Progress on Prediction Markets

One of the real barriers to widespread adoption of prediction markets by U.S. corporations has been a murky legal environment. Are prediction markets legitimate business tools, an alternative set of securities markets requiring SEC regulation, illegal betting markets, allowable games of skill, or something else altogether?

Fortunately, the Commodity Futures Trading Commission is stepping up to the plate, and I’m hopeful that this will eventually lead not only to regulatory certainty, but also provide a useful framework for the operation of prediction markets.

The difficulties in shaping appropriate regulation come from the fact that:

Contracts have been based on a wide variety of interests, including the results of presidential elections, the accomplishments of certain scientific advances, world population levels, the adoption of particular pieces of legislation, the outcomes of corporate product sales, the declaration of war, and the length of celebrity marriages.

Obviously some of these prediction markets are more socially useful than others.

On May 1 the C.F.T.C. announced that it is trying to figure out:

1. Whether prediction markets fall into their jurisdiction.
2. If so, whether there should be exemptions or exclusions applied.
3. How they should address the possible pre-emption of state gaming laws.

At this point, the C.F.T.C. is simply requesting public input. A much longer background document (with enough legalese to make any lawyer happy) is available here.

More from David Pennock, here. And Vern Smith is the first to register a formal comment, here.

[Hat tip: Bo Cowgill.]