No Elections Futures Market
Back in December, I made not of the efforts of a Chicago firm to receive permission from the CFTC to establish a futures market in election results. I was skeptical about the request at the time and wondered how it would be any different from sports betting in Las Vegas. Well, it would appear that this request is going to be denied:
Financial regulators are expected to prohibit traders from betting on the outcome of the 2012 election, according to people briefed on the matter, dealing a blow to Wall Street’s recent attempts to profit from politics.
The Commodity Futures Trading Commission is poised this week to reject plans for so-called political event contracts, a lucrative derivative deal that would allow firms to wager on Congressional races as well as the presidential battle, the people briefed on the matter said. The agency is expected to decide, in part, that such trading amounts to gambling — and that it could unduly influence election results.
The North American Derivatives Exchange, the Chicago-based firm that sought to offer the contracts, portrayed its effort as consumer-friendly. With a modest minimum buy-in of $100, and a maximum payout of $250,000, the exchange said it was appealing more to mom-and-pop investors than Wall Street titans.
“We think we’re the perfect exchange to do it because we’re a retail exchange,” Timothy McDermott, the firm’s general counsel, said in an interview last month.
Interestingly, the proposal that NADEX was making would have been illegal in America’s gambling capital:
Some states explicitly outlaw gambling on elections. Even in Las Vegas, the epicenter of gambling, betting on elections is off limits, regulators say.
Intrade is the most prominent player in the world of trading political event contracts, but it is based in Ireland. It is unclear whether American law applies to Intrade.
Only academics have escaped the strict rule. For two decades, United States regulators have allowed business students at the University of Iowa to operate an electronic exchange for trading political contracts.
As the markets have gained prominence, the public and the media have turned to Intrade and others not just for trading, but as a barometer for the election. Indeed, Intrade has become a public opinion polling site of sorts, providing the latest odds on, for instance, who will secure the Republican presidential nomination.
Nadex says it was well positioned to become the only major election trading exchange, because unlike Intrade and other competitors, it is subject to federal oversight at the futures commission.
“If the information is going to be reported to the public on such a wide basis, shouldn’t it be coming from a regulated exchange rather than an unregulated overseas trading platform?” Mr. McDermott said.
As I noted in my December post, though, it’s not at all clear that either Intrade or the Iowa markets are anything more than a reflection of information already available to the public. Moreover their predictive value has been mixed at best during the time that they’ve been operating.
On some level, if people want to bet on elections, or baseball games, I really don’t have a problem with it. Do it in a casino, though, rather than pretending it’s some kind of new financial instrument.