The Commodity Futures Trading Commission (CFTC) has expressed no concerns regarding prediction markets that offer contracts on sports events. However, it is the manipulable markets, particularly those involving player propositions, that are seen as violations of the Commodity Exchange Act (CEA).
This week, the CFTC took steps that may foster a coexistence between prediction markets and sportsbooks. Observers in the gambling industry have speculated for months that this scenario could unfold as prediction markets begin to penetrate the sports betting arena. In this model, bettors may prefer prediction markets for straightforward bets while utilizing sportsbooks for player props.
This arrangement may not align with the interests of those opposed to prediction markets, particularly states, tribes, and sports betting operators who are not equipped to launch their own exchanges.
The CFTC's recent advisory to designated contract markets (DCMs) emphasizes that while innovation in prediction markets is welcomed, it must remain compliant with the CEA. According to DCM Core Principle 3, each DCM is required to list only derivative contracts that are not easily manipulable.
Some player props may fall under this definition, although whether all of them do is a matter open to interpretation and debate.
Under the leadership of Chair Mike Selig, the CFTC has adopted a more relaxed approach towards prediction markets that offer sports-event contracts. A stricter interpretation of the CEA would suggest that such contracts should not exist on prediction markets, as the law mandates the CFTC to prohibit contracts related to gaming, as well as war, terrorism, and other illegal activities.
The advisory indicates that prediction markets have largely adhered to regulations concerning sports. Frank N. Fisanich, the Acting Director of the CFTC’s Division of Market Oversight, noted that sports-related event contracts often align with DCM Core Principle 3, as their outcomes depend on the collective performance of multiple participants over a significant duration.
Thus, while offering sports-based contracts is permissible, the concern arises when such contracts are easily manipulable.
The advisory further suggests that DCMs should assess whether certain types of event contracts pose a greater risk for manipulation or price distortion. For instance, contracts that resolve based on injuries to individual players, unsportsmanlike conduct, or physical confrontations, as well as those determined by the actions of a single individual or small group, such as officiating decisions during a game, may fall into this category.