CFTC Cracks Down on Intrade

by on November 26, 2012 at 5:07 pm in Current Affairs, Data Source, Economics | Permalink

CFTC Press Release: The U.S. Commodity Futures Trading Commission (CFTC) today filed a civil complaint in federal district court in Washington, DC, charging Intrade The Prediction Market Limited (Intrade) and Trade Exchange Network Limited (TEN), Irish companies based in Dublin, Ireland, with offering commodity option contracts to U.S. customers for trading, as well as soliciting, accepting, and confirming the execution of orders from U.S. customers, all in violation of the CFTC’s ban on off-exchange options trading.

Intrade and TEN jointly operate an online “prediction market” trading website, through which customers buy or sell binary options which allow them to predict (“yes” or “no”) whether a specific future event will occur, according to the CFTC’s complaint.

Specifically, according to the complaint, from September 2007 to June 25, 2012, Intrade and TEN operated an online “prediction market” trading website, which allowed U.S. customers to trade options products prohibited by the CFTC’s ban on off-exchange options trading. Through the website, Intrade and TEN allegedly unlawfully solicited and permitted U.S. customers to buy and sell options predicting whether specific future events would occur, including whether certain U.S. economic numbers or the prices of gold and currencies would reach a certain level by a certain future date, and whether specific acts of war would occur by a certain future date.

…David Meister, the Director of the CFTC’s Division of Enforcement, stated: “It is against the law to solicit U.S. persons to buy and sell commodity options, even if they are called ‘prediction’ contracts, unless they are listed for trading and traded on a CFTC-registered exchange or unless legally exempt. The requirement for on-exchange trading is important for a number of reasons, including that it enables the CFTC to police market activity and protect market integrity. Today’s action should make it clear that we will intervene in the ‘prediction’ markets, wherever they may be based, when their U.S. activities violate the Commodity Exchange Act or the CFTC’s regulations.”

In its continuing litigation the CFTC seeks civil monetary penalties, disgorgement of ill-gotten gains, and permanent injunctions against further violations of federal commodities law, as charged, among other relief.

The CFTC acknowledges the Central Bank of Ireland for its assistance in the CFTC’s investigation of Intrade and TEN.

Intrade announces:

We are sorry to announce that due to legal and regulatory pressures, Intrade can no longer allow US residents to participate in our real-money prediction markets.

Unfortunately this means that all US residents must begin the process of closing down their Intrade accounts. We strongly urge you to begin this process immediately:

What is it that Springsteen says, “Well the cops finally busted Madame Marie for tellin’ fortunes better than they do.”

Bjartur November 26, 2012 at 5:18 pm

So it’s official, the government is opposed to options for its citizens.

fallibilist November 26, 2012 at 7:58 pm

/threadwinner

Prakash November 27, 2012 at 1:49 am

+10

Crusher November 26, 2012 at 5:19 pm

These guys are all over it. Note that the CFTC has yet to charge MF Global/Corzine with anything. It/he only stole $1.6 billion.

Beans November 26, 2012 at 9:48 pm

In fairness, Corzine’s humiliation was thorough and complete.

Steve November 26, 2012 at 11:36 pm

Uh……no. He’s a criminal, there has to be a consequence for his gross negligence.

DocMerlin November 27, 2012 at 12:26 am

What part of “largest heist ever” do you not understand.

Gabe November 27, 2012 at 10:35 am

The SEC is a captured institution. Their job is to protect politically powerful commodity trading organizations. Therefore Goldaman’s cash flows are safe….while ex-goldmanites get away with stealing billions of middle class investors money.

Nothing new here.

albatross November 27, 2012 at 11:30 am

Yeah, and I’m pretty sure the justice system says the same thing whenever some black kid in New Jersey gets busted for selling $20 worth of crack to an undercover cop. The humiliation of the arrest is enough, we don’t need to send this guy to prison for several years. Right?

TuringTest November 26, 2012 at 5:25 pm

Will the courts enforce this action of the CFTC, or is the difference between the government and a band of robbers a null set?

