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The CFTC shouldn’t join the Super Bowl party

Football and dollars on American flag
Shutterstock / Andrew Angelov

Want to bet on whether the Kansas City Chiefs will beat the Philadelphia Eagles in the Super Bowl? You can now buy or sell a “contract” as to whether they will. It’s called “sports trading,” not “sports betting,” and it is technically a commodity futures contract regulated by the Commodity Futures Trading Commission (CFTC).

How did we get here? When the United States first started regulating commodity futures, only grains like wheat were covered. Regulation was deemed necessary because futures contracts affected the underlying commodity market. Farmers could hedge their exposure to price decreases, and flour mills could hedge their exposure to price increases, by trading those contracts.

The definition of commodities—and the CFTC’s jurisdiction—was gradually expanded to keep up with market innovations in financial futures, by including interest rates, currency exchange rates and other economic measures. To be comprehensive, Congress expanded the definition to include “an occurrence…or contingency…that is beyond the control of the parties to the relevant contract…and associated with a financial, commercial, or economic consequence.”

That’s pretty broad, but until recently, so-called “event contracts” were mostly about things like weather, corporate mergers, insurance losses or other events where market participants sought to hedge their economic exposure to uncertainty. The CFTC allowed a couple of contracts on elections over the years but only in narrowly constrained environments. When I was chairman, the staff approved an election contract market if it remained in an academic, not-for-profit setting, and subject to restrictions on size and numbers of participants. Over time, however, the operators ignored all those restrictions. 

In the last couple years, there has been a dramatic expansion of “prediction markets,” in the U.S. and abroad. They trade all sorts of contracts—like what songs will Kendrick Lamar sing at the Super Bowl or what will the Rotten Tomatoes rating be for the latest Captain America movie? Their websites make it easy to trade, typically at modest cost. 

This expansion of activity has created a regulatory headache for the CFTC. The law says the CFTC can prohibit contracts that involve specific categories such as war, terrorism, unlawful activity or gaming that aren’t “in the public interest.” But when the CFTC relied on that language to prevent the trading of contracts on whether Republicans or Democrats would control Congress in the 2024 election, it lost. The courts said the contracts didn’t constitute gaming or anything unlawful.    

So why not just let them be? Many say they generate useful information about consumer preferences and expectations—and were better at predicting the outcome of the 2024 election than most polls. They also argue the risks of fraud and manipulation that typically exist with financial markets are far less present here. With some contracts, at least, there is a risk that people who can influence the outcome of a contract are trading that contract. The platforms can and do seek to prohibit that, but it is doubtful how well those prohibitions are enforced. 

The Trump administration appears to favor letting these markets expand. The acting chair of the CFTC opposed a rule that was proposed last year that would have limited this activity. And Donald Trump, Jr., has become an advisor to one of the main platforms. 

My own view is that the CFTC should not be the regulator of these markets. The agency is small and has plenty already on its plate, and it may soon get additional responsibility for the crypto markets. Moreover, this is too far afield from its core competencies. Most of these contracts aren’t about hedging economic exposure or price discovery of an underlying commodity, and the platforms certainly aren’t systemically important to our financial system like the derivatives clearinghouses overseen by the CFTC. 

Instead of the CFTC, we could follow the United Kingdom and delegate oversight to a national Gambling Commission, perhaps modeled after state gaming commissions. Give it the authority to impose some basic rules, like age restrictions, price limits, and whether certain subjects are off limits, and prohibitions on trading for persons with interests in the contract. Of course, distinguishing which contracts should remain regulated by the CFTC because of their economic purpose—like those related to weather or economic measures—and which ones should not can be challenging, but line drawing is what lawyers are good at. 

The point is these really aren’t financial institutions. The platforms may call what they offer “trading” and not “betting,” but the activity has a lot more similarity to the latter than it does to commodity futures trading.           

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