The Commodity Futures Trading Commission (CFTC) issued new guidance regarding prediction market contracts that rely on the actions or statements of specific individuals.
CFTC Raises Manipulation Concerns Over Mention Markets
The warning was issued by the agency’s Division of Market Oversight on September 22. It focuses on so-called mention markets where traders can bet on whether a particular individual will say a specific word, attend a specific event, show up somewhere, or interact with another individual.
The contracts could pose unusual manipulation concerns because the outcome of the wager depends on the actions of one person, the CFTC said. Sometimes that person may also have a say in the outcome.
The Commodity Exchange Act mandates that designated contract markets (DCMs) make sure that the contracts they list are not vulnerable to manipulation. The most recent advisory details how exchanges should assess mention markets before bringing them to traders.
The regulator emphasized that the document does not create new obligations for registered exchanges, but rather explains how existing obligations apply to this kind of event contract.
One of the things exchanges should investigate is whether the person in the contract has any other duties or obligations that could affect the outcome. They should also think about whether outside influences might change the person’s behavior.
Another consideration is whether the event to settle a contract can be independently verified. The CFTC also wants exchanges to assess whether their surveillance systems are able to detect abnormal trading or other activity that might impact market outcomes.
CFTC Urges Exchanges to Review Risks Before Listing Mention Markets
The agency urged DCMs to collaborate with its Division of Market Oversight in developing these contracts. Early discussions can help exchanges identify potential manipulative issues before new products are presented for approval.
The announcement comes amid increased regulatory scrutiny of mention markets in the US. The CFTC had been reportedly looking into the products in the lead-up to the advisory. Kalshi, a regulated operator of prediction markets for such contracts, had already delisted some mention markets related to sports during the review.
It has also been associated with enforcement activity against traders with access to potentially valuable information. The CFTC acted against former White House teleprompter operator Gabriel Perez for trades tied to President Donald Trump’s speeches.
In August, Perez agreed to settle a case involving a $172,539 payment for trading on nonpublic information. The case showed the potential benefit of a head start on what a public figure was going to say.
Other prediction-market cases have raised similar questions about whether people can influence contracts that affect their own behavior.
Mention markets come in many flavors, including contracts tied to speeches, earnings calls, and public appearances. They are still here, so the exchanges have to evaluate the worthiness of offering such products and the risks involved with their settlement.
As prediction markets continue to expand in the US, the CFTC’s latest advisory thus puts more emphasis on contract design, verification, and market surveillance.