Are Prediction Markets Against the Public Interest?

by on November 27, 2012 at 3:27 pm in Current Affairs, Data Source, Economics | Permalink

Here is more on the CFTC’s attack on Intrade:

Why doesn’t Intrade just obey the complicated law and become a licensed exchange? They tried, but the CFTC won’t give them a license. When an established, licensed U.S. commodity exchange applied for permission to do what Intrade does, the CFTC turned them down, too.

Most importantly, in rejecting Nadex’s application to trade “political event derivatives contracts” the CFTC said this:

As a result of reviewing the complete record, the CFTC determined that the contracts involve gaming and are contrary to the public interest…

Thus the CFTC’s attack on Intrade is not about following or not following a particular regulation; it goes much deeper, the CFTC is arguing that all such markets are against the public interest.

Addendum: Kenneth J. Arrow, Robert Forsythe, Michael Gorham, Robert Hahn, Robin Hanson,
John O. Ledyard, Saul Levmore, Robert Litan, Paul Milgrom, Forrest D. Nelson,
George R. Neumann, Marco Ottaviani, Thomas C. Schelling, Robert J. Shiller,
Vernon L. Smith, Erik Snowberg, Cass R. Sunstein, Paul C. Tetlock, Philip E. Tetlock,
Hal R. Varian, Justin Wolfers, and Eric Zitzewitz disagree with the CFTC (among others).

1 Typhoon Jim November 27, 2012 at 3:32 pm

Government Closes Innovative Prediction Market Run By Local Bookies

2 mw November 27, 2012 at 3:35 pm

A quick look at the major commodities traders and it’s pretty clear that CFTC couldn’t possibly find any bigger fish to fry.

3 Mogden November 27, 2012 at 3:44 pm

All hail our elected overlords and their benevolent manipulations of the economy for the greater good!

4 Bret November 27, 2012 at 4:19 pm

If it’s gaming could Intrade just call it that and re-open is las vegas?

5 msgkings November 27, 2012 at 4:55 pm

Yes but you’d have to be physically in Nevada to place your trades. As it stands you aren’t allowed to gamble online at Las Vegas casinos.

6 mulp November 28, 2012 at 10:56 am

Well, how about selling it to State lotto commissions?

Call it pick-one. You buy tickets, the State takes 40%, the stores, commission, and machine vendors take 10%, and the winners split the remaining 50%.

They could also do a pick-100, where you bet the winner and percentage of the vote, with a decimal power pick.

If one had been run this past fall, the jack pot would have gone a long way to restoring the cuts to mental health and disability care in the NH budget and to replacing the bridges that are condemned here in NH, the State that was once the number one innovator on profiting from sin.

7 Mike November 27, 2012 at 4:52 pm

And these are the same clowns who couldn’t find anything wrong in the entire CDS/CDO scandal that brought down the world economy in 2008.

But a small predictions market in Ireland, which has supplied countless predictive morsels that have been useful to the media, public and even investors in the stock market for years now… OH, now there was a threat to humanity.

Could these clowns get any more destructive and incompetent? They’ve had it out for prediction markets for years now. Protecting the turf of their friends who they protected in 2007-8.

8 derek November 27, 2012 at 9:28 pm

Could these clowns get any more destructive and incompetent?

Dumb question. Four more years.

9 Nyongesa November 27, 2012 at 10:50 pm

Dumb answer. But i’ll take a bite, why dont you enlighten us on how four more years of the current admisntration will translate into clownish behaiviuos by the CFTC.

10 So Much For Subtlety November 28, 2012 at 1:54 am

There are five Commissioners of the CFTC. They are Gary Gensler, Jill E. Sommers, Bart Chilton, Scott D. O’Malia and Mark P. Wetjen.

Gensler is the Chairman and was appointed by Obama in May 2009. Sommers was nominated by Obama and comfirmed in August 2009. Mark P. Wetjen has served since August 2011 and hence is an Obama appointment too. O’Malia was also sworn in in 2009 and hence was an Obama choice.

Only Bart Chilton – who has great hair by the way – was a Bush appointment.

I think their clownish behaviour has something to do with the administration that appointed them don’t you agree? You might think there was a link between their actions, their beliefs, their ideology and the man who chose them.

