Comment Text:
2.a. Rules prohibiting abusive trade practices are relevant to prediction markets. Prediction markets, by design, do not provide impartial access nor transparency in their practices. Conventional gambling platforms like casinos are required to disclose the odds in games of chance, which are consistent for all players. Prediction markets allow people to change the odds by placing bets for large sums of money. By their very nature they are extremely vulnerable to abuse by inside knowledge.
2.b. The breadth of bets available on prediction platforms allow for evasive, fluid terms and conditions by including contracts on matters which are disputed or subjective in nature. The party deciding the outcome of contracts has significant leeway in directing the awards. It is unlikely that existing procedures for dispute resolution will be useful precedent given the huge breadth in the nature and subjects of contracts. Contracts will have a high risk of being based on contentious political questions that will, at extreme risk to the public good, allow or require the prediction market platform to decide what is “truth”.
2.c. Outcomes which are subjective, interpretive, or open to interpretation are highly susceptible to manipulation. Contracts covering sensitive political questions like the outcome of elections, legislative votes, or judicial decisions, which may have vast social, economic, or policy implications will create considerable motive for manipulation, and should be unambiguously prohibited.
2.d. Prediction markets present considerable challenge preventing manipulation and distortion. Prediction markets operate at a national scale with expedient, digital-based operations (web and/or smartphone apps) that are intended to enable participation by a maximum number of entrants with very little friction or opportunity for vetting. Prediction markets are not capable of determining whether individuals among this large user base are engaging in non-compliant behaviors. The large, expedient nature of prediction markets means it is unlikely existing surveillance practices will be able to detect suspicious activity with the necessary sensitivity and rapidity required to prevent substantial harms. These harms are greater than the direct economic harms suffered by potential traders. Contracts covering matters of public interest will have broad-reaching consequences to public perception and public discourse that cannot be remedied by existing practices.
2.f. Prediction markets should not be permitted trading on margin. Retail traders are very financially vulnerable to high-risk activity like trading on margin and frequently may not understand the level of risk involved. This will create strong incentive to dispute or manipulate the outcome of events subject to contracts, or at least inflict severe financial harm on those participants. This issue will not be remedied by creating distinctions based on retail versus institutional investors. As the odds assigned to contracts are based on bets placed, this will simply grant institutional investors further unfair advantage in manipulating prediction markets at the expense of retail investors.
32. Prediction markets will be affected by government employees with knowledge of upcoming government actions (ranging from public appearances to military strikes). Such employees will have a straightforward ability motivation to place well-timed bets on outcomes which are known to them, but not publicly. In the worst cases, government officials may have the power or influence to change the outcome of contracts in ways that are financially favorable to them. This goes beyond the normal conception of insider trading and has grave societal consequences. It will be difficult or impossible to enforce corruption as prediction markets currently operate. The Commission’s regulation must make insider trading by government employees a top consideration to prevent erosion of public confidence in government officials.
Prediction markets present a new, unprecedented threat of corruption. By using the outcome of matters of public interest for its contracts, prediction markets create a risk of manipulation that is unlike other futures trading, and presents a unique, extreme risk to the public interest. Prediction markets will enable wealthier, better-resourced participants, participants with inside knowledge, or participants with direct influence on the subject of contracts, to distort trading and broader public perception of events in ways that favor them. I strongly urge the Commission to take a strong regulatory approach to prediction markets. Reducing or eliminating these risks will require limits on access, size of trades, subject of contracts, and more. Prediction markets should be recognized as the gambling that they are, subject to the same tight controls and surveillance as conventional gambling platforms.
