31 July 2003. Thanks to A.

This is an unpublished version of the Policy Analysis Market web site dated July 29, 2003 discovered on the Net Exchange web site: http://www.nex.com/nex_files/work/

This version did not use the background images of the published version:

http://cryptome.org/pam/pam-site.htm

[Home]

Welcome to the Policy Analysis Market, PAM PAM is a market in Middle East Futures contracts – securities that payoff based on data indices that track regional conditions. These securities span economic, civil, and military conditions in eight countries of the Middle East plus the involvement of the United States. Live trading will begin on 22 September 2003 with a trial phase that will last through 31 December 2003. The trial phase will be used to improve the product. Registration is now open to select 100 traders for this trial phase. We will give each of these 100 traders a $100 trading account – this is real money and the traders get to keep their profits. On 1 January 2004, PAM will be available for broad public trader registration. From that date forward, traders will have to use their own money to back their PAM trades. Please take a look at our site and product. Then consider accepting a bit of our money in return for helping us in the PAM Trial Phase. Registration for the 100 available slots is open now and will close on 8 September 2003.               Copyright © 2003 Net Exchange. All rights reserved.

[Sample Trading Interface]

Sample Trading Inferface               Copyright © 2003 Net Exchange. All rights reserved.

[Registration for the Trial Phase]

Registration for the Trial Phase PAM is a novel product, so it needs to be put through its paces before opening for broad public use. From 22 September 2003 through 31 December 2003, a Trial Phase of PAM will be operated in which 100 individuals will be given $100 apiece to put PAM through its paces. These individuals will get to keep the proceeds from how ever much of this $100 they commit to trades during the Trial. These individuals will also receive preferential access to PAM when it opens for broad public use on 1 January 2004. If you are interested in being one of the 100 traders in this Trial Phase, then this webpage is where you must register for a chance to be selected among the 100. Registration will proceed through a series of steps: review of the Trial Phase participation rules, setup of your account, and your acceptance of the Trial Phase user agreement. To begin these steps, type in your name below and press the Submit button.               Copyright © 2003 Net Exchange. All rights reserved.

[The Organizations behind PAM]

Net Exchange has a ten-year history of applying innovative market technologies to processes not traditionally handled with markets – PAM is the latest chapter in this history. Net Exchange is responsible for design, development, and operation of the PAM trading system.   The Economist Intelligence Unit is the business information arm of The Economist Group, publisher of The Economist. Through a global network of over 500 analysts, it continuously assesses and forecasts political, economic and business conditions in 195 countries. As the world's leading provider of country intelligence, the Economist Intelligence Unit helps executives make better business decisions by providing timely, reliable and impartial analysis on worldwide market trends and business strategies. The Economist Intelligence Unit is working with Net Exchange to collect and process the data on which the securities in PAM are based, and then to assess the value of the securities when they mature.   The Defense Advanced Research Projects Agency (DARPA) is interested in improving on existing techniques for predicting future events and for assessing the issues that underlie and influence what might happen. DARPA has funded the development and operations of PAM. U.S. government agencies will not be allowed to participate in PAM and DARPA will not have access to the identities or funds of PAM traders.         Copyright © 2003 Net Exchange. All rights reserved.

[Background]

