1. Introduction - (+ The North Korean Missile contract + The trading information screen)
2. The North Korean missile launchs were real.
3. Unbelievably, the traders who were right will be the losers in this zero-sum game.
4. The focus is on the TradeSports / InTrade's North Korean Missile contract.
5. This is bad P.R. for TradeSports / InTrade and the prediction market industry.
6. InTrade and TradeSports should become a member of the Independent Betting Arbitration Service.
7. Addendum: Bo Cowgill's take: Pay both sides of the contract.
8. Addendum: TEN CEO John Delaney (who heads TradeSports / InTrade) retaliates against Chris Masse.
9. Addendum: Finance blogger Jason Ruspini's take: Expire the contract at 100.
10. Addendum: TradeSports / InTrade acknowledges its mistakes, but will expire the contract at 0.
11. Addendum: Donald Luskin writes, "This is a tough call for Tradesports, but it strikes me that they are making the wrong decision. The contract is on whether there was a test launch, not on whether some particular source said there was. The specified source indeed did not confirm launch, but neither did it deny it. In the absence of a denial, Tradesports should invoke the contract clause that permits it to improvise a new source."
12. Addendum: Doctor Eric Crampton's take: "TEN's not doing right by the traders in this case."
13. Addendum: BoDog.com and NewsFutures both settled their North Korean Missile bet/market in favor of the "yes" bettors/speculators.
14. The discussion continues on another webpage: SECOND LEG OF THIS NKM STORY.

1. Multiple statements by the executive branch of the U.S. government regarding the North Korea's missile launches. Do these statements fulfill the conditions for expiry stated in the contract? It's your call. Read and decide.
2. An argument that says that settling this binary bet in favor of the "no" side requires evidence that the North Korea's missiles did not leave its airspace. Is this argument convincing? Again, it's your call. Read and decide.

• "North Korea launch a test missile that leaves North Korean air space on/before 31st July 2006"

• Two rounds of North Korean missile tests were conducted on July 5, 2006. The Democratic People's Republic of Korea (DPRK or North Korea) reportedly fired at least seven separate missiles. These included two short-range Nodong-2 missiles, one Scud missile and up to two long-range Taepodong-2 missiles; []
• The missiles were launched from the Musudan-ri Missile Test Facility, and all of the missiles reportedly landed in the Sea of Japan (East Sea of Korea) (500-600 kilometers west of the northern Japanese island of Hokkaido), in international waters about 100 kilometers south of the Russian cities of Vladivostok and Nakhodka. It was also reported that two missiles landed in Russian territorial waters.
• The United States State Department has said that the Taepodong-2 missile failed in mid-air after about 42 seconds of flight and probably continued for 2 minutes in total. The most like[ly] outcome is that it fell 1.4km from the launch pad and attained a maximum altitude of 4.4km.

• You will find 80 news articles listed at the bottom of the Wikipedia webpage devoted to the 2006 North Korean missile test.

• White House — Press Briefing on North Korea Missile Launch - 2006-07-04
  • MR. HADLEY: It's probably -- it's a short-range ballistic missile. These went out about 275 miles, something like that. [Stephen Hadley is the National Security Advisor.]
  • MR. SNOW: Two more launches. A fourth launch that occurred at 6:12 p.m., into the exclusion zone, landed at 6:17 p.m. A second one -- both of them landed in the Sea of Japan. That was a Scud, we think. The second was a Nodong, landed in the Sea of Japan. [Tony Snow is the Press Secretary and speaks for the President.]
• U.S. State Department - (republication) — Press Briefing on North Korea Missile Launch - 2006-07-04
  • Tony Snow, White House Press Secretary; Steve Hadley, National Security Advisor -
• U.S. D.O.D. — USNORTHCOM statement on DPRK missile launches - 2006-07-04
  • "As of 5:30 p.m. MST today, U.S. Northern Command officials acknowledged that the Democratic Peoples Republic of Korea launched six ballistic missiles, including a long-range Taepodong-2 missile, from Taepodong at approximately 4 p.m. EDT."
  • "The Taepodong-2 missile launch failed on its own in the early stages and landed in the Sea of Japan."
• U.S. D.O.D. — U.S. Northern Command confirms 7th missile launch by DPRK. - 2006-07-05
  • "U.S. Northern Command officials acknowledged today that the Democratic Peoples Republic of Korea has launched a sixth short-range ballistic missile from Kittaeryong into the Sea of Japan."
• U.S. D.O.D. — NORTHCOM Detected Missile Launches; World Evaluates Next Step. - 2006-07-05
  • "NORTHCOM and North American Aerospace Defense Command officials quickly recognized that the seven ballistic missiles fired yesterday and early today did not pose a threat to the United States or its territories, Bryan Whitman, deputy assistant secretary of defense for public affairs, said today. North Korea fired a long-range Taepodong-2 missile and six short- and medium-range Scud and Nodong missiles. All landed in the Sea of Japan without incident, with the Taepondong-2 failing on its own shortly after launch, according to NORTHCOM statements released yesterday and today."
• U.S. Ambassador to the U.N. — Statement by Ambassador John R. Bolton, U.S. Permanent Representative to the United Nations, on the Launching of Multiple Ballistic Missiles by the DPRK, in the Security Council - 2006-07-15
  • "Eleven days have passed since the Democratic People's Republic of Korea (DPRK) brazenly defied the international community and fired seven ballistic missiles, including a Taepo-dong 2 intercontinental ballistic missile, into the waters surrounding its neighbors, notably Japan."
• (Via the TradeSports forum thread on the NKML.)

