Free Speech in Event Market Claims

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In addition to a joint comment with a score of signers, I also responded to the Commodity Futures Trading Commission (CFTC)&#8217-s Concept Release on the Appropriate Regulatory Treatment of Event Contracts by firing off a solo comment. I there focused soley on question 14, in which the CFTC asked, &#8220-Should certain underlying events or measures&#8211-such as those based on assassinations or terrorist activities—be prohibited altogether due to the social perception and impact of such events? What statutory or other legal basis would support this treatment?&#8221-

Much of my comment tracked the answer I posted here earlier. Long story short: such claims would not materially promote wrongful acts, so the CFTC has no legal basis to ban them. To that argument, however, I added a First Amendment analysis- to wit:

Could you fault claims about assassinations or other terrorist events for giving incentives for wrongful acts? Not very plausibly- as I explain above, it is very unlikely that anyone would find it profitable or prudent to try to use an event market to cash in on wrongdoing. Furthermore, all sorts of investment instruments offer the same incentives. Thus, for instance, a would-be terrorist might go long on oil futures prior to pulling off an attack on a refinery. Indeed, that sort of scenario seems much, much more likely than one involving event markets.

At root, concern about unseemly event market claims boils down to concern about violating a taboo about what sorts of things people discuss openly in a polite society. Those norms merit our concern, granted. They do not, however, justify imposing a speech restriction on event markets. And make no mistake about it- to bar such claims would constitute a restriction on speech.

Specifically, if the CFTC banned certain sorts of event market claims relating to assassinations, terrorist activities, or criminal acts, it would thereby impose a content-based restriction on speech. That would, under present First Amendment jurisprudence, trigger the highest level of judicial review: strict scrutiny. The ban would almost certainly fail to survive that scrutiny, as it would be too broad (stopping not just the bad guys but also the good ones), too narrow (since it would fail to forbid the use of other financial instruments, such as generic futures, from like uses), and not narrowly tailored (since there are other, better ways to discourage bad acts). Those sorts of claims would, moreover, fall within the core of the sort of speech protected by the First Amendment, as they would concern political events.

Our freedoms of speech and expression include the right to ask troubling questions. The CFTC has no good reason to ban event market claims about assassinations or other illegal acts. Nor can it do so constitutionally.

Suppose that my argument leads the CFTC to doubt that it can ban event markets from hosting claims about assassinations or terrorist activities. Suppose further, as seems likely, that the CFTC has some discretion in deciding whether its jurisdiction encompasses event markets- suppose, that is, that extant law does not command one answer to that question. What result?

I predict that the CFTC would tend to deny that it has jurisdiction over event markets because it would not want to take the blame for encouraging distasteful claims. Indeed, I not only predict that result, I intend it. I don&#8217-t trust the CFTC to do a very good job regulating event markets, so I want it to know why it does not even want to try.

[Crossposted at Agoraphilia and Midas Oracle.]

4 thoughts on “Free Speech in Event Market Claims

  1. Jason Ruspini said:

    Leaving aside the issue of threatening the CFTC, which might undermine all your other arguments, there are two big problems with this:


    First, if the CFTC decides to regulate event markets as excluded commodities, such markets will not satisfy the “beyond the control” criterion.


    Second, the freedom of speech argument is, I’m sorry, simply ridiculous. How does the CFTC not approving a contract curtail your freedom of speech exactly? You are still free to discuss what information you may have, in more detail, in many places – not to mention giving the FBI a call if you really know something. Also, since traders are motivated by profit, this would be (possibly misleading) commercial speech, granting that anonymously causing price changes counts as speech in the first place. This freedom of speech argument just strikes me as the kind of idea that seems clever at first but really isn’t effective when you reflect on it and sober up a little.

  2. Tom W. Bell said:


    Far from “threatening” the CFTC, I’m trying to help it avoid yet another embarrassing run-in with the First Amendment. See Taucher v. Born, 53 F. Supp. 2d 464 (D.D.C. 1999); Commodity Trend Service, Inc. v. Commodity Futures Trading Commission, No. 97-C-2362, 1999 U.S. Dist. LEXIS 15877 (N.D. Ill. Sept. 28, 1999). Friends don’t let friends violate the Constitution.

    Re your first point: Um, yeah, that’s the point. The CFTC will be able to do no more than offer “no action” status.

    Re your second point: Sheesh, you have to stop hitting the cranky juice! Try drinking in some First Amendment cases, instead. The fact that you can speak in another forum by no means excuses a government restriction on speech. And the commercial speech exception only applies to speech intended to effectuate a sale, such as an advertisement. Asking a question in the form of a claim does far, far more than that.

  3. Jason Ruspini said:

    Well even though they involve the CFTC, I don’t think those cases are very relevant to this specific question, nor am I sure that the commercial speech exception would not apply to speech-as-buying-and-selling.


    On the first point, I would argue that such options are within the CFTC’s jurisdiction, but cannot be approved for listing on a DCM under the CEA because of outcome manipulation issues. (This aspect of the argument is missing from the CME/Hedgestreet treatment.) Also, the DCMs are private property, so isn’t being able to speak (if not trade options on an exchange) somewhere else relevant here?


    In any case, the CFTC can still issue a public interest exemption, which is part of what we both argue for in some situations. Maybe a completely new regulatory body might be appropriate for a certain class of markets, but the CFTC option is better than the status quo, especially since there is no contradiction between jurisdiction for some markets and exemptions for others.

  4. Tom W. Bell said:

    I’m not sure about the commercial speech issue, either, granted; these things don’t typically admit to certainty. Sounds like a job for . . . a prediction market! I think you and I would assign rather different prices to the relevant claim.

    Good point about the manipulation angle. Of course, a similar critique would apply to a great many other sorts of claims that carry no taint of wrongdoing, such as ones relating to elections, scientific discoveries, etc. Hilary could have shorted her nomination claims, committed deliberate gaffes, and cashed in, for instance.

    That DCMs are not government owed offers no defense to a First Amendment defense. Privately owned newspapers, television stations, book publishers, blogs, etc.,–they all can sue when state action interferes with their freedoms of expression. So, too, DCMs.

    That said, DCMs will almost certainly *not* even *ask* to host assassination or terrorism claims. They have to keep the CFTC happy, as it controls their fates in many ways. That’s not a legal analysis; it’s just a practical, public choice one.

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