John Thacker November 26, 2012 at 5:36 pm

The most important question is whether they were also allowing, gasp, bets on the future prices of onions. As we know, that is one unacceptable thing in these United States.

Phil Perspective November 26, 2012 at 5:46 pm

It wasn’t just onions. It was supposedly oil and other things too.

Silas Barta November 27, 2012 at 1:21 pm

It wasn’t just onions.

This one deserves an honored place beside “you forgot Poland” and other famous remarks.

DocMerlin November 27, 2012 at 3:03 am

Someone managed to corner the market. The onion buyers naturally freaked out and got congress to regulate.

Ray Lopez November 27, 2012 at 6:49 am

I bet The Onion is going to have a field day with this pun (intended).

David November 26, 2012 at 5:40 pm

Our long national nightmare is finally over.

celestus November 26, 2012 at 5:44 pm

Serious question: did they wait until after the Presidential election to do this?

Willitts November 26, 2012 at 9:28 pm

Exactly.

BTW, what were the final prices of Obama and Romney?

DocMerlin November 27, 2012 at 12:27 am

Of course they did.
Heck, the white house sent out letter to lots of businesses telling them that they better not tell their bad news to workers until after the election.

I don’t think you realize exactly how insanely corrupt the federal government is.

Rahul November 27, 2012 at 3:02 am

What letters are you talking about? Or is this another conspiracy theory?

Phill November 27, 2012 at 12:01 pm

Well, haven’t YOU HEARD about all those businesses that failed the minute Obama got reelected?

Gosh, it’s like an epidemic.

Phil Perspective November 26, 2012 at 5:46 pm

What is it that Springsteen says, “Well the cops finally busted Madame Marie for tellin’ fortunes better than they do.”

Really? Was Intrade better? Or they weren’t willing to play ball with the right people? I wonder if the CBOT complained to the DOJ.

Urso November 26, 2012 at 5:49 pm

Yeah, much as I agree that Intrade shouldn’t be shut down, it’s never struck me as being as all-knowing as Prof. Tabarrok often seems to suggest.

Rahul November 26, 2012 at 11:58 pm

Which important events did InTrade do badly on?

DavidT November 27, 2012 at 10:40 am

They gave 3-1 odds that the Supreme Court would overturn the individual mandate…

Careless November 29, 2012 at 1:20 pm

Someone must have made out like a bandit on that with the leaks

Jacob November 26, 2012 at 5:54 pm

The CFTC is quickly becoming my least favorite financial regulatory arm, and that’s really saying something!

CP November 26, 2012 at 5:59 pm

Anarcho-tyranny.

Bill November 26, 2012 at 6:00 pm

I predicted this would happen but InTrade did not.

Bill November 26, 2012 at 6:06 pm

Looks like Intrade violated a previous settlement agreement with the CFTC per Wapo:

“TEN settled similar charges of soliciting U.S. investors in 2005. In an order filed with that settlement, the CFTC said that U.S. customers accounted for up to 40 percent of Intrade’s total customer base. TEN paid $150,000 and agreed to halt further violations.

Under the settlement, TEN agreed to use pop-up windows to tell U.S. customers which bets were not available to them. It said it would cooperate in any future investigations.

Monday’s complaint includes charges that TEN violated that earlier settlement. The company used Intrade to offer illegal options including on the future prices of gold, changes in the unemployment rate and a measure of U.S. economic output, the complaint said. It said TEN failed to provide the pop-up notices mandated in the 2005 order.”

prior_approval November 27, 2012 at 12:03 am

Maybe it is just tit for tat? – Microsoft also ‘forgot’ about the terms of its settlement with the EU.

‘The European Union has charged Microsoft with an antitrust violation, saying that it did not live up to the terms of its 2009 deal with the 27-nation bloc.

Joaquín Almunia, the European Union antitrust commissioner, told reporters in Brussels on Wednesday that the American software giant has not taken adequate steps to abide by a previous agreement that enables Windows users to choose which Internet browser to use, rather than automatically defaulting to Internet Explorer.’

http://arstechnica.com/tech-policy/2012/10/eu-to-microsoft-ie-browser-selection-error-violated-antitrust-deal/

Barkley Rosser November 26, 2012 at 6:02 pm

When did this law get passed? Seems pretty ridiculous and this app to intrade even mroe so.