11 mulp November 28, 2012 at 11:21 am

Have you bought your megabucks ticket? If you correctly predict the outcome, you get a share of something like $50 million.

How is intrade doing anything more than the State lottos?

Surely there is no evidence that intrade predicts anything better than State lottos.

Where was the predictive power of the credit default swap market?

If intrade really could predict anything useful, intrade would be predicting the storm losses each year by State so insurers could use it for reinsurance.

And I predict governments will collect 40% of all the money spent on megabucks plus collect taxes on the money the winners get, so charging 0.1% transaction tax on all trades would hardly limit the trading in useless derivatives that predict nothing, but it would generate revenue for the governments cleaning up the damage.

Unless you think it was wrong for Ben to protect your money market balance from losses resulting from the failure of the prediction markets predicting the widespread failure of the market to price assets. I know I’m thankful my money market fund balance wasn’t slashed when I was trying to avoid the market collapse I had been predicting since about 1990. I have been correct in my predictions at least three times, but just couldn’t predict the dates of the crashes. And I’m sure that the people who predicted the dates of all the crashes also won megabucks as often.

12 Bill November 27, 2012 at 5:18 pm

Regarding gaming.

If the CFTC were to permit something like “gaming”, it would be pre-empting state laws.

Where are all those conservatives who support states rights?

13 Alan Gunn November 27, 2012 at 6:34 pm

The CFTC would not be pre-empting state laws by allowing Intrade to operate. It would just be ruling that Intrade doesn’t violate Federal law. The states enforce their own laws, and the Federal government has no obligation to enforce those laws.

14 Bill November 27, 2012 at 8:38 pm


Here is a Cornell law piece on the federal gambling laws and interstate commerce issues discussed above.

15 Rahul November 28, 2012 at 12:41 am

So how did CFTC grant the exemption to the other (Iowa? Ohio?) prediction market mentioned by someone in the comments yesterday?

16 Alan Gunn November 28, 2012 at 7:59 am

This piece discusses both federal and state gambling rules. It doesn’t claim that relaxing Federal rules would “pre-empt” state rules.

17 Andrew' November 28, 2012 at 8:59 am

Arnold Kling wouldn’t say that he’s “shocked, shocked that someone gets the states’ rights backwards.”

18 Bill November 28, 2012 at 9:01 am

Alan, Federal law pre-empts state law unless expressly excluded by federal statute or unless the statute was designed not to cover the field.

19 Andrew' November 28, 2012 at 9:15 am

…Is what we’re saying…

So how is that states’ rights?

20 Alan Gunn November 28, 2012 at 11:03 am


It is simply wrong to say that a Federal failure to enforce state law “pre-empts” that law. The federal government does not enforce most state laws. The feds have not set a speed limit for Indiana, but that doesn’t mean the Indiana limits ar pre-empted; indeed, it would be silly to make that claim. It is just as silly to claim that a federal refusal to act against Intrade would pre-empt state laws against gambling. But this is a side issue, which you raised only to claim that conservatives were being hypocritical when agruing against the CFTC’s position (not that I’ve seen conservatives doing this). So it’s not worth further discussion.

21 Bill November 28, 2012 at 9:27 pm


Pre emption does not deal with enforcement of state laws. It involves whose laws govern in a federal system. The Constitution allocates this, with the constitution the supreme law of the land, and federal laws superceding state laws where there is a conflict or where the federal law covers the field.

Look up supremacy clause for futher facts, and I agree with you that, not unless you take some effort to get informed, “it’s not worth further discussion.” as you would say.

22 Cliff November 27, 2012 at 8:00 pm

Are you saying liberals support the CFTC enforcement action and conservatives don’t?

23 Epsteins Mother November 27, 2012 at 8:56 pm

I took a course from Merton Miller once, and assuming he was more in the conservative camp, “conservatives” not only don’t support CFTC enforcement actions, but, according to him, the entire CFTC building should be burned to the ground.

24 DocMerlin November 27, 2012 at 9:58 pm

…the earth salted, and then a monument erected as a warning for others.

25 Andrew' November 28, 2012 at 9:02 am

What Wouldn’t Arnold Say?: “Maybe that’s where we could store the spent uranium.”

26 Dave Taylor November 27, 2012 at 9:50 pm

You have it backwards.