• Internaut's question:
  • "In an on-the-record conference call with the Press on July 4, the National Security Advisor commented, 'These went out about 275 miles, something like that.' Can you please confirm that one or more of the missiles launched by North Korea earlier this month landed in international waters and that they did not all fall within North Korea's territorial waters? The quoted statement from Stephen Hadley can be found at http://www.whitehouse.gov/news/releases/2006/07/20060704-1.html ."
• U.S. DOD's answer:
  • "We will let the White House comments speak for us."

From - Fri Jul 28 00:10:24 2006
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Subject: RE: North Korean test missiles (final note)
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as I understand it, the launches did go beyond the territorial water of
N Korea.

  _____ =20

From: XXXXXXXXXXXXXXX [XXXXXXXXXXXXXXXXXXXXXXXXX]=20
Sent: Thursday, July 27, 2006 4:10 PM
To: Whitman, Bryan SES OSD PA
Subject: RE: North Korean test missiles (final note)


Dear Mr. Whitman,
=20
I do understand that there are limitations on what you can report, and I
am grateful for the information you have already provided.
=20
May I ask that you reply to this message simply to confirm that your
answer below to my July 14 question is authentic?
=20
I promise that this is my final request, and again I thank you for your
time.
=20
Sincerely,
XXXXXXXXXXXXX
.
.
.
.

• "By handling the NK contract so confusingly, TradeSports has transformed it, for the remainder of its life, into a contract on the TradeSports decisionmaking process -- albeit with a knockout provision in the event of DOD confirmation of the July 4 launch or another launch before the end of July 31."

• The Exchange confirms that it has sought direct confirmation from the US Department of Defense regarding the above contract. As of today's date no such confirmation has been received.

• "The Exchange does not say HOW it sought confirmation."

• "I got confirmation from Bryan Whitman, a top DOD spokesman, by email."
• "I have also sent to TS email replies from Bryan Whitman, the Deputy Director for Defense Information in the Office of the Assistant Secretary of  Defense for Public Affairs. In these emails he confirmed that the North Korean test missiles launched on July 4th 'did NOT fall in territorial waters' and 'landed outside the territorial water of North Korea in the sea of Japan.'"

• "I have still yet to get an answer from TS as to WHY they think Stephen Hadley's 275 miles statement is too vague. There is no good answer."

• I DON'T HAVE PERMISSION TO REPUBLISH HER E-MAIL.

• "In fact, Mr. Hadley's statement was not about the range of the missiles tested last week. He was asked what range missile a scud is considered; he responded that it is considered a short-range ballistic missile. He then added, in declaration of how far these particular test missiles actually traveled, that 'These went out about 275 miles, something like that.' Note that he did not say that such missiles CAN go, or TYPICALLY go, that range. He said that THESE missiles went out about 275 miles. There is no ambiguity. As North Korea's air space extends 12 nautical miles from its shore, these missiles that went out about 275 miles therefore left North Korean air space. There is no other reasonable interpretation that can be made."

• I DON'T HAVE PERMISSION TO REPUBLISH HER E-MAIL.

