impression that someone out there is protecting people will cause them to be less wary. Some people will still buy snake oil, but a whole nother group of people will come to use the term as a pejorative.
Given the actual history of how these regulations came about, and what things were like before and after, this statement is inane.
I take it you don't think it is possible for bad regulation to mislead people? Because that's a piece of what happened in the mortgage crisis, the ratings agencies were given a license to charge fees for putting stamps on bonds, and those bonds were sold into regulated investments like insurance and pensions, investments that people trusted to be in secure assets, in large part because they were regulated.
Take away the regulation and a bunch of that money is stuffed in mattresses, which while perhaps unfortunate, is obviously a better outcome than disappearing into a financial black hole.
Trust needs to be restored in regulators, rather than abolishing them and being left with so much uncertainty and a playing field ripe for malice.
Almost certainly not. The regulatory burden of operating in the finance industry is overwhelming - innovation is not so much stifled as killed. The big boys thrive because the little guy doesn't stand a chance from the get-go. The whole industry is estimated to be worth ~17% of global GDP and that money, which is almost equivalent to the output of Europe (or every country in the world except the top ~17 richest nations), goes to a list of companies so small you could probably write their names on a single page. It's a joke.
The insurance industry is worth another ~5trillion USD annually. The name of the game here, of course, is predictive analysis and I'd bet that my Netflix recommendations are more accurate than any assessment any insurance company has ever made of me.
I think you'd have diversification up the wazoo in extremely short order.
Edit: accuracy
This seems unlikely. Is this a top-line number? Why aren't existing VISA/MC processors the largest companies in the economy? The number you just gave is orders of magnitude higher than Apple's profits.
A couple minutes Google searching suggests that being a card issuer puts you in a relatively low-margin business with absolutely enormous network effects.
Edit because HN isn't allowing a reply: these numbers are industry revenue, not profit.
https://www.bcgperspectives.com/content/articles/financial_institutions_pricing_global_payments_2014_capturing_next_level_value/
http://data.worldbank.org/indicator/NY.GDP.MKTP.CD?order=wbapi_data_value_2013+wbapi_data_value+wbapi_data_value-last&sort=descIt's revenue, not profit, because I'm coming at this from the perspective of money (potentially) wasted. It's all in the first link.
That's not a reason in itself to not have it. I don't care if the rules are hard to follow. If you don't want to deal with them, go do something else.
"innovation is not so much stifled as killed."
If the "innovation" is stuff like mortgage backed securities, then good riddance. Finance is not a place where innovation should be happening.
"The whole industry is estimated to be worth ~17% of global GDP"
Which is about 17% too much for an industry that doesn't actually produce anything of value.
I don't mean that as an argument against regulation, but as an example, there are lots of stock market rules that make it simpler for individuals to make investments (required reporting of information, standards about how it is reported, etc). Without those rules, the risk would be higher and the investment would likely be lower, and the lower investment is exactly less connection to that market.
I don't buy that for a second.
I think if I don't own stocks and bonds it is quite clear that I am not as sensitive to those markets.
So given your testable claim, I'd expect you to be able to provide before-and-after examples of regulations, wherein you show that even a significant percentage (of all regulations) make things worse.
I don't have a magic information oracle, so I can't show you what the US economy would look like if there had never been an SEC, but I sort of expect that there would be less individuals that held stock in giant companies (because I expect there would be less overall investment and I expect that people with small amounts of money would be less inclined to expose it to an unregulated stock market).