2 years ago
Wall Street’s top derivatives regulator has deemed that one of the country’s only political betting markets has just six more months to live.
PredictIt — an 8-year-old trading hub where thousands of Washington insiders and politically savvy investors wager on everything from whether President Joe Biden will be his party's 2024 nominee to who will win the San Jose mayoral election — will shut down in the U.S. in February after the Commodity Futures Trading Commission said it failed to comply with market rules.
PredictIt, launched by Victoria University of Wellington in New Zealand, was established as an experimental prediction market to be operated "for academic research purposes only” under guidelines set by the CFTC in 2014.
The regulator did not disclose how PredictIt didn't follow the rules, and a spokesperson for Victoria University said the school disagreed with the CFTC's decision.
The market allows investors to bet on so-called event contracts, which have become a source of growing fascination across financial markets in recent years as the breadth of offerings in the derivative products has grown.
On Kalshi, a designated contract market regulated by the CFTC, hundreds of thousands of contracts are traded daily related to the Federal Reserve’s September interest rate-setting meeting, whether Monkeypox will become a pandemic and even the number of delays and cancellations at O’Hare International Airport.
CME Group, the world's largest financial derivatives exchange, is about to enter the market as well, with plans for event contracts on whether prices in some of the world’s most active futures markets will be up or down on any given day.
Trading on politics has been trickier for U.S. regulators to get on board with, though.
Just two years before PredictIt broke onto the scene, the CFTC denied a proposal to launch similar political event contracts from the Northern American Derivatives Exchange, in part over concerns about whether the market could move election results. “We need to be super careful about handing part of our electoral process over to the trading pits,” then-CFTC Commissioner Bart Chilton said in 2012.
PredictIt was an exception in that the market was built to be a research project from Victoria University that would give academics from around the world a way to collect and study data on trading patterns related to politics — something lobbyists, pollsters and journalists have all come to do as well in the years since.
It’s not the only market of its kind. For well over two decades, the University of Iowa has operated Iowa Electronic Markets, where investors can currently trade around the 2022 midterms as well as the French presidential election. But PredictIt has seen an explosion of growth into the mainstream, with reports indicating that the platform had as many as 80,000 users in 2018.
What has allowed both PredictIt and Iowa Electronic Markets to operate without having to register as derivatives exchanges are so-called no-action letters from the CFTC. Those letters have spelled out a list of requirements and restrictions for the markets that, if met, meant the regulator would not pursue any enforcement action against them for offering trading in products that would otherwise warrant heavier scrutiny.
Among the list of conditions in PredictIt’s case were that the market was to be small-scale and not-for-profit, and was required to limit advertising, and cap traders’ investments in any one contract at $850.
However, in an Aug. 4 order, the CFTC wrote that Victoria University “has not operated its market in compliance” with the 2014 terms and that it was withdrawing the no-action letter as a result. No enforcement action was released in conjunction with the letter, but the CFTC did say that PredictIt would need to wind down trading on the market in the U.S. by end of the day, Feb. 15, 2023.
The CFTC did not directly state how PredictIt violated the terms in either the order or a letter to the university.
A spokesperson for the commission declined to comment.
Following the regulator's move, PredictIt has stopped adding new contracts to the platform, according to a notice the prediction market sent to traders. Existing markets will be run through Feb. 15, unless they end earlier, according to PredictIt, which also wrote that the security of traders’ funds won't be affected by the CFTC’s action. There has also been no decision yet on how markets already open that have end dates beyond February 2023 will be wound down.
Still, PredictIt’s backers are pushing back on the claims that it violated the 2014 arrangement. In an emailed statement, Victoria University’s vice provost of research, Margaret Hyland, said the school “recognises and acknowledges the CFTC’s authority in this matter” but “disagree[s] with the decision.”
“We have done everything that we believe they’ve asked us to do,” said Brandi Travis, a spokesperson for Aristotle, a political technology company that runs PredictIt alongside the university.
The CFTC’s move may not mark the end of PredictIt entirely, though. In October, Aristotle filed a proposal with the regulator to launch a designated contract market of its own, a proposal that if granted would allow the exchange to launch event contracts in a similar way Kalshi does today.
What contracts would be offered on it are not yet known. Travis declined to comment on any plans for a market. But the Aristotle spokesperson said the company was “going to do everything possible to work with the CFTC to provide political event markets.”
English (US)