Prediction markets should dial back faulty filings for incentives to boost trading: CFTC

Like any regulated trading platform under authority of the Commodity Futures Trading Commission, prediction markets firms try to encourage heavy traders and for firms to act as market makers in ways that can deepen participation and trading volume. But the CFTC is concerned about how they're doing it, according to guidance issued on Wednesday.

The U.S. derivatives regulator cautioned the event-contracts platforms that it's seeing an increase in their filings in pursuit of incentive programs, and they are often "procedurally or substantively deficient," the document said. That hinders the agency from figuring out whether the platform "has provided adequate notice of the terms of the program and sufficiently evaluated the program’s compliance."

The CFTC is seeing some of the features of these rewards programs "present compliance concerns." Some of the rewards for high-volume participants can encourage them "to trade solely to reach volume targets, heightening risks of wash-trading, pre-arranged trading, or other fraudulent, manipulative, or disruptive trading practices."

And market-maker programs, in which firms are encouraged to handle either side of a market, have been guaranteeing net process or to cover losses "through stipends and rebates," which the regulator warned could also encourage fraudulent behavior and market manipulation.

The agency has taken a leading role in fostering U.S. prediction markets, taking up a legal battle against states that have sued the firms for violating their local sport-gambling regulations. The CFTC proposed its first prediction-markets rule in June. But the agency has also been steering the growing industry through guidance and advisories on how to properly follow the existing rules for designated contract markets (DCMs) overseen by the regulator, such as an advisory last month warning against cutting corners in templated contract certifications.