Comment Text:
Re: Prediction Markets; RIN 3038-AF65; 91 FR 12516
I respectfully submit this comment in response to the Commission's Advance Notice of Proposed Rulemaking on prediction markets. I am the founder of Vigilentis, a market-integrity analytics project focused on identifying concentration, abnormal trading activity, and manipulation risk signals in blockchain-based and digital-asset markets. This comment responds primarily to the Commission's questions regarding Core Principles 3, 4, 5, 11 and 20, blockchain-based prediction markets, inside information, cross-market manipulation, and cost-benefit considerations.
Prediction markets can provide socially useful price discovery, but their market structure also creates specific manipulation and integrity risks. Many event contracts have binary or near-binary payoffs, thin order books, asymmetric information, and settlement outcomes that may be influenced by a small set of actors or by external markets. These characteristics make it especially important that DCMs maintain surveillance capable of detecting not only trade-based manipulation on the venue, but also concentration and coordination across related event contracts, crypto assets, social signals, oracle sources, and other markets.
I recommend that the Commission encourage or require DCMs listing event contracts to maintain a risk-based surveillance framework that includes at least five categories of controls:
1. Position concentration and whale-risk monitoring. DCMs should monitor large position build-up, rapid increases in beneficial exposure, repeated directional accumulation close to resolution, and concentration across economically similar contracts.
2. Cross-contract and cross-platform aggregation. Position limit or position accountability should not be assessed only at the individual contract level. Where multiple event contracts reference the same underlying event, issuer, person, government action, election, index, oracle, settlement source, or economically equivalent outcome, DCMs should aggregate exposure for surveillance and escalation.
3. Manipulation and disruptive trading signals. Surveillance should include wash-trading, pre-arranged or noncompetitive trading, spoofing-like order behavior, momentum ignition in thin books, last-minute settlement-period trading, and activity designed to move a prediction-market price in order to influence another market or public perception.
4. On-chain and off-venue signals for blockchain-based markets. Where deposits, withdrawals, collateral, settlement, wallets, smart contracts, stablecoins, or oracle interactions are visible on-chain, DCMs should incorporate wallet clustering, funding-path analysis, coordinated address behavior, abnormal token flows, and oracle/settlement-source monitoring. These signals should be used as risk indicators, not as conclusive evidence, and should be subject to human compliance review.
5. Inside-information and controlled-event risk. For events that may be influenced or known by a small group of persons, including government, corporate, litigation, sports, policy, or protocol-governance events, DCMs should apply heightened controls. Such controls could include pre-listing risk classification, restricted-list procedures, enhanced monitoring near announcement or resolution windows, and documented escalation protocols where suspicious trading coincides with nonpublic or early public information.
The Commission should also consider requiring DCMs to document a contract-specific “manipulation susceptibility assessment” before listing event contracts. This assessment should cover the event source, resolution criteria, liquidity profile, expected participant base, possibility of actor control over the outcome, oracle or data-source risk, availability of external hedging or related markets, and whether similar contracts should be grouped for position-accountability purposes. For blockchain-based markets, the assessment should also identify smart-contract, custody, stablecoin, bridge, wallet-concentration, and oracle dependencies.
I do not believe the Commission should impose a one-size-fits-all technology mandate. Smaller markets should be able to use proportionate controls, but the regulatory expectation should be clear: prediction markets need auditable surveillance, escalation, and evidence-preservation procedures that are appropriate to their products. A principles-based framework that identifies required risk outcomes, rather than a fixed vendor or methodology, would promote responsible innovation while improving market integrity.
Finally, surveillance tooling can reduce regulatory costs by allowing DCMs and regulators to focus human review on high-risk events, participants, and time windows. In my view, the Commission should encourage standardized reporting of key risk indicators, including large-trader concentration, related-contract exposure, unusual settlement-window trading, and blockchain-based risk signals where relevant. This would support the CEA's objectives of protecting market participants, preventing manipulation, preserving price discovery, and promoting responsible innovation.
