The Commodity Futures Trading Commission (CFTC) is moving to tackle the issue of cross-ownership among market makers in prediction markets. In a significant development, the agency is suggesting new regulations aimed at mitigating potential conflicts of interest that arise from vertically integrated exchanges and market makers. While in-house market makers will still be permitted, the proposed rules would prevent them from taking directional positions on markets. This means they must provide liquidity on both sides of a trade, acting as neutral market makers.
The implications of this proposal could be substantial for various prediction market companies, including Kalshi, which operates its own market-making entity, and the joint venture Rothera between Robinhood and Susquehanna.
This news marks the beginning of our review of the recent highs and lows within the gambling sector.
Bust: CFTC’s Proposed Rules Face Criticism from Industry Experts
Industry insiders have expressed concerns that the CFTC's proposal may not be stringent enough. In contrast, the Securities and Exchange Commission (SEC) has adopted a more rigorous stance regarding exchanges that own affiliated market makers. Alex Kane, founder of Sporttrade, suggests that even if a vertically integrated exchange is required to maintain a neutral fee structure, it may still impose fees high enough that only its own trading arm can compete. This could inadvertently create a scenario resembling a single-dealer market, undermining the concept of an open exchange.
Some experts predict that this could lead to increased trading costs, reduced liquidity, and a faster consolidation of the market than previously expected, potentially signaling the end of the prediction market boom cycle.
Bingo: Underdog Set for Acquisition
In a major move, British trading firm IG Group has agreed to acquire Underdog for a deal valued at up to $1.3 billion. Underdog made headlines last September by becoming the first U.S. sports betting operator to transition into prediction markets, and it has since been expanding its footprint, now ranking third in U.S.-regulated notional volume. The acquisition news comes shortly after Underdog launched its own exchange, which reportedly achieved over $1 million in single-day volume just ten days post-launch.
Underdog is being sold for $1.1 billion, with potential earnings bringing the total to $1.3 billion. This rapid growth from zero to this valuation in just six years is remarkable. Concerns remain about the future of Underdog's Best Ball product, but the potential acquirer’s perspective on this remains unclear.
Bust: Prediction Markets Face Legal Hurdles
A recent court ruling temporarily halting the enforcement of Minnesota's law against prediction markets came with a stipulation that some event contracts offered may not be under the CFTC's jurisdiction. This ruling adds another layer of complexity to the already challenging landscape for prediction markets.