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Tradesports has introduced a new online futures contract on whether or not the US will go into recession in 2007. On opening day of the new contract, the implied probability is about 25.5%.

Sadly, we have another case of Tradesports screwing up the rules that determine how a contract will be settled (remember their North Korean nukes scandal?). The news announcement of the new contract says,

For expiry purposes a recession is defined as two successive quarters of negative real economic growth. Expiry will be based on figures released by the United States Department of Commerce and reported in three independent and reliable media sources.

The contract will be expired once the 2007 fourth-quarter figures are released (may not be until 2008). If however the 2007 third-quarter figures show positive growth the contract will be expired at 0.

But the actual statement of rules for the contract is substantively different (missing word-spaces in this quotation are per the original):

Forexpiry purposes, a recession is defined as two successive quarters of negativereal GDP growth.

Expirywill be based on the data reported by the U.S. Department of Commerce (Bureauof Economic Analysis, Table 1.1.1, "Percent Change From Preceding Periodin Real Gross Domestic Product") as reported by the BEA as of February 15,2008.

If the table asreported at that time indicates that any two consecutive quarters between (andincluding) 2006:Q4 and 2007:Q4 are negative, then the contract will expire at100. Otherwise, the contract willexpire at 0.

Consider the contradictions between these two versions of the rules.

The news version says that data from the Commerce Department as of a single date is the arbiter of the expiry value. Simple enough. But...

The news version includes an additional arbiter (emphasis added): "figures released by the United States Department of Commerce and reported in three independent and reliable media sources." What if you are long the contract and the Commerce Department data proves you the winner, but for some reason it's not reported in the media? Who wins? Which set of rules prevails? If Tradesports' history on this kind of thing is any guide, they will claim the official contract rules prevail -- but why publish two contradictory sets of rules and confuse people? Why create this risk?

The news version also includes an additional expiry condition not mentioned at all in the contract version: "If however the 2007 third-quarter figures show positive growth the contract will be expired at 0." Huh? First, that contradicts (or at least supercedes) the one and only expiry arbiter given in the contract version. Second, but related, it seems to ignore the possibility of a backward revision in the February 15 2008 data release -- the release that the rules version enshrines as the sole dispositive arbiter -- possibly downward-revising the previously released positive growth numbers to negative (large revisions are frequent events). What if a long sees that third-quarter data, which would be released in October 2007, and demands expiry at 100? Would Tradesports cite the "official" rules and keep the contract alive until February 2008? What if the data in February 2008 contradicts the data in Octoer 2007? Who wins?

What the hell is going on at Tradesports? How can they be so sloppy and disorganized as to publish what amount to two entirely different sets of rules for what should be an emminently simply contract definition? This is basic stuff. Really disappointing.

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