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State of Play’s TL;DR
- Two Oxford legal scholars say prediction markets should have a different set of rules than securities markets.
- They point out that participants can illegally influence some contracts.
Oxford legal scholars Jonathan R. Macey and Luca Enriques argue that US regulators should treat prediction markets differently from securities markets, saying the biggest risk in event contracts is not traditional insider trading but contracts that may encourage participants to influence outcomes through corrupt or illegal acts.
In a blog published Aug. 26 by Oxford Business Law, the authors say securities-market rules should not be imported automatically into prediction markets because the two markets serve very different functions.
Their proposal comes as US agencies and lawmakers continue to scrutinize event contracts following recent enforcement actions and congressional interest.
Why the authors say the main risk is different
The article points to two recent insider-trading cases involving event contracts. Federal prosecutors brought the first criminal insider-trading case tied to an event contract against an Army master sergeant with top-secret clearance who allegedly traded on classified information about an upcoming military operation.
It also says the CFTC and DOJ pursued a Google engineer who allegedly made about $1.2 million trading contracts tied to Google’s unreleased “Year in Search” rankings. The post says those matters helped trigger a House Oversight Committee investigation and at least eight bills.
Still, Macey and Enriques argue insider trading plays a different role in prediction markets than in securities markets. They write:
“Because the price of event contracts is the product, informed trading on such markets is not a system bug at all. It is the feature, the only feature, that makes the product interesting to market participants and socially valuable to the rest of us.”
The authors describe prediction markets as zero-sum side bets with less than $500 million in outstanding contracts, compared with roughly $60 trillion in US public equities. They add that public markets provide about three-quarters of financing for non-financial corporations, while prediction markets do not allocate capital, finance businesses, create jobs, or safeguard savings.
Listing-stage bans, not wholesale securities rules
The authors say the more distinctive regulatory problem is that some event contracts can create incentives to rig outcomes. In their words, prediction markets can create “a serious moral hazard” by giving participants reason to engage in “corrupt, illegal, or dangerous actions” to influence a contract’s result.
Their solution is to stop those contracts before they reach the market.
The post recommends excluding corruption-prone contracts at the listing stage, using rebuttable categorical presumptions, leaving most participant-conduct rules to exchanges, policing breaches of confidence at their source, and adopting a no-parity rule rather than mirroring securities regulation.
According to the authors, the Commodity Exchange Act already contains the basic framework for that approach.
Based on a legal blog by Jonathan R. Macy and Luca Enriques for Oxford Business Law.
