Regulated U.S. election markets might not be so hard.

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Based on the arguments Hedgestreet presented in its response to the CFTC on event markets, the exchange has a fairly strong justification to self-certify and begin trading election futures, soon. While most event markets trade as binary options, and the CFTC has flexible discretion over options per 7 U.S.C. § 6c(b), the Commission does not have direct discretion over approving DCM futures that conform to the Commodity Exchange Act, by 7 U.S.C. § 7a-2(c)(3). Therefore, a vote-share or electoral college future is more feasible at this moment than a winner-take-all option, although the latter is more useful as a hedging vehicle.

The major question here is what degree of trading restrictions the CFTC considers appropriate in order to fulfill the CEA&#8217-s &#8220-beyond the control&#8221- criterion of excluded commodities. There is little doubt that low position limits alongside candidate death contingencies and prohibitions on trading by candidates, their staffs, members of the electoral college, and their proxies would not satisfy the CEA in this respect. The challenge lies in enforcing such trading prohibitions. I hope that Hedgestreet is in the process of developing a framework to do so. The CFTC could also issue an interpretive letter on this specific point, without addressing the more general, challenging issues related to their jurisdiction over event markets.

If Hedgestreet&#8217-s trading restrictions are conservative and rigorous, it is improbable that such a self-certification would put Hedgestreet in bad graces with the CFTC. Alternatively, Hedgestreet could submit the futures (or options) for approval under CFTC regulation 40.3. If they do so, the CFTC has 45 days to review the products, at which point they could render a decision or extend the review process. In the meantime, however, Hedgestreet could be in communication with the CFTC and NFA concerning the development of trading restrictions, which again should be the main point of contention here, as there is no doubt that such event markets are associated with an &#8220-economic consequence&#8221-. Note that CME does not even believe that trading prohibitions are necessary, citing the role of the Fed in determining interest rates and the lack of problems there with respect to manipulation. I tend to believe that the Fed and interest rates is a special case, not to mention that it is treated differently in the CEA, and that it is prudent to impose special trading restrictions on political event contracts. Those restrictions, however, can remain flexible and be loosened over time, especially the position limits, as the market grows.

Given the current political climate in which the CFTC operates, the Commission may welcome such an active stance from Hedgestreet and other DCMs on this issue, as it will allow them to take a more passive role in the process. In the case of vote-share, electoral college and tax futures with appropriate trading restrictions, the Commission would simply be complying with the CEA by allowing such contracts. Allowing winner-take-all options would be incrementally more sensitive for the CFTC given their additional discretion in such cases. In any case, I think we have passed beyond the point where there is any material doubt that such markets are bona fide excluded commodities.

[Previously, my response to the CFTC, where I take a broader view with respect to jurisdiction and issues like gaming law preemption. Cross-posted from Risk Markets and Politics]

18 thoughts on “Regulated U.S. election markets might not be so hard.

  1. medemi said:

    Making progress, in these modern times, means we have to be flexible. We can’t rely on strict laws all the time. Besides, they won’t give us the answers most of the time anyway.

    You could have a look at regulation by use of principles. The FSA does it all the time.

    Or governmental policy based on what we call “gedoog” beleid.

    Gedogen is an open-eyed tolerance, and a matter of governmental policy.

    If there is a social matter that will not allow a concrete solution, the Dutch will “gedoog” it; they will allow an exception to the rule — not by turning a blind eye to the violation, but by accomodating it.

    The Dutch acknowledge, officially and with intensive debate, that, sometimes, eradication of a problem is impractical — and for that reason maybe an inappropriate objective.

  2. Jason Ruspini said:

    medemi, I generally agree, but these restrictions are meant to conform with the CEA and CFTC. I have a more “tolerant” proposal here for dealing with manipulation:



    I don’t really know if the idea of a published market balance “warning label” metric is going to work, but it seems worth exploring. Similarly, imagine that instead of the FDA rejecting drugs outright, after initial trials, if risks are below a certain threshold, pharma companies were just required to disclose all side-effects quantitatively, with insurance companies also tracking risk tables for various drugs. I realize there are several problems with that, but the general idea might be a net positive compared to the current regime which has a “do no harm” bias that results in many “unseen” deaths.

