Does CFTC Advisory Portend Prediction Market-Sportsbook Co-Existence?

The steps taken this week by the Commodity Futures Trading Commission could help shape an environment where prediction markets and sportsbooks co-exist.

It’s a scenario some gambling industry observers have for months believed to be among the feasible outcomes as prediction markets encroach upon the sports betting space: Prediction markets can be for straight bets, while bettors will go to sportsbooks for player props.

The dynamic isn’t what opponents of prediction markets want – it wouldn’t sit right with states, tribes, and sports betting operators not positioned to launch an exchange.

Nor is exactly what the CFTC laid out in its advisory to DCMs this week, which stresses that while prediction markets are encouraged to innovate, they must do so within the framework of the Commodity Exchange Act.

The advisory reads: 

Under DCM Core Principle 3, each DCM has a specific statutory obligation to list for trading only derivative contracts that are not readily susceptible to manipulation.”

Some player props certainly fall into this definition. Whether they all do is up for interpretation, debate and more litigation.

Sports-Event Contracts ‘Shown To Be Consistent’ With CEA

Under Chair Mike Selig, the CFTC has taken a laissez-faire stance toward prediction markets offering sports-event contact. Under a stricter interpretation of the CEA, sports-based contracts shouldn’t be on prediction markets at all, as the law requires the CFTC to prohibit contracts involving gaming, in addition to war, terrorism, assassination, and illegal activity 

Per the advisory, though, prediction markets have largely been following the rules when it comes to sports. 

Author of the document, Frank N. Fisanich, Acting Director of the CFTC’s Division of Market Oversight, writes:

Sports-related event contracts and event contracts more generally have often been shown to be consistent with DCM Core Principle 3 where the settlement outcome depends on the aggregate performance of multiple participants over an extended period of play.”

So prediction markets offering sports-based contracts is not a problem; offering ones that are easily manipulable is.

More from the advisory:

DCMs are encouraged to consider whether certain categories of event contracts create a heightened potential for manipulation or price distortion. For example, in the context of sports-related event contracts, such contracts could involve those that resolve or settle based on injuries to individual sports participants, unsportsmanlike conduct, or physical altercations between sports participants, as well as contracts that resolve or settle based on the action of a single individual or a small group of individuals, such as officiating actions occurring during a sporting event.” 

The above passage is also subject to interpretation. 

Contracts that “resolve or settle based on the action of a single individual or small group of individuals” could certainly be interpreted to mean all player props. It’s examples like “unsportsmanlike conduct” or “officiating actions” that seem to leave the door ajar for prediction markets to keep offering over/unders on a basketball player’s points or a quarterback’s passing yards.

Also read: Trepidation Among Potential Prediction Market Investors

CFTC Wants Your Help

Along with the advisory to DCMs, the CFTC issued an Advance Notice of Proposed Rulemaking, (ANPR) seeking public comment as it writes new regulations to govern prediction markets.

The dense 32-page document contains dozens of questions the CFTC invites input on to help interpret its own rules. Again, this process is ripe for interpretation and doesn’t provide much optimism for those wanting prediction markets to cease doing sports.

“Gaming”, the fifth activity the CFTC, per the CEA, may deem contrary to public interest, is interpreted by many to include sports. The CFTC isn’t so sure, asking in its request for comments:

What sources should inform the Commission’s determination of the scope of the term ‘gaming’? For example, is gaming synonymous with, or more or less extene than, the scope of activities covered by State and Federal gambling statutes? Are there characteristics – such as an entertainment purpose, or an element of chance – that distinguish gaming from other activities?”

And in a passage that contains the document’s only mention of “sports”:

In this regard, how should the Commission distinguish between various types of contests? For example, should a sports competition be treated differently than an award competition, and if so, what factors support this distinction? What other types of contests should or should not be considered to be gaming?”

The question of whether a sports-event contract constitutes a swap is being litigated in courtrooms all over the US, and the CFTC is itself unsure: 

More from the ANPR/RFC: 

What aspects of prediction markets are relevant to whether event contracts should, or should not, appropriately be classified as swaps? What aspects, if any, distinguish event contracts from other types of swaps?”

We’re sure the CFTC will be flooded with comments during the 45-day window it opened for submissions, many of them offering interpretations of “gaming” and “swaps” prediction markets might not like. We’re just not sure any of these arguments will convince the CFTC to rein them in.