Wednesday, December 12, 2012

CFTC Targets Prediction Markets; Hits First Amendment

Would you pay good money for accurate predictions about important events, such as election results or military campaigns? Not if the U.S. Commodity Futures Trading Commission (CFTC) has its way. It recently took enforcement action against overseas prediction markets run by InTrade and TEN. The alleged offense? Allowing Americans to trade on claims about future events.

The blunt version: If you want to put your money where your mouth is, the CFTC wants to shut you up.

A prediction market allows its participants to buy and sell claims payable upon the occurrence of some future event, such as an election or Supreme Court opinion. Because they align incentives with accuracy and tap the wisdom of crowds, prediction markets offer useful information about future events. InTrade, for instance, accurately called the recent U.S. presidential vote in all but one state.

As far as the CFTC is concerned, people buying and selling claims about political futures deserve the same treatment as people buying and selling claims about pork futures: Heavy regulations, enforcement actions, and bans. Co-authors Josh Blackman, Miriam A. Cherry, and I described in this recent op-ed why the CFTC’s animosity to prediction markets threatens the First Amendment.

 The CFTC has already managed to scare would-be entrepreneurs away from trying to run real-money prediction markets in the U.S. Now it threatens overseas markets. With luck, the Internet will render the CFTC's censorship futile, saving the marketplace in ideas from the politics of ignorance.

Why take chances, though? I suggest two policies to protect prediction markets and the honest talk they host. First, the CFTC should implement the policies described in the jointly authored Comment on CFTC Concept Release on the Appropriate Regulatory Treatment of Event Contracts, July 6, 2008. (Aside to CFTC: Your web-based copy appears to have disappeared. Ask me for a copy.) 

Second, real-money public prediction markets should make clear that they fall outside the CFTC's jurisdiction by deploying notices, setting up independent contractor relations with traders, and dealing in negotiable conditional notes. For details, see these papers starting with this one.

[Aside to Jerry and Adam: Per my promise.]

[Crossposted at Technology Liberation Front, and Agoraphilia.]


Xerographica said...

I want taxpayers to put their taxes where their mouths are. If I stop blogging then you'll know that the CFTC got to me.

Anonymous said...

Can this be challenged in court?

Can you get the Institute for Justice involved?

Tom W. Bell said...

X.: Fight the power, man.

g.: Yeah and maybe, but I think InTrade has its own cure in mind. It made a public announcement to the effect that it plans to stay in biz. I hope it follows my advice, but I'm still waiting for that call. . . .

Xerographica said...

"Fight the power"...heh. In a democracy that means I've got to fight the voters.'s what I'm up against...Unglamorous but Important Things. That's my collection of people's responses to the idea of taxpayers putting their taxes where their mouths are.

I'm up to 83 responses and I still suck at explaining why...

1. allowing taxpayers to shop for themselves in the public sector would produce an efficient allocation of public funds
2. we would want public funds to be efficiently allocated

Can you do me a favor and write a post explaining those two concepts? I mean, it would be a good post to follow this one.

You could say, "If you want to put your money where your mouth is, then why don't you support tax choice?"