NEW YORK (CNN/Money) -
Theory says that more traders equal less volatility. Buyers will have an easier time finding sellers, sellers will have an easier time finding buyers, and where the market was once like a leaf whipped along by the current, now it will be a stately moving ship.
But theory and reality don't always match up quite so well as they're supposed to, and when that happens you've got to figure that in any moment savvy traders are going to come sniffing out opportunity. Take the Saddam futures administered by Dublin-based Tradesports.com.
The contracts, which trade around the chances market participants ascribe to Saddam Hussein keeping his present occupation, have been gaining in popularity since CNN/Money first wrote about them a month ago, getting written up in various publications around the world.
Pros tend to view these futures as "bets" rather than solid investments, like trying to guess what the price of corn will be at the end of the month. But lately the Saddam contract has been getting highlighted in some of the many research notes that hit Wall Street trading desks every day.
And more traders are trying for a piece of the Saddam action. Volume and open interest in the contracts have risen sharply, and where Tradesports previously only offered contracts on a March or June ouster, they've introduced April and May contracts as well.
They've also come up with an Osama bin Laden contract (the al Qaeda leader will still be in action at the end of the year, the market says) and contracts on the United Nations authorizing the use of force against Iraq
But instead of dampening volatility, the increased attention on has raised it, said Tradesports' CEO John Delaney. The reason? Where it was once mainly U.S. traders who were involved in the Saddam futures, after articles appeared in publications like Germany's Der Spiegel and Singapore's Straits Times, the contracts began to draw attention globally. And global opinion of how long Saddam will hang on isn't quite the same as U.S. opinion.
"Now you come up against trades from France and Spain and Italy, for instance," said Delaney. "They have different opinions, and that's driving volatility."
The Saddam futures are all-or-nothing contracts that trade between zero and 100. If Saddam has left office, for whatever reason, by the end of March, the March contract will pay off 100 percent of the notional value of the contract -- in this case, ten bucks.
If he's still there, the contract expires worthless. Traders who think the event will happen buy, those who don't sell, and the price they agree on gives you the percentage odds the market as a whole is giving for the event to happen.
But what Delaney is noting is that the contracts increase in value as the day wears on, because the Europe-based traders, who are trading it earlier in the day, see more of a chance of some sort of diplomatic solution to the United States' problems with Iraq than do the U.S. traders, who are there later in the day.
Apparently, the arbitrage community, which seeks to profit off of discrepancies in price, hasn't cottoned to this one yet. It sure seems like some enterprising young trader would be busily buying up Saddam contracts during European hours to sell in the U.S. session. It's gotta be a better gig than trying to make money flipping tech stocks...