Receive our daily newsletter

District Court Imposes Penalty on Two Foreign "Prediction Market" Companies for Violating CFTC Trading Ban

bzwirb's picture
Commentary by Bob Zwirb

The U.S. District Court for the District of Columbia ("District Court") ordered two Ireland-based companies that jointly operate an online "prediction market" trading website to pay a $3 million civil monetary penalty for violating a 2005 cease and desist order and illegally trading binary options.

According to the Memorandum Opinion, Intrade The Prediction Market Limited and Trade Exchange Network Limited ("TEN") (collectively, the "defendants") allegedly (i) violated a 2005 cease and desist order for breaching the CFTC's ban on off-exchange options and (ii) further violated the CFTC's ban by trading binary options. The District Court found that the defendants allowed U.S. customers to trade 5,503 binary contracts concerning CFTC-regulated commodities from September 2007 to June 25, 2012. Additionally, the Court determined that TEN violated the 2005 cease and desist order by (i) permitting U.S. customers to trade binary option contracts, (ii) failing to have procedures in place to stop U.S. customers from trading on 2,027 prohibited binary option contracts and (iii) removing blocks on prohibited binary option contracts.

Judge Royce C. Lamberth noted in the Memorandum Opinion that the defendants' repeated violations of CEA and CFTC Regulations warranted the civil monetary penalty of $3 million. Additionally, the District Court permanently enjoined the defendants from violating the CEA and CFTC Regulations any further. The defendants reached a separate agreement with the CFTC and agreed to disgorge approximately $250,000 to be distributed among U.S. customers.

Commentary

It wasn't that long ago that these defendants provided the U.S. public with important and useful information regarding upcoming events, information that was highlighted on major news outlets. They also provided the American public, and not just "eligible contract participants," with the opportunity to speculate or hedge on certain events for very modest sums, such as the outcome of elections, the unemployment rate, or the U.S. gross domestic product. Not only were these transactions useful and fun, they often were in the public interest. See, e.g., Paul Architzel, Event Markets Evolve: Legal Certainty Needed  and Tom W. Bell, Prediction Markets for Promoting the Progress of Science and the Useful Arts. Moreover, they also provided the public with more accurate indicators of the likely outcome of events, such as presidential elections, than did unreliable political polls. One could follow, for example, the ebb and flow of a candidate or issue's popularity on sites like Realclearpolitics.com, which featured the results of the defendant's market activities.

But in 2005, the CFTC took away the punch bowl, rigidly applying its ban on options to the defendants' activities, and has never looked back. As a result, only an occasional not-for-profit market is allowed to operate after obtaining a no-action letter to do so. But for the most part, because event and prediction markets are so unwelcome in the U.S., virtually no one here can effectively hedge against the outcome of certain events, such as the upcoming congressional mid-term elections, or the next presidential election in 2020. This has real-world consequences for business owners. For example, the owner of a certain restaurant in Lexington, Virginia might want, or even need, to hedge against the likelihood that the incumbent President might be re-elected in two years. But alas, she can't under CFTC rules, notwithstanding the fact that well-seasoned and experienced firms like the defendants here offer the opportunity. And political junkies have virtually nowhere to go today for information on who is going to win the next important political race as reliable as that provided by the defendants. Perhaps the leadership at the CFTC might want to reconsider its policy of inhibiting such markets as part of its regulatory reform efforts.

Email me about this

Premium Content

Available only to Cabinet Premium subscribers.

 

Tags

Products: 
Regulated Entities: 
Body of Law: 
Jurisdiction: 
Organization: