Monday, July 07, 2008

Free Speech in Event Market Claims

In addition to a joint comment with a score of signers, I also responded to the Commodity Futures Trading Commission (CFTC)'s Concept Release on the Appropriate Regulatory Treatment of Event Contracts by firing off a solo comment. I there focused soley on question 14, in which the CFTC asked, "Should certain underlying events or measures--such as those based on assassinations or terrorist activities—be prohibited altogether due to the social perception and impact of such events? What statutory or other legal basis would support this treatment?"

Much of my comment tracked the answer I posted here earlier. Long story short: such claims would not materially promote wrongful acts, so the CFTC has no legal basis to ban them. To that argument, however, I added a First Amendment analysis; to wit:

Could you fault claims about assassinations or other terrorist events for giving incentives for wrongful acts? Not very plausibly; as I explain above, it is very unlikely that anyone would find it profitable or prudent to try to use an event market to cash in on wrongdoing. Furthermore, all sorts of investment instruments offer the same incentives. Thus, for instance, a would-be terrorist might go long on oil futures prior to pulling off an attack on a refinery. Indeed, that sort of scenario seems much, much more likely than one involving event markets.

At root, concern about unseemly event market claims boils down to concern about violating a taboo about what sorts of things people discuss openly in a polite society. Those norms merit our concern, granted. They do not, however, justify imposing a speech restriction on event markets. And make no mistake about it; to bar such claims would constitute a restriction on speech.

Specifically, if the CFTC banned certain sorts of event market claims relating to assassinations, terrorist activities, or criminal acts, it would thereby impose a content-based restriction on speech. That would, under present First Amendment jurisprudence, trigger the highest level of judicial review: strict scrutiny. The ban would almost certainly fail to survive that scrutiny, as it would be too broad (stopping not just the bad guys but also the good ones), too narrow (since it would fail to forbid the use of other financial instruments, such as generic futures, from like uses), and not narrowly tailored (since there are other, better ways to discourage bad acts). Those sorts of claims would, moreover, fall within the core of the sort of speech protected by the First Amendment, as they would concern political events.

Our freedoms of speech and expression include the right to ask troubling questions. The CFTC has no good reason to ban event market claims about assassinations or other illegal acts. Nor can it do so constitutionally.

Suppose that my argument leads the CFTC to doubt that it can ban event markets from hosting claims about assassinations or terrorist activities. Suppose further, as seems likely, that the CFTC has some discretion in deciding whether its jurisdiction encompasses event markets; suppose, that is, that extant law does not command one answer to that question. What result?

I predict that the CFTC would tend to deny that it has jurisdiction over event markets because it would not want to take the blame for encouraging distasteful claims. Indeed, I not only predict that result, I intend it. I don't trust the CFTC to do a very good job regulating event markets, so I want it to know why it does not even want to try.

[Crossposted at Agoraphilia and Midas Oracle.]


Anonymous said...

Leaving aside the issue of threatening the CFTC, which might undermine all your other arguments, there are two big problems with this:

First, if the CFTC decides to regulate event markets as excluded commodities, such markets will not satisfy the “beyond the control” criterion. I see just now that the CME agrees with me.

Second, the freedom of speech argument is, I’m sorry, simply ridiculous. How does the CFTC not approving a contract curtail your freedom of speech exactly? You are still free to discuss what information you may have, in more detail, in many places - not to mention giving the FBI a call if you really know something. Also, since traders are motivated by profit, this would be (possibly misleading) commercial speech, granting that anonymously causing price changes counts as speech in the first place. This freedom of speech argument just strikes me as the kind of idea that seems clever at first but really isn’t effective when you reflect on it and sober up a little.

Tom W. Bell said...

Jason: As you've evidently seen, I replied to your analogous comment over on Midas Oracle.