For a few hours last Thursday the regulated prediction market Kalshi listed contracts referencing outcomes of the 2024 congressional elections in the United States—contracts that had previously been prohibited by order of the Commodity Futures Trading Commission.
Hi there! I saw this referenced on Andrew Gelman's blog and made this comment there, but thought I would add this comment here as well.
Matt Levine discussed this topic in his newsletter on May 14th. I want to link to it online, but I cannot find a way to do this, so I will excerpt it and link to the subscription page for the newsletter. If you do not already subscribe, you should!
If the CFTC allows these kinds of event contracts, then they will also need to regulate the markets, as you point out. What kind of manipulation could happen? One example you reference is a whale taking a large position on one side with the intention of swaying opinion. That would probably be reasonably straightforward to handle.
But the far trickier situation is where election participants themselves do things that could be construed as manipulating the market. The is the problem Levine outlines, and seems to be the main reason the CFTC does not want to allow event contracts for election outcomes.
Matt Levine:
> [If these contracts were allowed,] And then there’d be an election, and one candidate would win, and the other candidate would say “no this election was stolen from me,” and the outcome for the financial purpose of settling the contracts would be disputed. And either the losing candidate would be wrong, and lying about the election being stolen, in which case there would be arguable commodities fraud inflating the price of his contracts. Or he’d be right about the election being stolen, in which case there would be arguable commodities fraud depressing the price of his contracts. And people with money on the line would go to court. And the thesis of “everything is securities fraud” is that US law is somehow more responsive to financial-market claims than it is to other, substantive claims, and so the courts and the CFTC would feel more compelled to address the claim “this election was stolen, which is commodities fraud,” than they would to address the claim “this election was stolen, which is bad on its own.”
In the Motion for Stay filed by the CFTC, they do not emphasize this kind of case, but it is definitely something they are thinking about. Levine goes on to quote CFTC Chairman Rostin Behnam:
> Allowing these contracts would push the CFTC, a financial market regulator, into a position far beyond its Congressional mandate and expertise. To be blunt, such contracts would put the CFTC in the role of an election cop.
It's clear that, were something like this to occur, it would be a minefield. Given that, maybe a ban is the better outcome overall.
Interesting perspective, thanks. But IEM and PI operate under no-action letters from the CFTC so the problem doesn't seem insurmountable. Contracts could be contingent on verifiable events like certification, rather than ambiguous events like who won.
Hi there! I saw this referenced on Andrew Gelman's blog and made this comment there, but thought I would add this comment here as well.
Matt Levine discussed this topic in his newsletter on May 14th. I want to link to it online, but I cannot find a way to do this, so I will excerpt it and link to the subscription page for the newsletter. If you do not already subscribe, you should!
https://www.bloomberg.com/authors/ARbTQlRLRjE/matthew-s-levine
If the CFTC allows these kinds of event contracts, then they will also need to regulate the markets, as you point out. What kind of manipulation could happen? One example you reference is a whale taking a large position on one side with the intention of swaying opinion. That would probably be reasonably straightforward to handle.
But the far trickier situation is where election participants themselves do things that could be construed as manipulating the market. The is the problem Levine outlines, and seems to be the main reason the CFTC does not want to allow event contracts for election outcomes.
Matt Levine:
> [If these contracts were allowed,] And then there’d be an election, and one candidate would win, and the other candidate would say “no this election was stolen from me,” and the outcome for the financial purpose of settling the contracts would be disputed. And either the losing candidate would be wrong, and lying about the election being stolen, in which case there would be arguable commodities fraud inflating the price of his contracts. Or he’d be right about the election being stolen, in which case there would be arguable commodities fraud depressing the price of his contracts. And people with money on the line would go to court. And the thesis of “everything is securities fraud” is that US law is somehow more responsive to financial-market claims than it is to other, substantive claims, and so the courts and the CFTC would feel more compelled to address the claim “this election was stolen, which is commodities fraud,” than they would to address the claim “this election was stolen, which is bad on its own.”
In the Motion for Stay filed by the CFTC, they do not emphasize this kind of case, but it is definitely something they are thinking about. Levine goes on to quote CFTC Chairman Rostin Behnam:
> Allowing these contracts would push the CFTC, a financial market regulator, into a position far beyond its Congressional mandate and expertise. To be blunt, such contracts would put the CFTC in the role of an election cop.
It's clear that, were something like this to occur, it would be a minefield. Given that, maybe a ban is the better outcome overall.
Interesting perspective, thanks. But IEM and PI operate under no-action letters from the CFTC so the problem doesn't seem insurmountable. Contracts could be contingent on verifiable events like certification, rather than ambiguous events like who won.