• "I vigorously disagree with your assertion that Stephen Hadley was not specific in his statement. True, he said the missiles went 'about' 275 miles', and not specifically 274 or 276 miles. But 'about 275 miles' cannot be confused with 12 miles, which is the edge of North Korean territorial waters and air space. The points I made in my earlier email still stand; there is no doubt that he was specifically referring to the missile launches of July 4 when he stated that the missiles went about 275 miles.
• I would also like to bring to your attention the remarks that John Bolton, the United States Ambassador to the United Nations, made to the Security Council on Saturday. He said: 'Eleven days have passed since the Democratic People's Republic of Korea (DPRK) brazenly defied the international community and fired seven ballistic missiles, including a Taepo-dong 2 intercontinental ballistic missile, into the waters surrounding its neighbors, notably Japan.'"

• "As I wrote as nauseam, the rules only allow for an expiry of 0 'if there is a launch but it is confined to North Korean air space.' Since there were seven missiles launched, TS needs to prove that all seven landed in NK territorial waters. Obviously they can't and won't be able to do this. How can they expire at 0 without it, though, and be honest with their members? TS has still not answered me on this point."

• "You stated that 'our contracts rules do not require us to prove a negative (ie to prove that an outcome did not occur), but rather the onus is on proving that something has occurred.' I do not disagree with that concept in general, however its logic would not apply in this case as there is no dispute that the event in question has occurred: North Korea launched seven test missiles on July 4. Only the landing area seems to be at issue. So I am not suggesting that the Exchange needs to prove a negative to expire the contract at 0. Quite the contrary, I am suggesting that, if the Exchange is to remain faithful to the integrity of its contract rules, it cannot in good conscience expire the contract at 0 without confirmation of a positive: that all seven test missiles launched on July 4 landed within North Korean territorial waters. That is the 'something' that the Exchange must prove occurred. I repeat once again the exact phrase from the contract rules: 'if there is a launch but it is confined to North Korean air space.' This is an explicit, positive, and provable statement. The contract rules do not state or even suggest that the contract will expire at 0 if there is a missile launch but lack of confirmation as to the distance the missiles traveled. The rules state in plain English that the standard for an expiration at 0 is if the missiles are confirmed to be confined to North Korean airspace.Is it not the responsibility of the Exchange to take pro-active and transparent steps to prove this positive, that all the missiles launched were confined to North Korean air space? You write that the 'including but not limited to' phrase in the contract rule 'does not conclusively rule out any other possibility for a 0 expiry.' I am sure you don't mean it this way, but that sounds like the Exchange is throwing up its hands in frustration and saying it has to expire the contract somewhere, so it might as well just expire at 0. But that is not acceptable. Given that all available evidence proves that the missiles landed OUTSIDE North Korean air space, is it not the responsibility of the Exchange to explicitly and transparently explain to its members, to the media, and to the general public from which it hopes to attract future members, WHY it would opt for an expiry of 0 when it has failed to offer positive confirmation from the Department of Defense that all seven test missiles were confined to North Korean air space? This is a very serious matter. If the Exchange errs and expires the contract at 0 without providing positive confirmation from the Department of Defense that all seven test missiles launched were confined to North Korean air space, it will lose members and  the subsequent international media attention this matter could discourage potential future members from joining. I sincerely hope that this question will become moot and that the Exchange accepts the evidence already before it and also finds additional confirmation from the Department of Defense, as I have already done myself, and expires the contract at 100."

• I DON'T HAVE PERMISSION TO REPUBLISH HER E-MAIL.