I followed intrade fairly closely prior to the election. They tended to be somewhat more optimistic about Romney’s chances than Nate Silver or some of the others out there, although in the end even Silver underforecast how well Obama did. Intrade had Obama winning with about a 2 to 1 probability in the days just before the election compared to Silver’s 9 to 1 or so. Silver called all the states, while inrade missed on Florida, and only got Obama slightly ahead in officially tossup VA and CO just in the days prior to the election. There were also accusations that they were briefly manipulated by some pro-Romney people after the first debate when Romney’s percent chance to win briefly soared to 48%. However, unlike Rasussen, Gallup, and apaprently the inside pollsters for Romney, while not as accurate as Silver, intrade never got to the point of ever saying that Romney was ahead of Obama.

Eric Crampton November 26, 2012 at 8:00 pm

InTrade was persistently more pro-Romney than were the other foreign markets like BetFair or iPredict. I ran a pure arbitrage play from New Zealand that banked a bit over $700 in risk-free profits on it – well, almost risk free. Because InTrade takes a fortnight to pay out, and I didn’t hedge the currency risk, it wasn’t purely risk-free. But it was close. The price spread was able to persist because of the ridiculous regulations set up to keep money launderers and such out of InTrade – I couldn’t deposit more than $5k via credit card at InTrade, and wire transfer is too slow for an arbitrage play; others, who didn’t have a pre-existing account, were entirely shut out of the deal. I posted on it here: http://offsettingbehaviour.blogspot.co.nz/2012/11/final-arbitrage-position-statement.html

Cliff November 26, 2012 at 9:04 pm

How is wire transfer too slow? Isn’t it same-day?

Eric Crampton November 26, 2012 at 10:23 pm

I wish. It normally takes at least a couple of days for those things to clear. When InTrade sent over my winnings, their note said “You should see these funds in your bank account within five business days.” A credit card payment goes through immediately.

Eric Crampton November 26, 2012 at 10:30 pm

On 16 November (Friday) I received the note from InTrade confirming that my withdrawal request of 8 November had been processed and that I should receive it within 3-5 business days. I received the funds on 19 November, so that was pretty quick. Final accounting, after exchange rate fees and such, here: http://www.offsettingbehaviour.blogspot.co.nz/2012/11/final-arbitrage-tally.html

I started my arbitrage play on Monday, NZ time. Had I wired over the money in hopes of trading, it MIGHT have been allocated to my InTrade account before the polls closed. But I DEFINITELY would have had to have waited another two weeks to get the money out, regardless of whether I’d been able to trade. I can do that on the credit card so long as it’s within the repayment window. Doing it out of the savings account has larger opportunity costs.

PB November 26, 2012 at 6:05 pm

InTrade’s response seems a little bit of an overreaction no? Why not just limit U.S. resident’s access to the Commodity futures contracts, but still allow them to participate in the many other, unique contracts offered by Intrade. If I were an Intrade user, I’d be mad at them for booting me off.

Rahul November 27, 2012 at 3:03 am

Should’t you be madder at your regulator?

PB November 29, 2012 at 5:32 pm

I don’t think one ought to be mad at a regulator for enforcing the law. If we all generally think that commodity future trading should be possible in unregulated markets, than we should change the law, not get mad at the CFTC for enforcing it. Intrade is breaking the law by offering commodity futues, and has already broken promises it made to CFTC 5 years ago to bring it’s practices into compliance. So what should it do? Make it’s practices compliant with the law, not boot American’s off entirely.

Jeff November 26, 2012 at 6:07 pm

Seriously, what threat to the integrity of commodity markets did InTrade pose? There is no physical delivery of any commodity at play here.

Rahul November 27, 2012 at 3:04 am

Further, how is war or an election a commodity?

PB November 29, 2012 at 5:40 pm

They aren’t commodities. It’s completely legal to offer those prediction contracts to Americans. But instead, InTrade is opting to kick Americans out entirely.

