Font Size: AAA // Print // Bookmark

Comment for Proposed Rule 89 FR 48968

  • From: Kyle Tauzer

    Comment No: 73738
    Date: 5/24/2024

    Comment Text:

    I’d like to express my opposition to the proposed rule put forth for consideration by the CFTC. Many public comments have already been put forth expressing opposition on the basis of the misguided notion that prediction markets constitute gaming, and I fully agree with these points. More specifically, though, I would like to address the question of whether prediction markets related to elections are in the interest of the public. I think there are three primary ways in which they are:
    1.) Prediction Markets are a highly efficient and reliable way of aggregating large amounts of conflicting information. In an era of information overload, with low barriers to creating false or misleading media, widespread distrust in the press, and active propaganda from bad actors, there are few sources of completely trustworthy information to draw on. Prediction markets provide a strong incentive for participants to evaluate this information and collate it into a prediction of what events will actually take place. Any spin within a news piece or bias in a poll provides a potential edge for traders to arbitrage away so that only the real probabilities remain. This is why prediction markets are widely used as leading indicators of changing prospects during elections and why academics study them. An example would be treatment of polls by the market. Many successful traders within these markets have sophisticated models to ingest and interpret these polls within the context of historical biases, analysis of their methods, and other factors. Ultimately the probabilities implied within prediction markets are more reliable than the polls themselves. This transparency provides a trustworthy source of information for the public and is in the public’s interest.
    2.) Prediction markets generate federal income tax. As with any financial investment, trading results in winners and losers. The winners pay income tax on their gains while the losers have limited ability to write off their losses. The net result is an increase in the taxable income base. I personally have had good success employing arbitrage strategies within prediction markets that result in predictable gains, and have claimed these gains consistently as income on my tax return and paid taxes accordingly. Additionally, my trades are subject to fees from the market provider, who is a non-profit organization. These fees go to operational expenses which provides employment to employees of the market provider, also who provide taxes. The taxation of these activities can then go on to fund any number of government activities which are clearly in the public’s interest.
    3.) Prediction markets increase civic engagement. The incentives provided by markets tied to elections are to gather as much information that could determine the outcome in order to gain an edge. Very often, this means performing research on the administrative procedures undertaken by governments and political parties. I have personally witnessed countless examples where traders have attended obscure administrative proceedings, listened to state and local officials give press releases, dug up committee meeting minutes, and gathered information about administrative procedures from all manner of other sources. Traders very regularly watch legislative sessions and track votes in real time. I have personally gained many insights into the way that governments and political parties function, especially when market outcomes come down to very specific and niche questions like the specific parliamentary procedures that will be taken or the timeline of a particular activity. In a world where many people distrust our institutions or have fears of “the deep state”, having people incentivized to dig deep into these administrative procedures and civically engage with government can only be a net positive for the public good.

    I note that the CFTC currently is allowing many activities that are classified as legitimate financial derivatives to be traded that do not have these same benefits. Trading in short term options on apps like Robinhood, trading so called “meme stocks”, gambling on fantasy sports, and trading cryptocurrencies all fail to provide meaningful market information, closely resemble gambling, and do nothing to encourage civic engagement. I fail to see how these activities could be justified as being in the public’s interest when election prediction markets are not.

    In contrast to these benefits to the public good, I have personally been able to find no damaging factors to the public good caused by prediction markets. Participants are free to participate of their own will. I have serious doubts that any documented cases of “gambling addiction” specific to election prediction markets have ever been identified. I do not believe that these markets are significant enough in size to create financial incentives for election interference, and certainly these incentives pale in comparison to efforts undertaken in lobbying and similar activities. I would urge the committee to inspect any supposed harms to the public interest that are put forward as theories and to inspect whether they actually have any meaningful evidence to support that the harms are real. These markets have been around for, in some cases, decades. Any theoretical harms that they bring about should be readily apparent if they truly exist. A high bar should be set for this.

    If the CFTC wishes to further regulate these activities, I would encourage it to instead find ways to maximize the benefits to the public good of prediction markets. Lower fees and fewer caps on volume would improve market efficiency and liquidity, providing more efficient market pricing. Specific guidance on tax treatment of winnings would ensure full capture of the taxable income from all participants. Regulation and oversight of the processes by which market outcomes will be determined and transparency about the specific settlement sources and timelines will improve civic engagement and provide a level playing field. These are legitimate improvements that could be made in the public interest. Banning the markets entirely is totally counter to the public good.

No records to display.