Put your money on the storm
Two new markets let people bet on where they think storms will hit the United States. One is open to experts, the other to anyone with a credit card.
By HELEN HUNTLEY
Published August 16, 2005
Hurricanes may be notoriously hard to predict, but now there's money to be made by trying.
Two futures markets are offering trading in hurricane contracts:
--The University of Miami and the University of Iowa teamed up Monday to launch the Hurricane Futures Market, modeled after Iowa's popular presidential elections market.
--An Irish company, Trade Exchange Network, last month added hurricanes to the menu at www.intrade.com which features contracts on everything from Hillary Clinton's nomination for president to Osama bin Laden's capture.
Both markets offer the opportunity to make money - though not necessarily very much - by predicting whether and where a hurricane will make U.S. landfall. At least initially, the universities' market is open only to people with backgrounds in meteorology, who get $100 apiece to do their speculating. At Intrade, anybody can sign up by using a credit card.
The universities' market claims a noble purpose: a better understanding of hurricane forecasting. The project is based on the predictive capability of markets. Collectively, people putting money on the line often turn out to be pretty good at forecasting the future for everything from oil prices and interest rates to Nobel Prize and presidential election winners.
"Even though there's uncertainty about where tropical cyclones are going to go, it's more than chance," said David Nolan, who teaches meteorology at the University of Miami and helped organize the new market. "These will be people who watch the storm closely, look at computer models themselves and make their own decisions. What we're hoping to do is identify cases where popular opinion of experts may be different from that of the National Hurricane Center or any particular model."
He said he thinks the market will work if at least 50 traders participate, but having 100 would be better. He said many are likely to be graduate students in meteorology because "they know enough about meteorology to know what they're doing and they have a lot of free time."
The market will get its first action as soon as Tropical Storm Jose is formally identified.
The official hurricane forecasters don't think much of the concept.
"I don't see how it can offer any value," said Max Mayfield, director of the National Hurricane Center in Miami. He said focusing solely on the point of landfall neglects a lot of other important aspects of hurricane forecasting, such as the intensity of the winds and the size of the storms.
Government meteorologists will not be participating, he said.
"We can't use our positions or knowledge from our positions for personal gain," he said. "It's the law."
The Hurricane Futures Market divides the U.S. coastline from Texas, around Florida and up to Maine, into 16 segments based on hurricane history. Supposedly there's an equal probability that a hurricane in the Gulf of Mexico will make landfall in any one of the eight gulf segments. There also will be a contract for those who don't expect the storm to hit the United States.
A player who expects the hurricane to make landfall in the Tampa Bay area would buy up those contracts and sell the ones for other areas considered less likely storm targets. As contracts become more popular, they become more expensive, while those falling into disfavor drop in price and may not find any buyers. When the hurricane makes landfall, winning contracts will pay $1 and the others will expire worthless. With only $100 to spend, even the most successful players won't end up wealthy, but they will win bragging rights among their peers.
University of Miami researchers hope they eventually will be able to open the market to the public.
The intrade.com market operates with fewer contracts that specify the strength of the storm and the state where landfall is predicted. For example, one Hurricane Irene contract specified that a storm of Category 1 or higher would make landfall in New Jersey. If you thought that was likely to happen, you would buy the contract. Hardly anybody did. With Hurricane Irene never posing a real threat to the United States, trading was light.
In both markets, players are competing with only each other, not against the "house," which manages betting in casinos. However, Intrade levies a 4-cent commission on each contract.
Intrade has the advantage of having more participants - about 46,000 members who trade 200,000 contracts a day, according to a recent Fortune magazine report. Intrade's parent company has said it wants to develop a U.S. exchange that would operate under U.S. commodities regulations. If the hurricane market grew large enough, insurance companies could use it to hedge their risks, Fortune suggested.
At the moment though, it's more of a curiousity.
--Helen Huntley can be reached at huntley@sptimes.com or 727 893-8230.