  3. medemi said:


    I don’t know what you’re talking about when you’re referring to CEA, DCM’s, trading restrictions etc. I’m not into that. In general, I prefer to stay away from what is, and what isn’t possible, and focus on what is possible. The downside is, that I won’t be able to get into certain aspects. The upside is that I am capable of detecting win-win situations other people would never think of.

    You’ve found one of them. I’ve proposed a warning system myself on betfair’s forum, since betfair are very much capable of detecting suspicious betting activity – confirmed on the Panorama programme btw, where one insider was active on 90-some markets and another on 40-some markets, both laying huge sums of money, taking the markets off-balance and ripping punters to pieces. Yet, despite all this awareness by betfair, there’s no protection for punters, none. And the industry suffers while the government is wasting our money chasing the insiders.

    I asked for an indicator, a green/red light or a number, anything, which will indicate the amount of risk punters are facing. You’ve designed a metric. I would like to see that translated into a red/orange/green light on the screen. People can decide for themselves what to do with that info, at least it provides some protection for those who want it. It will also act as a deterrent for insiders.

    What this boils down to – we’re using openness to warn customers when it is needed, inducing trust in the market place. We’re doing it in a practical/cheap way without restricting people’s freedoms. A win-win situation. Problem is, the operator may prefer to keep things hidden, swept under the carpet, hope it will go away etc. until eventually things get out of hand, by which time it will be too late. I’m not counting on betfair but we might still have a chance in the US or with Intrade etc.

    I’m sounding more positive than I should be, I know that.

  4. Jason Ruspini said:

    A study of market error based on balance, and which metrics would best describe that balance would be a good paper topic, and somewhat central to the “wisdom of crowds” idea.

  5. medemi said:

    I will run through the streets naked on a Saturday afternoon if one researcher is able to present us with reliable data and a meaningful conclusion following this type of research, relating to the topics above. We’re not measuring the effect of an overdosage alcohol on rats, here. But there must still be some people who have blind faith in science these days. Actually, what I’m trying to say is, when you set it up in such a way that your results will be reliable, they will also very likely be meaningless, due to the complexity of the matter in reality and the lack of understanding of the average person. All you need to ask then is “what exactly have you been measuring?” to be able to point out the insignificance of said study. And I can’t wait for some researcher who has seen the light and comes up with a theory of how insider trading benefits the markets. Maybe even funded by the gambling industry. Best to open your eyes and use your brain, IMO.

    Oh dear… Paris Hilton. A masterpiece by our think tanks of how to manipulate the crowd. It was on the radio, here, this morning. And about how stupid all these reporters are :-D But if you really want to become one of the bad boys’ future bitches, then study to be a researcher. You can’t miss. There, saved you some money again, today.

  6. medemi said:

    Betfair have provided evidence, to the Gambling Commission, that in-running betting isn’t causing any damage to the unexperienced punter. It would be interesting to have a look at that study and punch a few holes in those results. I’m PMSL already, science at its best. And it’s not like I can’t be objective – I’m already on record stating what a good job the Gambling Commission did IMO with their research on gambling addiction after they presented their surprising results. I don’t think you will find it’s me who will be showing a lack of objectivity. Just not the manipulative type.

  7. medemi said:

    What’s with all the style definitions ? I have to edit every post I make. Is it just me ?

    I will leave it in this time.

    I switched from IE7 to firefox because my enter key wasn’t working in IE7.

    Btw, should anyone try to contact me by using e-mail, I won’t be able to respond. I can receive but not transmit.

  8. medemi said:

    <!– /* Style Definitions */ p.MsoNormal, li.MsoNormal, div.MsoNormal {mso-style-parent:””; margin:0cm; margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:12.0pt; font-family:”Times New Roman”; mso-fareast-font-family:”Times New Roman”;} @page Section1 {size:595.3pt 841.9pt; margin:70.85pt 70.85pt 70.85pt 70.85pt; mso-header-margin:35.4pt; mso-footer-margin:35.4pt; mso-paper-source:0;} div.Section1 {page:Section1;} –>


  9. medemi said:

    It’s Word, I think.