Background   (Each topic below will open a new window with further information) [Windows inserted.] Evolution of the Information Trade Evolution of the Information Trade A market performs the dual role of allocation and price discovery among parties that are interested in the items exchanged through the market. When the market in question is coordinating the exchange of something that cannot exist until some future point in time, then the forward exchanges among the traders are driven by their expectations of the future value of the items and their beliefs about what might affect the future value. Futures markets aggregate disperse information and refine the information through the feedback of price discovery. Sample progression in the use of markets to refine information:     1. Futures markets based on an underlying commerce that has been standardized (key role of objective data)     2. Insurance against specific futures, supported by wholesale reinsurance to spread out the specific risks     3. OTC Derivatives (essentially, 2 making use of 1)     4. Iowa Political Market and other pure info. markets (see The Economist, 5/9/03)     5. Economic Derivatives (4 applied to economic issues) www.gs.com/econderivs/     6. PAM enhances (4) by standardizing a commerce (1) then provides a robust derivative capability (3+) The PAM Security Structure The Automated Market Maker at the heart of PAM Intuition behind the PAM Security Structure The classic Information Market (e.g., the Iowa Political Market) relies on specific events, the outcomes of which can be enumerated as a set of independent states that span all possible outcomes of the event. For example; the set of outcomes (Bush, Gore, Nader, Other) spanned the event known as the 2000 U.S. presidential election. To support policy analysis, a market in the future of the Middle East must have a time horizon that is reasonably distant; e.g., one year. Even if it were possible to list all potential events in the Middle East over the next year that might be of interest, such an approach would be a computational nightmare and require expensive periodic renewal of the list. Net Exchange has chosen to standardize a futures commerce by establishing security series that track fundamental issues, such as economic health, civil stability, and military posture. As with any standardized futures commerce, data indices must exist for each security series. Traders must view these indices as objective and unbiased. The Economist Intelligence Unit has defined the necessary data indices and will perform data collection and assessment for PAM. Spanning Securities and Specific Event Securities Fundamentals standardized into series of securities – spanning issue space: Regional: Economic, civil, military, and U.S. involvement for Egypt, Iran, Iraq, Israel, Jordan, Saudi Arabia, Syria, and Turkey Global economic and conflict indicators (e.g., trade, terrorism deaths) Regional Securities will be ranges relative to a data index: As maturity nears, finer ranges are defined. The prices for all securities of an issue that mature on the same date add up to $1.00 Specific events that become of interest and can be stated as Yes or No will be issued into PAM. Examples of potential Specific Event Securities: Provisional Palestinian State recognized by the U.S. government during the first quarter of 2004. Fall of Iranian cleric-led regime in the fourth quarter of 2004. Security Examples The table below illustrates securities available for trade on 15 Dec. 2003 First row involves a Regional Security defined by an index range Second row involves a Global Security defined directly from its index Third row involves a Special Event Security Fourth row involves a hedge derivative Security listed on 15 Dec. 03 Posted Prediction Example of a Trader and his/her Perception Trader Action Turkish econ. health in 2nd 04 will be > 115 36¢ (%) Bank officer charged with Turkey risk assessment considers this more likely. Buy contracts in this security until prediction = 45¢ U.S. military deaths in 3rd 04 500 Reporter with a Middle Eastern news agency considers this too high. Sell contracts until prediction = 300 U.S. recognizes provisional Palestine 3rd 04 55¢ Professor of Middle Eastern studies thinks this is too high. Sell contracts until prediction = 40¢ If 2nd 04 Iraqi econ. > 150, then 3rd 04 Syrian civil stability < 100 42¢ Expert in Syrian domestic politics considers this far too low. Buy contracts until the prediction = 60¢   Security listed on 15 Dec. 03 Posted Prediction Example of a Trader and his/her Perception Trader Action Turkish econ. health in 2nd 04 will be > 115 36¢ (%) Bank officer charged with Turkey risk assessment considers this more likely. Buy contracts in this security until prediction = 45¢ U.S. military deaths in 3rd 04 500 Reporter with a Middle Eastern news agency considers this too high. Sell contracts until prediction = 300 U.S. recognizes provisional Palestine 3rd 04 55¢ Professor of Middle Eastern studies thinks this is too high. Sell contracts until prediction = 40¢ If 2nd 04 Iraqi econ. > 150, then 3rd 04 Syrian civil stability < 100 42¢ Expert in Syrian domestic politics considers this far too