If the federal government were to prohibit an activity, it would impair the ability of states to permit it, as we’ve seen over the last several years with respect to medical marijuana. But if the federal government were to decline to prohibit an activity, states could still prohibit it, as is clear from many state and municipal restrictions on alcohol sales.

Your idea that federal inaction impairs federalism is bizarre.

27 Bill November 28, 2012 at 10:23 pm

Dave, There is a federal statute that governs gambling using the wires.

It is not federal inaction.

Moreover, an activity conducted over the wires between jurisdictions–ie, my state forbids gambling and I communicate to another state that does–is prohibited.

If you want to learn more about this, I suggest you can either look up gambling laws, or look to how lawyers advise their clients on games of chance that could constitute gambling under sweepstakes laws.

28 Bill November 28, 2012 at 10:27 pm


To satisfy your deficit, I suggest you read this Cornell law school summary on this subject:

I’ll link you to some material on the supremacy clause if you need it.

29 Enrique November 27, 2012 at 5:46 pm

And yet State-run lotteries are legal ?!?

30 Bill November 27, 2012 at 6:26 pm

Yes, and they are permitted and regulated by that state’s law. But, state law also DENIES other forms of gaming in the state. Citizens can lobby the legislature to permit gambling, like they do in Nevada.

31 Enrique November 28, 2012 at 1:29 am

My point is this: why does federal law permit some forms of gambling but not others? This has nothing to do with the “public interest” or the lobbying of “citizens”

32 Bill November 28, 2012 at 9:03 am


We live in a democracy. Lobby for a Change in the federal law. But, don’t, as Alex did, mislead the reader into thinking some agency willy-nilly has this big discretion to break a federal law re gambling.

33 Andrew' November 28, 2012 at 9:24 am

He didn’t. They deemed it gaming. First of all, it’s not gaming. We don’t actually have to get past that part. They are wrong on the rest as well.

And even if the statutes are as illogical as you claim they are, and I kind of doubt they are that bad though I assume they are terrible, then they are wrong.

Not to mention, the Feds have proven they are unqualified to pass judgment on the public interest.

What they are probably doing is simply making sure that we don’t get the obvious public interest of being able to see the prediction markets.

I really can’t understand what you are saying. If the government can only allow something by requiring it, then that’s exactly what our complaint is.

34 mulp November 28, 2012 at 12:19 pm

How is intrade different from paramutual betting on horse races, dog races?

Election outcomes involve “skill” plus “stupidity” the same way a horse race does. A jockey riding a sure winner can screw up and make an instant choice of a move boxing his horse in so he loses, just like Todd Akins screwed up in his instant choice of a reckless phrase. The jockey might have a long record of bad choices of moves that paid off, just like Akins had a long record of reckless phrases that paid off for him.

No intrade bet hedges a real world loss of asset value.

Contrary to the interpretation employed by conservatives, without an actual interest in assets which are hedged, a moral hazard is created by intrade. Let’s imagine an unfettered intrade market in election results, and an Akins gets into an election and carefully cultivates a good image to make his opponent cheap on intrade, so he can accumulate $25 million in her shares, and then he intentionally implodes because he wins by losing. This was the nature of credit default swaps.and even most market traded futures.

Corn futures requires capital to back contracts, and for a farmer he needs to have a real interest at stake to use his planting as capital. Credit default swaps that were moral hazard free would have required real ownership in the securities determining the swap outcome.

Instead the argument was credit default swaps would better predict the future if moral hazard were legal because secret purchase of swaps on securities designed to fail serves the public interest because the cheap price on doomed securities correctly predict they will not fail?

Hey, maybe Romney bought Obama on intrade and merely tried to perform well enough to get his average Obama price down as low as possible while intending to lose all along. In the last debate he intentions went blah. He intentionally ran ads in Ohio that were going to be attacked easily as outright lies so he would lose. He intentionally alienated Hispanics by hiding his ties to Mexico so he would lose the swing States. He intentionally attacked gay marriage instead of pointing to the dictates of Congress in violation of the First Amendment that made his great grandfather flee the US to avoid jail.

If Romney intentionally lost to profit on intrade, maybe intrade is in the public interest??

35 R Richard Schweitzer November 27, 2012 at 5:56 pm

What is the “commodity” exchanged on Intrade?

