As legal sports gambling has spread across the country, one of the obvious questions is when will we be able to bet on other things? Sites like PredictIt have been letting bettors place wagers on various political events, but what about other more mundane aspects of life?
The desire to bet on any and all things was something that drove the temporary success of websites like InTrade, but InTrade was shut down by the Commodities and Futures Trading Commission (CFTC) and nothing has filled its gap. Indeed, the likelihood of another InTrade popping up appears unlikely given a certain provision in the 2010 Dodd-Frank Act. The provision is one that prevents people from betting on things like assassinations or a war occurring, but it also prevents you from betting on box-office receipts. This provision may limit the likelihood that we see another broad-scale prediction market like InTrade.
On July 21, 2010, President Barack Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The bill was meant to bring about significant changes to the way that Wall Street operated following the 2008 financial crisis. Pieces of the landmark legislation have recently been rolled back by the Financial Choice Act, but significant portions of the Dodd-Frank legislation remain in place.
One of the things that Dodd-Frank aimed at were various types of futures contracts.
What is a futures contract?
A futures contract is, according to Investopedia:
a legal agreement to buy or sell a particular commodity or asset at a predetermined price at a specified time in the future. Futures contracts are standardized for quality and quantity to facilitate trading on a futures exchange. The buyer of a futures contract is taking on the obligation to buy the underlying asset when the futures contract expires. The seller of the futures contract is taking on the obligation to provide the underlying asset at the expiration date.
In reality, most futures contracts never result in actual delivery of the item, after all, there is a limited market for millions of dollars’ worth of pork bellies. But, the futures market serves an important purpose by allowing investors to hedge risk.
Why does the CFTC hate onions?
Prior to the passage of the Commodities and Futures Trading Act in 1974, which created the Commodities and Futures Trading Commission, the trading of futures was regulated by the Grain Futures Act of 1922, and then the 1934 Commodities Exchange Act. All of which were under the jurisdiction of the Department of Agriculture, which makes sense when considering that historically (and still somewhat true today) most futures contracts that are traded involve agricultural products.
When Congress created the CFTC in 1974 (still under control of the Department of Agriculture) they gave the agency vast jurisdictional power. The 1974 Act expanded the definition of the term ‘commodity’ to include, according to Thomas Russo and Edwin Lyon: “’all other goods and articles, except onions . . ., and all services, rights, and interests in which contracts for future delivery are presently or in the future dealt in ….’” The broad definition has naturally resulted in some controversy over the years, but why were onions excluded?
The onions futures act
The story of why onions are not within the CFTC’s jurisdictional grasp is the result of a law passed nearly 20 years earlier, the Onions Futures Act. In the mid-1950s, two futures traders had cornered 98 percent of the Chicago Mercantile Exchange’s onion market, holding 30 million pounds of onions. With their onion empire, the two traders told onion growers they would flood the market with onions if the growers did not begin purchasing from the traders.
As the growers secured a greater and greater stake in the onions, the traders took a short position (betting against the price of onions going up). The traders then released their onions, flooding the market and causing the price of onions to plummet, while getting rich themselves. The resulting catastrophe led to many onion farmers losing everything. This prompted Congress to take action and ban the trading of onions futures contracts.
Fast forward to betting on box office receipts
As Shaun Raviv reported in an article for The Ringer, in 2001 Cantor Fitzgerald purchased a website with a devoted following of 30,000 active users called the Hollywood Stock Exchange. The operation of the Hollywood Stock Exchange was simple. With $2 million in play money, “investors” would invest in box office releases doing better than were projected, pocketing the play money profits when a film exceeded expectations during its first four weeks at the box office.
Looking for a way to hedge risk, the play money stock exchange began to appear viable as a real money financial tool in 2010. Fitzgerald raced to get regulatory approval to begin taking real money on the Hollywood Stock Exchange’s descendant. This led the Motion Picture Association of America (MPAA) to run to Congress to stop the chance for Wall Streeters to take over the movie industry.
While the trading of box office derivatives could have created new financing opportunities for filmmakers, it also would have provided a means to hedge against a box office flop for financiers, as Jeremy A. Gogol explained:
If a film failed to produce enough revenue at the box office to equal these entities’ investments, the settlement on their [Box Office Stock Exchange] contracts would, in theory, provide the capital necessary to allow the entities to break even.
If the long and short positions of these individuals and organizations are in balance, enough liquidity would be available in these markets to encourage others (e.g., marketing partners, minor investors, film talent, speculators) to buy and sell these same contracts.
Congress did not listen
Despite the apparent benefits associated with the public trading of box office receipts contracts, Congress chose to side with MPAA executives and ban the idea of commodity traders trading box office derivatives. Within Dodd-Frank legislation, there is also a Special Rule regarding the approval of event contracts (often called prediction markets). Section 745 (5)(C) states:
SPECIAL RULE FOR REVIEW AND APPROVAL OF EVENT
CONTRACTS AND SWAPS CONTRACTS.—
‘‘(i) EVENT CONTRACTS.—In connection with the listing of agreements, contracts, transactions, or swaps in excluded commodities that are based upon the occurrence, extent of an occurrence, or contingency (other than a change in the price, rate, value, or levels of a commodity described in section 1a(2)(i)), by a designated contract market or swap execution facility, the Commission may determine that such agreements, contracts, or transactions are contrary to the public interest if the agreements, contracts, or transactions involve—
‘(I) activity that is unlawful under any Federal or State law;
‘‘(V) gaming; or
‘‘(VI) other similar activity determined by the Commission, by rule or regulation, to be contrary to the public interest.
‘‘(ii) PROHIBITION.—No agreement, contract, or
transaction determined by the Commission to be contrary to the public interest under clause (i) may be listed or made available for clearing or trading on or through a registered entity.
The ban on trading of many event contracts will likely have a chilling effect on exchange-style wagering in the U.S. legal market, which is popular in Europe. There are also potential implications for some peer-to-peer types of betting, which could be found to be operating as unregistered exchanges facilitating the trading of unauthorized derivative contracts. This to go along with the ban on onion futures, and box office receipt contracts.