Commodity Futures Trading Commission Denies Request for Election Prediction Market

April 3rd, 2012

From Dealbook:

The Commodity Futures Trading Commission is poised this week to reject plans for so-called political event contracts, a lucrative derivative deal that would allow firms to wager on Congressional races as well as the presidential battle, the people briefed on the matter said. The agency is expected to decide, in part, that such trading amounts to gambling — and that it could unduly influence election results.

The North American Derivatives Exchange, the Chicago-based firm that sought to offer the contracts, portrayed its effort as consumer-friendly. With a modest minimum buy-in of $100, and a maximum payout of $250,000, the exchange said it was appealing more to mom-and-pop investors than Wall Street titans.

“We think we’re the perfect exchange to do it because we’re a retail exchange,” Timothy McDermott, the firm’s general counsel, said in an interview last month.

It is unclear whether regulators will allow the exchange, known as Nadex, to remake its proposal and address the futures commission’s concerns. The agency is expected to announce its decision on Monday, the final day of a 90-day review period for the proposal. . . .

But after seeking approval from the futures commission in December, the plan hit a wall in Washington. The Nadex plan was seen as a crucial test case for other exchanges that have discussed offering political contracts but have been skittish about treading on murky legal ground.

Some states explicitly outlaw gambling on elections. Even in Las Vegas, the epicenter of gambling, betting on elections is off limits, regulators say.

Intrade is the most prominent player in the world of trading political event contracts, but it is based in Ireland. It is unclear whether American law applies to Intrade.

Only academics have escaped the strict rule. For two decades, United States regulators have allowed business students at the University of Iowa to operate an electronic exchange for trading political contracts.

As the markets have gained prominence, the public and the media have turned to Intrade and others not just for trading, but as a barometer for the election. Indeed, Intrade has become a public opinion polling site of sorts, providing the latest odds on, for instance, who will secure the Republican presidential nomination.

Nadex says it was well positioned to become the only major election trading exchange, because unlike Intrade and other competitors, it is subject to federal oversight at the futures commission. . . .

The agency on Monday is expected to say that election derivatives, while a novel idea, have the potential to improperly affect election results. One problem, the agency argues, would arise if a candidate’s supporters bought huge positions and drove public opinion in their favor.

This does not bode well for a prediction market involving the outcome of cases.