Michael Selig took over the Commodity Futures Trading Commission in December promising clear rules for prediction markets such as Kalshi Inc. and Polymarket. The indictment of a soldier betting on the Nicolas Maduro raid and two pitchers accused of rigging the pitches people wager on have sharpened questions about the utility of these markets and their vulnerability to insider trading.
What Selig’s agency proposed Wednesday was something else: A regime in which every contract listed is provisional. They trade on the exchange’s own say-so until the CFTC calls for a 90-day “public interest” review. The categories that trigger review — “gaming” chief among them — reach most of the industry’s volume. This is not a rule. It is a promise to make rules up later, one contract at a time.
The proposal gets the economics of prediction markets exactly backward. One public-interest factor asks “whether buyers and sellers have any basis to form a meaningful view” of the event. This is a polling criterion, not a market criterion: A poll is informative only if the typical respondent knows something; a market price is informative if anyone does. I need to know nothing about soccer to know a team is overpriced after watching its chartered flight divert at 2 a.m. — and the crowd betting on feelings is what pays the rare trader who knows something.
Yet the same proposal would ban mention markets, such as those betting on whether President Donald Trump mentions “250” in a speech, because insight is “highly concentrated — in a single individual,” and Little League contracts because “broad and numerous groups of individuals would potentially have inside information.” Too concentrated: banned. Too dispersed: banned. Whatever the distribution of information, some factor condemns it. A test that can reject anything isn’t a standard, it’s a docket.
Markets publish what insiders know. When Morton Thiokol Inc.’s stock collapsed soon after the Space Shuttle Challenger exploded in 1986 — before any investigation named the company’s O-rings — the market wasn’t committing a crime.
Banning markets has never stopped anyone from selling secrets. Aldrich Ames sold the CIA’s Soviet assets to the KGB and traded safely for years; Robert Hanssen sold FBI counterintelligence for two decades. If secrets are going to be sold — and they are — better they be sold in public. Selling classified information remains a crime either way, but the soldier who bet on the Maduro raid was suspected within days and indicted within months. Prohibiting the market doesn’t prevent the sale; it only determines whether it happens where we can see it and whether the public or America’s enemies are the beneficiaries.
This is the founding logic of the markets the CFTC regulates. Futures markets have never had a stock-market-style insider trading prohibition. A farmer trading on private knowledge of his own crop isn’t a scandal, it’s the mechanism. The insider problem is an enforcement problem, not a listing one. Delisting a contract doesn’t delete insiders; it relocates them offshore, or to private buyers who never report the seller. Listing it creates the evidence: registered accounts, timestamped trades, the paper trail that produced both of the past year’s indictments.
What prediction markets add is something equities never offered: a way for thousands of people to sell small bits of information — a logistics clerk’s observation, a local journalist’s hunch — that are individually worthless and collectively a forecast.
For manipulation, the CFTC could write an actual rule, with numbers, borrowed from its own playbook. The agency has limited positions in physical commodities for decades by reference to deliverable supply: You may not hold a position large enough to profit from cornering the market.
For event contracts, estimate the cost of influencing the outcome — bribing a pitcher, rigging a vote count, moving a Federal Reserve decision — and cap positions and total market size an order of magnitude below it. A single-pitch contract fails this test because the outcome sells for $5,000, the price one Cleveland Guardians pitcher allegedly took to throw a ball. A Fed contract passes because no position the market could absorb would cover the cost of buying a policy decision. Run the arithmetic and the answers fall out without any public-interest séance.
Some contracts should be banned outright, and the arithmetic delivers them: Anything one person can cheaply cause to resolve — an assassination, an injury, a Little League game, a word in a speech — gets a cap of zero, which is a ban. The objection is not to bans. It is to an unbounded “public interest” standard that can ban anything, for any reason, without showing its work.
The CFTC is not the first body to insist it can recognize what it cannot define. Justice Potter Stewart conceded in the 1960s that he could not define pornography — “I know it when I see it” — though the Supreme Court spent a decade trying anyway, demanding “redeeming social value” from each work. Justice William Brennan, who authored that standard, eventually recanted since no formulation could define the crime.
Wednesday’s proposal asks one regulator to know the public interest when he sees it, 90 days at a time.
The people with the strongest incentive to police these markets are already doing it. Kalshi moved to require employer disclosure from certain traders before the CFTC required anything, and the pitch-rigging scheme surfaced because betting-integrity monitors flagged anomalous wagers — market surveillance, not regulatory inspection. On who detects manipulation faster, a trader with money on the line or a five-person commission currently staffed by one, the answer is not close.
The CFTC’s comment period runs 45 days. Here is mine: Delete the public-interest factors, publish the influence-cost arithmetic, and let the markets that survive tell us what they know.
A message from Advisor Perspectives and VettaFi: Discover something new! Click here to register for our upcoming webcasts.
Bloomberg News provided this article. For more articles like this please visit
bloomberg.com.
More Closed End Funds Topics >
