Overview
- The Commodity Futures Trading Commission's oversight team indicated that prediction market contracts based on whether a specific individual utters certain words are highly prone to manipulation.
- This presumption extends to contracts concerning attendance, handshakes, photographs, and social media interactions.
- While exchanges can contest this presumption, they must provide substantial proof and detailed evidence of their monitoring and control measures.
The staff of the Commodity Futures Trading Commission's (CFTC) Division of Market Oversight declared on Tuesday that contracts in prediction markets, which determine outcomes based on whether a named individual says specific words, appears at a location, or interacts with another person, should be assumed to be vulnerable to manipulation.
This category, known in the industry as mention markets, encompasses more than just spoken words. It also includes contracts related to attendance, handshakes, photographs, and social media activity.
Unlike typical event contracts that rely on uncontrollable outcomes, such as economic indicators or election results, mention markets hinge on the actions of a particular individual. According to the staff, these actions may not be "independently generated or externally verifiable."
As an example, the advisory references a contract that determines if a podcast host will use a specific catchphrase; the host could simply choose to say it, and a trader could influence the result by asking a question or paying for an on-air mention. Those closest to the outcome often have access to scripts, prepared statements, or guest lists, which the staff considers as material nonpublic information.
Myriad: How low will Nvidia stock go? Click to make your prediction.Registered exchanges that offer these products, known as designated contract markets, are required under Core Principle 3 to list only contracts that are not easily subject to manipulation. However, this presumption can be countered. The staff will evaluate factors such as whether the individual has legal or professional obligations that would deter interference, if they could be pressured by others, whether the conduct is independently verifiable and open to public scrutiny, and the effectiveness of the exchange's monitoring systems.
Recommendations from the staff include maintaining restricted lists of participants with contract interests, implementing third-party screenings, issuing pop-up alerts before trading, and establishing position limits that would make manipulation economically impractical.
This advisory, which carries no legal authority and reflects the opinions of division staff rather than the Commission itself, is signed by acting director Duncan Hennes. It follows the CFTC's recent settlement with Gabriel Perez, a former teleprompter operator at the White House, who was fined $172,000 for trading on presidential mention contracts based on speeches he had previewed.
This advisory is part of a broader initiative to clarify the scope of event contracts. In June, the Commission proposed criteria to assess whether a contract pertains to terrorism, assassination, warfare, gaming, or illegal activities, and would prohibit sports contracts that depend on specific player actions, such as fouls or individual plays, which is directly referenced in the current advisory.
The question of who regulates these markets remains contentious. Several states have contended in a series of federal lawsuits that contracts related to sports events amount to unlicensed gambling, leading the Justice Department and the CFTC to sue Illinois, Arizona, and Connecticut in April to assert the agency's exclusive regulatory authority.