What is the CTFC definition of an “Option?”

Will the CFTC take jurisdiction over the very short-term “options” purchased at Baccarat, Craps, and Roulettte in the bugreoning casino industry?

If only to say they are “not in the public interest?”

36 Bill November 27, 2012 at 6:22 pm

Re: “Will the CFTC take jurisdiction over the very short-term “options” purchased at Baccarat, Craps, and Roulettte in the bugreoning casino industry?”

That’s the point, isn’t it.

Nevada regulates and permits gambling; other states don’t; and Nevada can’t do online gambling to other parts of the US.

I think the gaming issue is part of the CFTC’s problem–a respect for state’s rights–unless you want to reformulate a bet on the die as “I predict a snakeyes.” as a way to get it on InTrade.

As to CFTC options regulation, I predict InTrade did not want to go through the hoops to be a clearinghouse for options…such as assessing counterparty risk, bonding, etc. if you want to refer to it as options.

37 NAME REDACTED November 27, 2012 at 7:32 pm

No, actually they tried to but where denied the permit.

38 NAME REDACTED November 27, 2012 at 7:33 pm

The problem isn’t being a clearing house. Its the selling to non-rich people which is illegal.

39 Cliff November 27, 2012 at 8:01 pm

Respect for state’s rights is a nonsense argument. CFTC has nothing to do with state law. States allow or disallow Internet gambling as they choose without regard to what the CFTC does.

40 Bill November 27, 2012 at 8:33 pm

Cliff, Interstate gambling is in interstate commerce. It is prohibited, currently. States cannot allow interstate internet gambling–that is a federal interstate commerce exclusive jurisdiction.. They do not have the power to approve, for example, a citizen of Alabama to violate his states law.

States rights is the argument re gambling. There is a different issue regarding options regulation and bonding for exchanges.

41 Cliff November 28, 2012 at 12:51 am

The federal wire act does not cover offshore casino gambling- it is left up to the states to allow it or not allow it. That is why some offshore casinos do not allow residents of certain U.S. states to join. FYI I used to make a lot of money gambling online before UIGEA.

42 Cliff November 28, 2012 at 12:54 am

I think we’re going off the rails anyway. Even if the CFTC “approves” it, I don’t see why that would prevent a state from banning the exchange for state residents.

43 Bill November 28, 2012 at 9:28 pm

Cliff, Offshore gambling on a river is not the same as interstate wire communications which are governed by federal law. Sorry.

44 dirk November 27, 2012 at 6:13 pm

I, for one, feel safer.

45 DocMerlin November 27, 2012 at 6:27 pm

Being able to predict elections inherently damages the rent seeking power of politicians and their consultants. (Harder to get payoffs if people think you will lose, or know you don’t need their help to win.)
The government exists so politically connected people can rent-seek, so this does damage a “public” (governmental) interest.

46 Bill November 27, 2012 at 6:30 pm

Re Your addendum implying that the economists opposed the CFTC.

It’s not accurate.

What they said was:

“(ii) Congress should support the CFTC’s
efforts to develop prediction markets (18). To
the extent that the CFTC incurs costs in promoting
innovation, Congress should provide
the necessary funding. More fundamentally,
Congress should explore alternative ways of
securing a legal framework for prediction
markets if the CFTC’s existing authority
proves inadequate. In particular, Congress
should specify that a no-action letter, or similar
mechanism, preempts overlapping state
and federal antigambling laws. Because
Congress did not intend the CFTC to regulate
gambling, it is important to design new regulations
so that socially valuable prediction
markets easily qualify for the safe harbor but
gambling markets do not.”

The article argues for legislation to clarify and authorize small stakes prediction markets.

47 Cliff November 27, 2012 at 8:03 pm

Did you even read your own quote? It says Congress should pass enabling legislation IF the CFTC is unable to develop prediction markets with existing authority (due to conflicts with states/existing federal law).

48 Bill November 27, 2012 at 8:41 pm

Cliff, YOU didn’t read Tyler’s comment at the addendum where he said: “and Eric Zitzewitz disagree with the CFTC (among others).” That’s not what they said. They said that there should be a change in the law

49 Curt F. November 27, 2012 at 9:59 pm

You didn’t read…I’m sorry, I meant…YOU didn’t read the part where it was Alex and not Tyler posting.

