I've talked to some people from the industry, and they all have negative feedbacks about this new Economic Derivatives -- such as "it's just like legal gambling" , "horse racing", "Goldman is trying to rip off their custumers"... What do you think? Any feedbacks are welcome!

Umm...it's always hard to get any feedbacks on this topic....anyone?

On the gambling question....Yes.....and no in my opinion.A digital call on the non-farm payroll number with an overnight expiry does certainly look and feel like a bet, but then don't all digital options to some extent? However a three month vanilla call on HICP looks to me like an analogue of short term interest rate options as traded on respected futures exchanges. In this case, unless you have an aversion to zero-sum games, I can't see any suggestion of gambling. The key thing with anything like this is that the market will adopt what it likes and drop what it doesn't.If traders were using treasuries as a proxy for a bet on US figures now they can get direct access to what they want. On the rip off front... reading the literature it seems that Goldman and Deutsche apply a spread to the auction price to make their money. That's what market makers do isn't it. If the spread is too wide nobody will deal and they will tighten it up.... aren't the markets a wonderful thing?

I think the gambling criticism derives from the fact that we generally do not have exposure to the economic nos directly, but to some derivatives thereof (stocks, bonds etc, where liquid mkts already exist). Hence, as there is no natural hedging role for these products, they exist only as an outlet for punters, and ultimately no mkt can survive without a mix of hedgers and speculators.But as one can hedge one's exposure to the derivatives (eg bonds) by taking a position in the 'underlying' (the economy, as proxied by the data), I don't believe that this critique is valid.As for the 'ripoff' critique, those who are first to market extract the monopoly rents. There's no compulsion here, so the criticism is tendentious.

QuoteOriginally posted by: AthleteScholar".. trying to rip off their custumers"... That depends on pricing, isn't so? As I see the pricing is an auction that should demonstrate the "perception"of majority of players. To compensate them for their "perception", the bank need a hedge. I can't think of one, if one can then he/she can look at pricing it and conclude if it is a rip off. The derivative being a gambling or not doesn't make it a rip off. Incidently since one can't think of a hedge quickly, the product is not so popularly traded (this is my belief and is yet to be proven ).QuoteOriginally posted by: AthleteScholar"it's just like legal gambling"... Why should gambling or no gambling bother anybody? If there are more gamblers than the market can take, hedging will become profitable. If there are more hedgers than the need is, gambling is a good idea. The question is what is the bank doing?The rest is pure bull and avoid if you have short temper..Assume the product is actually pure gambling, then the bank being on the other side is a hedger. As I assumed earlier, hedge is hard to conceive and harder to stand test of time (Correlations, don't we love/hate them depending whether we are buying/selling). In that case the bank is doing some social service by taking on a non profitable enterprise. Clearly, the bank is not in that business, so it is probably gambling itself. If the bank is gambling, then the other side is hedgers., but didn't we start with the premise that the other side is gambling? Contradiction.So the product can't be pure gambling.

Actually, the system is a parimutuel auction. The bank takes no risk, and effectively acts as the exchange.Mechanics of economic data derivatives