Comment Text:
Prediction markets on elections and events, like ordinary capital markets on economics, equities, or commodities, provide a valuable public good. They provide the best known mechanism for ordinary people to predict what is going to happen and plan around it.
My impression is that this rule stems from an understandable desire to protect against the manipulation of elections. However, banning public prediction markets will not protect elections at all.
1. Many people are already highly interested in the outcome of elections. Billions of dollars already hang on these outcomes, and a few nerds will not suddenly care more than multinational corporations, radical partisans, and billionaires. The notion that the existence of legal prediction markets will allow traders unprecedentedly large incentives to manipulate in politics without being noticed by regulators is absurd.
2. There is a concern that moneyed interests will bid up the prices of candidates they want to have win. This is highly unlikely. True, in a very small, low-liquidity election, a large bet by a market manipulator could plausibly raise the price for a while until a lot of other traders noticed the inefficiency. However, it’s difficult to imagine that millions of dollars would not be better spent on directly advertising and campaigning rather than maybe raising the low-value signal of the probability on a prediction market. Most voters don’t care about prediction markets at all.
3. There is a concern that the market prices of liquid prediction markets will be used to convince voters not to vote in elections where one candidate is already favored, or to argue against certain candidates if, for instance, one primary candidate is considered by the market as less likely to win in a general election. This argument is antithetical to a culture of free speech. People already make arguments that people should vote based on their subjective probabilities of winning. Banning prediction markets because they would provide somewhat more objective evidence for those kinds of arguments is akin to banning polls on the same grounds. Such a justification would violate the First Amendment and a broader commitment to free speech.
4. Prediction markets are most analogous to polls, another method of aggregating public opinion. The government cannot use the grounds of potential misinformation to ban either. If anyone wants to make a fake or manipulated poll in an attempt to sway an election, they fall squarely under the protection of the First Amendment. The same holds for prediction markets, which are much harder and more expensive to rig. They are especially so if regulated by the CFTC.
I focused on elections, but the case for banning prediction markets on ordinary events like Rotten Tomato movie scores and the outcome of award shows is even weaker.
The word ‘gaming’ clearly was not meant to apply to games, not everything under the sun. The philosophical outlook that all of life is one big game is charming, but not the sort of thing the US government can adopt as its official position. Meanwhile, sports betting is already legal in every state.
There is a small but committed community of people who enjoy using prediction markets. They spend a lot of time thinking about the future, and the sum of their thinking is expressed in a market. Some make money, others, lose it, but in the process they provide valuable public information for everyone.
Banning prediction markets for such weak reasons is a slap in the face to this community. If the courts somehow fail to overturn this frivolous rule, the CFTC should still abandon it.
