The Government Wants Your Opinion on Prediction-Markets Regulation

The US Commodity Futures Trading Commission (CFTC) is soliciting public comment on the regulatory treatment of event (prediction) markets and prediction-market exchanges. These markets allow participants to take positions, in some cases with real-money consequences, on the odds of various events such as the election of particular political candidates, the frequency of hurricanes, and trial verdicts. (Intrade, whose quote board appears on the left margin of this blog, and of whom we are an affiliate, is an outstanding example of a prediction-markets exchange.) There is significant evidence that such markets provide the best available probabilities on the occurrence of many kinds of events and thus benefit all of us.

The central concern regarding prediction markets in the USA is their legal and regulatory classification. Currently it appears that some types of prediction markets are forbidden as “Internet gambling” (thank Congress), and there is uncertainty about others. Executives of offshore prediction-market exchanges have been harassed legally, and on at least one occasion arrested when they passed through this country. The uncertain US legal climate is chilling development of this beneficial industry, and there is interest from the industry in gaining for itself a regulatory safe-harbor similar to that enjoyed by established futures and options exchanges. Aside from the obvious libertarian argument for allowing business between consenting adults, I see no downside to the public and, as I suggested, the potential benefits are large.

The CFTC proposal and instructions for comment (you may comment by email) are HERE.

The CTFC is asking for comment on what its regulatory stance toward this nascent industry should be. IMO, Tom Bell’s proposal, posted at the indispensable Midas Oracle, is a good start. Tom will submit his response to the CFTC in petition form. If you want to sign on, contact him at [tbell at chapman dot edu] before noon PST on July 6. (N.B. Please see his post for complete details before you contact him.) I am going to sign Tom’s petition and I recommend that you do too, unless you have a better proposal — in which case please post it in the comments here or email it to me.

Unfortunately, comments must be received by the CFTC by July 7, which leaves little time for anything other than email unless you are in DC. But better to make your opinion known on short notice, as I will, than not at all.

The prediction-markets industry is a worthwhile cause with prominent enemies including Congressional anti-gambling activists, and significant parts of the established futures industry (nobody likes competition). It would be a great loss if this worthwhile new industry continued to be crippled by outdated regulatory practices.

(For more background, I strongly recommend this post by Chris Masse at Midas Oracle. Ignore the stuff about Wolfowitz, just scroll down to the “BACKGROUND INFO” links and start clicking.)