Defining the Sandbox for Prediction Markets

The announcement by the Commodities Futures Trading Commission (CFTC) that they will be soliciting input for review and consideration on potential regulation of prediction markets hopefully will result in useful regulatory clarity that will facilitate the growing use of this valuable forecasting and decision support tool.

While highly restrictive regulation is unwarranted and could seriously impact the application of prediction markets for enterprise decision support and public policy debate, defining a large enough sandbox within which prediction markets can be established, run, and continue to evolve without the need for regulatory consideration is welcome. Precedent does exist within which to establish this clarity. As examples the Iowa Electronic Markets (IEM) has operated a public market for several years and allows traders to place up to $500 at risk (supported by two no-action letters by the CFTC), Hedgestreet's prediction markets that allow users to offset very large volumes of potential financial risk are regulated by the CFTC, and numerous enterprises run internal prediction markets to assist with forecasting and decision support without any CFTC involvement. Assuming the CFTC does take action, hopefully it will cast a wide enough net to allow the use of prediction markets to continue to flourish.