Anon. November 26, 2012 at 6:33 pm

It’s pretty crazy that in the US CFDs are illegal. Supposedly the financial markets are deregulated…when the regulators are in fact completely captured by the participants.

DocMerlin November 27, 2012 at 12:55 am

No, the US has the most regulation financial markets of any western nation.

Frank s November 26, 2012 at 7:12 pm

Was there an Intrade market for this event occurring?

Jacob November 27, 2012 at 6:43 pm

There used to be one on whether the entire exchange would cease to exist, but I can’t remember if they kept that open. It was pretty illiquid for obvious reasons.

Ed November 26, 2012 at 7:16 pm

I predict a market in foreign addresses for U.S. residents who wish to participate in prediction markets overseas.

While I’m appalled that the CFTC is taking this position, I will take this time to point out that one prediction market is open to U.S. citizens and has been “cleared” by the SEC. It’s called the Iowa Electronic Markets, it’s the “granddaddy” of predictions markets, being almost 20 years old, and is run by the University of Iowa. They have active contracts in the Fed Funds rate right now and have markets in the presidential and congressional races when they occur. They charge NO fees other than $5 to sign up.

Downside is that registration is very low tech, requiring mailing a paper check to the University of Iowa. Maximum “investment” is $500. But it you like the idea of friction-free prediction markets, the Iowa Electronic Markets are for you.

Al November 26, 2012 at 9:09 pm

Thanks, Ed. Good to know.

SeriouslyFrank November 26, 2012 at 7:55 pm

So they are freezing the Presidential Election funds as well?!?!

Bill November 26, 2012 at 8:39 pm

I am shocked that those pretending to rely on market mechansims and design have not undertaken an effort to design a replacement market that is not based on money, but rather, reputation instead.

I could envision creating a website where members were allocated beginning chits–assigned to their name–and they would bid “reputation” chits in a bidding market to support their predictions.

This kind of market would be uninfluenced by the initial endowment of dollars that would permit you to place irrational bets, as may have been done in Intrade, to influence perceptions.

If you made an irrational bid with your reputation, you could lose your reputation.

So, this is a challenge: Create a reputation bidding market; assign to each persons name and email address some reputation chits, and let people bid on outcomes.

I wonder who would win?

Maybe Krugman v. Cowen?

TGGP November 28, 2012 at 10:12 pm

People don’t care enough about accuracy.

Ram November 26, 2012 at 9:18 pm

I contend that this will stimulate AD via some incomprehensible zero lower bound mechanism.

Roger Sweeny November 26, 2012 at 9:41 pm

“The requirement for on-exchange trading is important for a number of reasons, including that it enables the CFTC to police market activity and protect market integrity. …David Meister, the Director of the CFTC’s Division of Enforcement”

Reminds me of the crazed dictator in Woody Allen’s Bananas. “From now on, citizens of San Marcos must change their underwear every hour. Furthermore, all underwear must be worn on the outside–so we can check.”

John Thacker November 27, 2012 at 12:00 am

Anyone still thinking that the Obama Administration secretly wants to legalize poker should take this into consideration.

albatross November 27, 2012 at 11:34 am

Anyone who still imagines that Obama has any interest whatsoever in the libertarian side of liberal political positions is as naive as people who were convinced, in 2004, that Bush was really an advocate of small government.

Anonymous November 27, 2012 at 12:45 am

Doh! Lost another one to Bitcoin! BetsOfBitcoin predictions market is still operating. Globally. Pay using bitcoins

http://BetsOfBitco.in

DocMerlin November 27, 2012 at 12:58 am

The system they use is less transparent.

Max November 27, 2012 at 5:31 am

It’s good to see Matt Yglesias is already sticking up for the government here. What on earth would we do without the CFTC?

zbicyclist November 27, 2012 at 9:25 am

Humiliation? Sure, that’s enough for stealing $1.6 billion, but not enough for those who steal a car?

Seth November 27, 2012 at 5:41 pm

Reminds me of firefighters who start fires just so they can put them out.

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