A draft response to the CFTC
Jed Christiansen June 25th, 2008
Over on Mercury’s Blog, I’ve been posting a series of draft responses to the specific questions raised by the CFTC in the Concept Release. In order to prevent a far-too-long single post, I’ve separated them into five sections:
- Intro and Broad Overview questions
- Public Interest
- Jurisdictional Determination
- Legal Implementation
- Market Participants
Overall, I believe that prediction markets / event contracts should be opened as widely as possible with as little regulation as possible. That said, retail customers in a real-money prediction market should have sufficient protections against poorly run marketplaces.
I believe that the safe harbour provisions that the very esteemed group of academics promote are a good start, but do not go far enough. Those provisions are a very good way to deal with the markets they discuss: academic, internal corporate or small-stakes (a la IEM) markets.
In my drafts, I write that the CFTC should have jurisdiction for event markets, that retail event markets should be allowed, and they should be allowed with as little regulation as possible while keeping consumers protected. This last balance may be difficult to find at first. What I suggest is that the CFTC allow individual marketplaces to operate providing that the marketplace operator self-certifies that:
- The rules of the contract are specifically stated for each contract
- The marketplace has a dispute resolution procedure
- The marketplace provides a basic warning to retail customers that they can lose their investment
Tom Bell, in reading some of my early drafts, doesn’t like what I’ve said in reference to contracts on assassinations, terrorist attacks, etc. I believe that any contract that is based on a criminal act (as defined by US law) should not be allowed. My reasoning is two-fold: I don’t believe that any contract should exist that provides an incentive to break laws, and I believe that the public in general would find a market for these contracts “morally repugnant” (to use an Al Roth phrase).
Tom believes that the CFTC should not forbid trading in these claims because they would offer thin and traceable trading. Perhaps part of my difference with him is in these assumptions; I don’t believe the CFTC should be regulating event marketplaces so tightly that trading would be 100% traceable. To do so would force exchanges to verify customers identities and take other steps that I personally believe are too burdensome in a regulatory sense.
That said, I don’t believe that all of these markets should be forbidden, just those that would violate US laws. Markets on foreign terrorism (such as terrorist bombings in international “hot spots”) would be allowed, and provide potentially useful information. Whether these markets should be offered at all would still be up to each exchange, based on the demand from that exchange’s customers.
Summary
Please do browse through my responses. Perhaps something will spark discussion and lead to a better overall reply to the CFTC.
I would appreciate any and all comments; you can do so directly on each post. And if you would like to co-sign what I plan to submit, please feel free to contact me directly.
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- Comments(11)
If you are an enterprise prediction market consultant, then I would expect you to concentrate on the regulatory scheme of private prediction markets. Do you tell something about that to the CFTC?
I don’t believe that the CFTC ruling will mean that much to enterprise/corporate prediction markets, if I’m honest with you. Very few companies want to deal with real-money trading, so there is no barrier as it stands to adoption. What most companies want to do is reward top traders/participants. In other words, little of this woul be affected by any CFTC ruling.
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Where the CFTC would help is in the general perception of prediction markets, and ensuring that a wider slice of the public are exposed to them and accept them as forecasting tools. That will drive more companies to use them in day-to-day practice.
Jed,
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how do you feel about market manipulation and insider trading ?
These are market-killers, company-destroyers.
Real-money prediction markets have NO future unless we pay close attention to these issues.
That means active regulation.
The effects will be a lot more damaging in the US compared to the UK (the reasons I will skip).
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Yet you’re focusing on US law.
US law will be what society wants it to be, in the long term anyway.
What it is now, is irrelevant, when we’re considering new developments.
And we are.
Medemi,
Market manipulation and insider trading are issues that are difficult to deal with, but I believe more complex issues with regards to event markets (as opposed to commodities or sports betting). I think that the priority should be allowing these markets to establish a foothold, instead of establishing a wall of potentially unnecessary regulation.
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When we’re talking about the CFTC we HAVE to focus on US law. The CFTC cannot and will not take anything else into consideration.
@Jed Christiansen: The CFTC is, by essence and historically, an agency that fights manipulation.
Jed, I think I understand your point of view.
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If you’re saying that we should move within the legal framework in order to gain the public trust (etc.) then you have a point.
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We all want the same thing - we want prediction markets - it’s just how to get there where “we” have a difference of opinion, sometimes.
All I’m asking for is attention, actually. Attention for two issues I mentioned earlier, which are crucial IMO if we want to achieve our goal. This could be as simple as a statement from the CFTC that they won’t tolerate market manipulation, and will be closely watching it. It doesn’t have to be expensive, or put a burden on the future prospects of prediction markets. It is my opinion that there will always be ideas/measures/actions that can be taken which will result in a win-win situation.
Hi, Medemi.
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I was just discussing this with Jason Ruspini via e-mail. As I wrote him, a few weeks back I probably would have come down heavily on the side of significant regulation, auditing requirements, etc. But then I starting thinking that might get to be simply too burdensome and that exchanges might never get off the ground. But as I’ve been reading the comments I think my first instincts were better.
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I’ll be editing my drafts and posting an update in the coming days on my blog. I’d appreciate any further comments you might have.
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