Comment Text:
Re: Advance Notice of Proposed Rulemaking on Prediction Markets (RIN 3038-AF65)
Dear Chairman Selig and Commissioners,
I submit these comments on behalf of Delphi Capital LLC, a Texas limited liability company through which I trade event contracts on CFTC-regulated designated contract markets. I am an active participant in these markets, building quantitative models, providing liquidity across a range of contracts, and trading daily on the platforms the Commission is now considering how to regulate. I appreciate the opportunity to share a market-participant perspective.
I write to encourage the Commission to adopt a regulatory framework that addresses specific, identifiable harms while preserving the features of prediction markets that make them economically and socially valuable. I want to focus on three points where I think a participant's view may be particularly useful.
First, on price discovery and public interest. The price discovery function of these markets is real and operationally observable. Prices on liquid contracts respond to information faster than survey-based forecasts and integrate a much wider set of signals. As a trader, I rely on this. The same property is what makes these markets useful to journalists, researchers, businesses managing event-driven risk, and the general public. Any public-interest analysis the Commission undertakes should weight this informational benefit explicitly. It is not a speculative or theoretical benefit. It is the principal reason these markets exist and the principal reason participation has grown so rapidly.
Second, on the gaming classification question. I would urge the Commission to resist treating event contracts categorically as gaming based on subject matter alone. The relevant economic question is whether a contract serves a price-discovery or hedging function, not whether the underlying event is one that could also be the subject of a wager elsewhere. Many contracts on weather, macroeconomic releases, election outcomes, and policy events are used by participants, including me, to express probabilistic views informed by research and modeling, in ways that are functionally indistinguishable from trading any other derivative. A categorical approach would be both over-inclusive, sweeping in contracts with clear economic utility, and under-inclusive, missing manipulative or socially harmful contracts that do not look like "gaming." A functional, contract-by-contract analysis under CEA section 5c(c)(5)(C) would serve the statutory purpose better.
Third, on manipulation and inside information. These are legitimate concerns and I take them seriously as a participant. Manipulated markets are bad for everyone trading honestly. But the Commission already has substantial tools here. CFTC Rule 180.1 prohibits manipulative and deceptive conduct, and the Division of Enforcement's recent advisories make clear that misappropriation-based insider trading is actionable in event contract markets just as in other commodity markets. The marginal regulatory question is therefore not whether to prohibit such conduct, since it already is prohibited, but how to ensure DCMs have surveillance and information-sharing arrangements adequate to detect it. I would encourage the Commission to focus rulemaking energy on surveillance standards, position reporting, and DCM self-regulatory obligations, rather than on categorical contract prohibitions that displace activity to less-regulated venues without addressing the underlying conduct.
A final note on cost-benefit considerations. The population of participants who trade these markets seriously is small but growing, and many are individual traders or small firms operating under structures like mine. Compliance costs that are trivial for an institutional trading firm can be prohibitive for an individual building a sustainable trading operation. To the extent the Commission considers participant-facing requirements rather than DCM-facing ones, I would encourage proportionality. For example, scaled position reporting thresholds, or carve-outs for smaller participants from requirements designed for institutional flow. The diversity of participants is itself part of what makes these markets informationally efficient, and rules calibrated only to large institutions will narrow that participant base.
I appreciate the Commission's careful approach to this rulemaking and its stated commitment to developing a clear, durable framework rather than regulating through enforcement. I would welcome the opportunity to provide further input as the rulemaking progresses.
Respectfully submitted,
Lucas Klein
Managing Member, Delphi Capital LLC
Austin, Texas