    Will be buying a new computer shortly. Sorry for bothering you with this.

  10. Jason Ruspini said:

    I agree on the market error metric and clearly if the trader base of Intrade shifts in any way because of legal or regulatory changes, that is a reason to be especially wary of any past results.  Worth testing though..

  11. medemi said:


    I’m not sure what it is you want to test, since you don’t have to force people to look at the information we are talking about. It should be available though, for those traders who want some protection against insider trading and market manipulation. We first need to convince the operator, or better yet the regulators, of the value of this information and the value in general of being transparent in the market place. Then we need to be smart and chose a sensible formula/metric.

    Usually markets will be balanced, meaning that there are about as many traders laying as backing (a relatively small amount of money). On rare occasions though you’ll find one person laying or backing huge amounts of money, taking the market off-balance, which could be represented by a number like 4% or 96% when the ideal market would give us 50%. People don’t have to look at that information. That goes especially for people who want to allow the insiders to trade freely on these markets. :-D Let THEM be fleeced.

    It should be noted we now have at least three sources of information which will help the trader.

    – An indication whether markets are on- or off-balance (your idea) to provide protection.

    – Provide feedback to customers on traders’ track record (recently discussed) for more accurate markets.

    – Something to do with destination invariant funds and liability (Adonis’ idea) to boost betting integrity which I’m sure he will get back to, some day.

    This points out to me the importance of transparency in the market place, which will benefit all parties involved, except the cheats. That’s our goal, isn’t it ?

  12. Jason Ruspini said:

    I just want to test if how market balance corresponds to error based on closing prices.  Sometimes it will reflect manipulation or overconfidence and other times the “smart money” or insiders, so it is unclear how to interpret if unbalanced prices are not significantly different from relatively balances ones.

  13. Medemi said:

    I just want to test if how market balance corresponds to error based on closing prices.

    Sounds good.

    …so it is unclear how to interpret…

    Hypothesis stated. Hypothesis confirmed (by me). No need to trouble your mind with contaminated data and an inborn urge to try and make sense of the world we live in.

    However, our inability to interpret unbalanced prices or markets doesn’t mean there is no value in them. On the contrary, it will act as a warning sign (nothing more). People will still trade these markets, but they have been warned.

    There’s a third possibility btw – the crowd could have misinterpreted the rules on a specific market causing said market to go off-balance when one or a few traders decide to cash in. There could be other reasons too, but the signal remains the same and is still a valid one – “Trader beware, there could be something funny about this market”. If that’s how we’re going to regulate these markets and provide protection for the consumer, I will settle for it.

  14. Chris F. Masse said:


    I have suppressed the anti-spam plugins. Now people need to register themselves and log in to get to comment. Is it better form your standpoint?

  15. Medemi said:

    So, now that we have had the debate (and no-one seems to disagree), done our research, when are we going to get this show on the road ? I heard you Americans were so quick to adapt to changing environments.

    Meanwhile I’ll just open an account with Intrade and see whether I can so some damage to the market makers there. It’ll also be interesting to know how long I can survive on their forum…

    Binary options, a transaction fee, it looks like my prairs have been answered. And John seems like a decent bloke.

  16. Medemi said:

    Good morning America.

    It’s sunday today, so I guess applying for a job at McDonald’s is out of the question. Perhaps we could try and revive the prediction market industry ?

    For those who are against gambling/sports markets I have a deal to offer. The Australian model, meaning no in-running betting. That should take care of the dark side of betting to a large degree. Your fears, I have to admit it, are justified. In-running sports gambling, what it essentially does is give the punter an opportunity to fleece his opponent. Before you know it, most people will tolerate this kind of behaviour and you’re stuck with a rip-off society, the mentality we can witness today in the UK. This is not America.

    I’ll admit it, but you have to do something for me. Rid yourselves of your biased beliefs that gambling is bad. It’s not. Consumer protection and betting integrity are key, and that’s where our focus should be. And it sure looks like you need the jobs.

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