• "First, I do not suggest that the Exchange must seek confirmation that the missiles did NOT leave NK air space. I suggest that the Exchange must seek confirmation that the missiles DID all land WITHIN North Korean air space to expire the contract at 0.
• Second, had the Exchange written an unflawed binary contract it would have been expired shortly after the North Korean test missile launches, as were the similar contracts/props on other exchanges and sportsbooks. But this contract included the notion of launches and then the notion of whether the missiles either left NK air space or were confined to it. Once the first event -- the launches -- occurred, the only remaining question is that of where the missiles landed. Because the Exchange says it does not know where the missiles landed, it is de facto asserting that they all landed within NK territorial waters if the contract expires at 0. Further muddying the issue is the fact that the Exchange chose a referee -- the Department of Defense -- which has no inclination or motive to issue an explicit, clear ruling on its own, as it subservient to the White House, which has already spoken on the matter.
• Third, I have not suggested that the Exchange accept 'the general indication from the media that the test missiles' left NK air space. I have produced a clear statement from the President and Commander-in-Chief's National Security Advisor that the missiles 'went out about 275 miles' and a response from the Department of Defense that stands by those remarks. The Exchange has never explained its contention that these remarks are unclear or vague after I conclusively illustrated why there was no question that Mr. Hadley was referring to the distance traveled by the test missiles launched on July 4.
• I am just a solitary citizen with no political connections, but I was able, after many attempts and many sources, to get the proper confirmation about the missiles' landing area from Bryan Whitman, a top DOD spokesman. I have no idea whether he will be similarly responsive to an Irish trading/gambling exchange. I pray that he is. If not, and if no other confirmation is found or recognized, the Exchange does have another honorable way out of this mess, and that is to invoke rule 1.9. Surely the Exchange did not foresee that its chosen referee in this matter would refuse to play ball."

• 1.9. Unforeseen Circumstances: If there is any other change to an event not addressed in the Rules, the exchange, at its sole discretion, will determine the fairest and most appropriate course of action on the basis of the most similar event outlined in the Contract Rules.
• 1.8. Proposition Contracts: (General Rule) A 0-100 Contract that a specified outcome occurs. The expiry price will be 100 if the specified outcome does occur and 0 if it does not. Expiry Results: The Result used to determine the expiry prices will be specified in the accompanying Exchange News story for each individual Proposition contracts. Where the expiry price is determined by news announcements, the Trade Exchange Network reserves the right to pause the markets, halt all trading and unwind ALL Trades time stamped within one hour prior to the first news story/announcement appearing on Associated Press new service or another similar major news provider. All time protected markets will be clearly labelled as such in the accompanying Exchange News Story.

• "It's debatable at best whether the specifics of the contract have been met. The administration, of which the DOD is a subsidiary part, had spoken on the issue and confirmed the terms of the contract. The DOD has since aligned itself with those remarks. And since then a top DOD spokesman has confirmed them specifically in private emails to a TS member. Who knows how TS itself is trying to confirm what happened, if it even is. The problem is, TS has shown difficulty with some simple language for whatever reason, and doesn't seem to (or pretends not) understand what information has been released.
• Furthermore, TS is also undone by the very language of its contract rules. If you read the contract in question, TS is obliged to prove that all the missiles launched were confined to North Korean air space to expire the contract at 0. But again TS either doesn't understand this or is ignoring it. They want to pretend that they wrote a well-constructed binary contract. No one else needs to."

• "In an athletic contest, the umpire says 'safe' or 'out,' 'fair' or 'foul.'  In this case, TS chose an umpire that has no incentive to issue a clear ruling either way and in fact is highly disciplined in not revealing any information it doesn't need to. So I would say that the contract rule that requires specific DOD confirmation for expiry is a bad one."

• "TradeSports’ approach is actually a fairly good one, but their problem is sourcing. While democratic governments seem like a reliable source, it is a bit of a leap to always assume that governments will be unbiased, especially in matters of war, nuclear missiles, and so on. If TradeSports were to choose a less biased source of information, such as the New York Times, then perhaps they wouldn’t be in the fix they’re in now.
• For example, looking at the Israeli/US Air Strike against Iran contract on TradeSports one can already see a potential problem. The wording in the contract that relates to sourcing says: 'An overt air strike against a land facility is defined as an air attack officially announced by the Pentagon/ the US Department of Defense or the Israel Ministry of Defense.' But, as I’ve noted before, what happens if an air strike against Iran happens, but is never 'officially announced.' This gives rise to a situation like the current one: the event is clearly true, but the source is not clear (or just plain wrong, or worse, lying)."

• "The spirit of the contract was met: North Korea launched seven missiles and they all left North Korean air space and territorial waters."

• "On [the Foresight Exchange], the judges occasionally say that they will honor 'the spirit of the claim' if the outcome isn't clear, but in that case, they have more than the text of the claim to go by. There's usually a fair amount of discussion during the creation of the claim that you can read to figure out what the claim's owner wanted the claim to be about. In the absence of that (as at TradeSports) all you have to go on is the written description of the claim. The claim says that the DoD's statements will be used to determine what happened. Bettors should pay attention to that. And complainers should focus on what the DoD said, (which seems sufficient to me.) 'The spirit of the claim' is a red herring."