50 Bill November 27, 2012 at 11:13 pm

Apologies to Tyler

51 Cliff November 28, 2012 at 12:56 am

I did read that part and consider it to be correct. They think prediction markets ARE in the public interest.

52 Jim November 27, 2012 at 11:38 pm

The CFTC said that prediction markets were “contrary to the public interest,” the listed group said prediction markets “have great potential for improving social welfare…” Alex’s statement is accurate.

53 Bill November 28, 2012 at 9:07 am

No it isn’t. The article says that they favored a law change. CFTC is simply saying we have to follow the law. Alex is misleading.

54 Jeff November 27, 2012 at 7:45 pm

>>the contracts involve gaming and are contrary to the public interest

So will CFTC prevent commodities traders from speculating on their own exchanges?

55 Epstein's Mother November 27, 2012 at 8:58 pm

Not to mention that I’m not quite sure how a synthetic derivative isn’t also gaming.

56 Andrew' November 28, 2012 at 9:38 am

Elementary. When they say it isn’t. Unless it is. That’s when they say it is.

57 Mr. Winston November 27, 2012 at 8:04 pm

Not in the public’s interest, unless the public is solely defined by the State-run lottery monopolies, Indian casinos and Las Vegas. All other forms of gambling are “immoral!”

58 Max November 27, 2012 at 8:52 pm

It doesn’t bother any of the gov’t apologists that this activity is legal in pretty much every other country worth visiting?
I don’t care if you call it predictions, options, futures or degenerate gambling. What exactly is the big deal?

59 Andrew Bissell November 28, 2012 at 12:07 am

Gambling is a textbook victimless crime. The only justification for regulation of it comes from old tomes involving lots of prophets wandering various deserts.

60 Rahul November 28, 2012 at 12:46 am

What about the families? The children?

61 Andrew Bissell November 28, 2012 at 3:03 am

If that’s the justification, then every single vice which can have negative impacts on “families & children” should be subject to a soft ban just like gambling. Alcohol. Day trading. Adultery. All should be subject to intrusive federal regulation.

Won’t someone *please* think of the children?

62 Rahul November 28, 2012 at 3:33 am

Alcohol and day-trading are all fairly strictly regulated. Ok, adultery, maybe not.

I was addressing your ” justification for regulation” comment. There is an externality to gambling.

63 msgkings November 28, 2012 at 1:16 pm

Well, Max, remember that in every other country worth visiting they also have universal, government-run health care. So that may not be a criterion to use.

That said the CFTC is being really fucking stupid here.

64 Ray Lopez November 28, 2012 at 1:43 am

As a dual national, I almost feel it’s my patriotic duty to open an account with CFTC (it only costs $5 a month). It reminds me of the fiasco where the Pentagon disavowed prediction markets (does anybody recall with what company?) about 10+ years ago because it was deemed “against morals” to wager bets on the likelihood of war, though such betting was considered accurate and of course would make better military planning. Dumb and dumber. On an analogous topic, you cannot trademark even fanciful descriptions of obscene words like “FUKC U” ™ for the same reason, and you cannot (last I checked) patent keeping a monkey head alive for the same reason–against morals (the latter example was an actual patent granted then pulled by the US Patent Office).

65 Stephen November 28, 2012 at 3:43 am

Sleep soundly tonight, Americans, for your government has protected you from the evils of prediction markets!

66 Marc November 28, 2012 at 5:49 am

Looks like @tylercowen has no problem with this:

“On InTrade, if no systemic risk, and there was not, regulators should stop banned activity, no further major penalty.”

67 B.B. November 28, 2012 at 11:15 am

So, has the U. of Iowa prediction market been closed down also?

68 Andrew' November 29, 2012 at 8:17 am

Funny that that the first time in half a century the commerce clause could be cited in a non-bass ackward fashion some folks want to pretend states’ rights is an issue. Not that states’ rights is an issue, but it might be a useful dissembling wedge issue.

69 Saturos November 29, 2012 at 12:07 pm
70 Josh Blackman December 9, 2012 at 10:28 pm

I co-authored an Op-Ed in today’s Houston Chronicle, arguing that the CFTC’s overbroad suit may run into some First Amendment problems:

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