New Yorker writer James Surowiecki asks the right question concerning futures markets in public events and the like. While such markets are oft-criticized for being illiquid and being dens for (largely nonexistent) abritrageurs, Surowiecki points out that doesn’t invalidate the whole idea of betting on everything from terrorism, to the Lord of the Rings’ take last weekend. He writes, however:
“It’s perfectly possible that there is something about these markets — other than a lack of liquidity, which I think is a huge problem — that will guarantee their uselessness in contrast to other exchanges, but I’d like a coherent explanation of what that something is.”
I don’t think there is anything — other than lack of liquidity — that will make it tough for these markets to work. But that’s a biggie. Bifurcated markets are going to be a problem for some time, doubly so given that trade-driven interest in forcing markets to consolidate is nowhere near as high as it is, for example, in share markets like the NYSE and Nasdaq.