low. Buy contracts until the prediction = 60¢ Security Structure A standard futures structure is used for Regional and Global securities A group of all security series will be issued at the start of each quarter. Each security matures one year after issue, except for those in the 1st 3 groups. A security of each series matures each quarter. Special Event securities will be issued into PAM using the following process: Net Exchange nominates a definition to the Economist Intelligence Unit, it accepts or rejects assessing the security. If accepted, Net Exchange issues the security. | back to top | The Process that led to the Selection of the Market Maker for PAM How PAM lets traders back orders with money and securities Principle: Match the Market Design with the Environment In the Iowa Market, a single specific event (the outcome of a presidential election) is traded. A double auction fits the trader and info. environments. The future of the Middle East results from interactions in a network of many nodes of several classifications: country, issue (econ., pol., mil.), & time.    Many traders pay attention and know there is a network    Traders specialize – individuals focus on subsets of nodes    Predicting a future may require linking the insight of several    traders – combining knowledge about different subsets. Design Decision: PAM must coordinate dispersedly held & interconnected information; therefore, PAM should be a Combinatorial Market. Example – Assume PAM existed in March 2003 at the start of hostilities:    Military expert believes P(B) is low – he buys    NSC member believes P(AB) is high – she sells    Expert in Jordanian politics thinks P(A|B) is certain – buys hedge Design Runoff of Two Combinatorial Mechanisms Two combinatorial mechanisms were tested with the same order format:     A combined value call market based on established     Net Exchange products (Emissions Trading & Bond Connect)     A combinatorial market maker with no application     History (see http://hanson.gmu.edu/combobet.pdf) Caltech’s social science laboratory was used to run experiments using the same environment for both:     Binary Var. X,Y,Z, 23 = 8 combinations     P(X=0) = .3, P(X=Y) = .2, P(Z=1)= .5     Random mapping of XYZ to ABC     3 people, see 10 cases of: AB, BC, AC     Goal is to trade information to figure out mapping   X Y Z Case A B C 1 1 - 1 2 1 - 0 3 1 - 0 4 1 - 0 5 1 - 0 6 1 - 1 7 1 - 1 8 1 - 0 9 1 - 0 10 0 - 0   Sum: 9 - 3   Same A B C A -- -- 4 B -- -- -- C -- -- -- A non-combinatorial double auction was run for purposes of comparison. (Similar experiments were run with an 8-variable environment.) Runoff Results and PAM Product Decision Both combinatorial processes exhibited superior info. aggregation to the DA Market Maker outperformed the Combined Value Call and can function with any number of traders. Therefore, PAM will debut using the Market Maker. Critical Policies Critical Policies The Defense Advanced Research Projects Agency has funded PAM development and its operations through the 1st quarter of 2005. Net Exchange does not have to, and will not, extract a cut from trading. DARPA will be given the same access as a PAM trader, and no more. Net Exchange and The Economist Intelligence Unit are responsible for all matters associated with PAM securities -- DARPA and the DOD do not get to ask The Market questions. Employees of the U.S. government may register as private individuals. (No employee of Net Exchange or the EIU may be a PAM trader.) All traders will remain anonymous from the U.S. government. Trading statistics (prices and volumes) will be released publicly, but delayed. Current understanding is that PAM will be an unregulated exchange (PAM securities do not fall under the legal definition of securities). Goal of 50% non-U.S. participation Copyright © 2003 Net Exchange. All rights reserved.

[Commercialization]

Commercialization Net Exchange (the organization leading the PAM effort) intends to commercialize PAM and its underlying technologies. The direct commercial value of PAM is risk management for entities with financial interests in the Middle East, and this value can be extended to the formation of other financial risk management markets. The technologies that underlie PAM can form the basis of decision support/risk management processes that function within firms, such as the planning and management of research and development efforts in major pharmaceuticals firms. Representatives of the financial industry and of firms with high-valued multi-path internal investment decisions are invited to participate in PAM as a means of assessing techniques and technologies that they may find valuable.                 Copyright © 2003 Net Exchange. All rights reserved.

[Press and Publications]

Press & Publications 1) Abstract from the 4th Annual ACM Conference on Electronic Commerce 2) Combinatorial Information Market Design These documents require the Adobe Acrobat Reader:                           Copyright © 2003 Net Exchange. All rights reserved.

[Contact Us]

Contact Us All inquiries can be sent to: comments@policyanalysismarket.org.                           Copyright © 2003 Net Exchange. All rights reserved.