• "Half a dozen heavy traders, such as Sacha and Abacus, have [suggested to] the company to let them help review contract wording before it is posted. They offered this service for free and without condition. They were ignored. It does not matter how many times poorly crafted contracts cause problems or how many times factual, logical and grammatical errors are pointed out; the company arrogantly persists in repeating them.
• Whoever writes contracts for the company is not an idiot. But given how much is at stake both for traders and for TradeSports, it's idiotic to not have a rigorous review process in an effort to clear up any potential ambiguities or errors before contracts go live. A draft could be posted privately to several select people (market makers, high-volume traders and other interested and capable parties, such as yourself and professors/authors in the PM field), who would have 24 hours to respond. Something like this would have avoided every problem that has come up over the past three years. In such a process some would offer suggestions that would not be adopted, but the outright errors and confusing ambiguities would be caught."

• Some InTrade / TradeSports traders claim that TEN screwed up the 2005 SCOTUS Justice Retirement prediction markets. I will not investigate this issue at this time. I will just quote one trader, in the paragraph below.

• "This, by far, is the most blatant incorrect call Tradesports ever made. What happened is they expired the contracts on the announcement of the resignation even though the contract terms was explicitly when the judge departed. O'Connor managed to stay on long enough before Rehnquist died. There is no way, legally or the 'spirit of the contract' that you could have misinterpreted this. Fortunately (or unfortunately) I did not have a position on this contract at expiration, but if I was long on Rehnquist, I would have been VERY VERY pissed off.
• The other screwed up interpretation was the John Roberts confirmation contract - the contract explicitly stated 'if the nomination is pulled for any reason, the contract shall expire at zero'.
• What happened is that Roberts was nominated for the position of Supreme court justice, but when Renquist died, Roberts' nomination was pulled and then he was re-nominated for the Chief Supreme Court Justice position. Although this happened in a single press statement, his nomination was pulled and legally (according to how they wrote it) the contract should have expired at zero. Of course the 'spirit' of the contract (John Roberts to be confirmed by the US Senate) was whether he would get 50 votes or more in the Senate.
• I was ticked off on that one since I went short on the contract as it was apparent that his nomination had to be pulled to become chief justice. When Tradesports made their 'interpretation', I quickly covered up and lost a few pizzas in money.
• The North Korea one I believe is being 'legally' interpreted, but not 'in the spirit of the contract'. As I said previously, I went short once I realized that Tradesports was not going to reverse their previous call.
• The final issue deals with hurricanes - there hasn't been a wrong interpretation yet, but I am very worried that Tradesport's interpretation of what 'landfall' is has changed from 2005 to 2006. They now talk about an 'eyewall' in a very ambiguous fashion. What happened in 2005 is that Hurricane Ophilia grazed North Carolina - so close that the eyewall was over land, but the centre of the eye (which is called the 'surface normal' in formal terms) did not. A lot of people bitched that the hurricane did make landfall. Legally and 'spirit-wise' it did not. I had a financial interest in the hurricane not making landfall, and generally took advantage of other people's 'interpretations' as to what exactly landfall consisted of.
• So generally, Tradesports is just as much trying to predict certain geopolitical events as it is trying to predict how their staff will expire contracts. Fortunately things like elections and winners of sporting events are less ambiguous, so they can't screw up that."

• "I am a little worried about the ambiguity in the GOP Senate control contract rules: 'The Senate contract will expire once either the Republicans or the combination of Democrats and Independents gain 51 seats.' If the Senate ends at 50R - 49D with one independent (Vermont), then the Republicans would have control of the Senate (via Cheney’s tiebreaker vote), but the way the contact rules are written, the contract couldn’t be expired at either 100 or 0."

• Five open questions about prediction markets - (PDF - PDF) - by Justin Wolfers and Eric Zitzewitz - (2005-01-21) - 2006-02-00
  • 2. How to tradeoff interest and contractability? A fundamental problem in mechanism design is that the outcomes of interest are often impossible to write into contracts.
    • Observable indicators of contractability have thus far had little explanatory power for a prediction market’s success. --- Tradesports traders have thus far been willing to trust the exchange to make a good faith determination, and this trust is helped by the fact that Tradesports does not itself hold positions in any of its contracts and that it has a clear need to maintain a reputation for fairness among its traders. But as the sums traded become more substantial, traders may begin to worry more about these issues.