CFTC Charges "Prediction Market" with Violating the CFTC’s Off-Exchange Options Trading Ban and Filing False Forms
Commentary by Bob Zwirb
The CFTC announced the filing of a civil complaint in federal district court charging Intrade The Prediction Market Limited ("Intrade") and Trade Exchange Network Limited ("TEN"), both of which are based in Dublin, Ireland, with offering commodity option contracts to U.S. customers for trading, as well as soliciting, accepting, and confirming the execution of orders from U.S. customers in violation of the CFTC's ban on off-exchange options trading. The complaint also alleges that TEN violated an order issued by the CFTC in 2005 that found that TEN had previously engaged in similar conduct and that ordered TEN to pay a $150,000 civil penalty and cease and desist from offering such contracts to U.S. customers. In order for such contracts to be legal, TEN was required to restrict them to eligible contract participants, which the complaint alleges it did not do.
See: CFTC Press Release and Complaint.
Commentary
TEN, whose Intrade website is particularly widely followed in the U.S. during election seasons, operates what is known as an "event" or "prediction market," i.e., an internet-based trading platform that allows participants to buy and sell binary "winner take all" options predicting whether specific future events will occur, including whether certain U.S. economic numbers (such as the unemployment rate) or the prices of gold and currencies will reach a certain level by a certain future date, or whether certain candidates will win their electoral contests. For years, there has been considerable discussion both inside and outside the CFTC as to the economic utility of prediction markets and whether the Commission would tolerate or impede their development. Today's action may suggest the latter with the agency's enforcement director emphasizing that the CFTC will intervene in such markets "wherever they are based" unless such contracts are traded on a designated exchange (or are legally exempt from such requirement). Of course, this statement begs the question, since the CFTC in its history has designated only one such prediction market, HedgeStreet, which no longer operates, and there is a special provision in Dodd-Frank that prohibits the trading of contracts based upon "motion picture box office receipts (or any index, measure, value or data related to such receipts)."