CFTC Orders PredictIt Shut Down- Can Political Betting Survive?

Political betting has long been in a legal grey area. It seems that the Commodities Futures Trading Commission wants to make everything black and white, but at least for now it has simply made everything murkier.

PredictIt is the largest political betting site in the US; if you want to know who is likely to win an upcoming election, its the best place to find a quick answer. Prediction markets have two great virtues- they are usually right about what’s going to happen, and if they aren’t you can bet, making money and improving their accuracy at the same time.

PredictIt has operated since 2014 under a “no-action letter” from the CFTC. Effectively, the regulators told them “we’re not saying what you’re doing is definitely legal, but we know about it and have no plans to shut you down as long as you stick to the limits described in this letter”. But last week the CFTC withdrew their letter and ordered PredictIt to shut down by February 2023.

My first question was, why? Why shut them down now after 8 years when all their operations seem to be working as usual? The CFTC said only that “DMO has determined that Victoria University has not operated its market in compliance with the terms of the letter and as a result has withdrawn it”, but did not specify which of the terms PredictIt violated, leaving us to speculate. Did the scale simply get too big? Did they advertise too heavily? Did Victoria University, the official operator, let too much be handled by a for-profit subcontractor? Did some of their markets stray too far from the “binary option contracts concerning political election outcomes and economic indicators” they were authorized for?

PredictIt hasn’t been much clearer about what happened, simply putting a notice on their site. Their CEO did an interview on the Star Spangled Gamblers podcast where he said there was no one thing that triggered the CFTC but did mention “scope” as a concern- which I interpret to mean that they offered some types of markets the CFTC didn’t like, perhaps markets like “how many times will Donald Trump tweet this month”.

The other big question here is about PredictIt’s competitors. In 2021 it seemed like we were entering a golden age of real-money prediction markets, with crypto-based PolyMarket and economics-focused Kalshi joining PredictIt. I looked forward to seeing this competition play out in the marketplace, but it now seems like we’re headed toward a Kalshi-only monopoly where they win not by offering the product users like best, but by having the best relationship with regulators. Polymarket had offered markets without even a no-action letter, based on the crypto ethos of “better to ask forgiveness than permission”; this January the CFTC hit them with a $1.5 million fine and ordered them to stop serving US customers.

If the CFTC doesn’t reverse their decision to shut down PredictIt, then February 2023 will see a Kalshi monopoly. This has led to speculation that Kalshi is behind the attack on PredictIt; their cofounder issued this not-quite-a-denial. But it certainly looks bad for the CFTC that they are effectively giving a monopoly to the company that hires the most ex-CFTC members.

For now you can still bet on PredictIt or Kalshi (or even Polymarket if you’re outside the US). If you’d like to petition the CFTC about PredictIt you can do so here. It might actually work; while the CFTC’s recent actions certainly look cronyistic, they’ve been reasonable compared to other regulators. They’re giving PredictIt no fines and several months to wind down, and even Polymarket gets to keep serving non-US customers from US soil. I’d likely make different decisions if I were at CFTC but the ideal solution here is a change in the law itself, as we’ve seen recently in sports betting. Prediction markets are impressive generators and aggregators of information, and politics and policy are at least as valuable an application as sports. To go meta, suppose we want to know- will PredictIt survive past February? There’s a prediction market for that, and its currently saying they’ve got a 20% chance.

Fed Dot Plot vs Markets

After their last meeting in March, the Federal Open Market Committee released the summary of economic projections. Most of the variables they project are inherently difficult to predict: GDP, unemployment, inflation. But their forecasts of the Federal Funds rate should be pretty good, since they’re the ones that get to pick what it will be. The median FOMC member thinks the the Federal Funds rate will be just under 2% by the end of 2022.

I said in my last post that the Fed is under-reacting to inflation. Markets seem to agree, but they also think that the Fed will change. Kalshi runs prediction markets on what the Fed Funds rate will be, which they recently started to summarize using this nice curve:

So traders think that the Fed will raise rates faster than the Fed thinks they will, with rates getting to 2.5% by year end. Traders at the Chicago Mercantile Exchange see an even bigger change, with rates at 2.75% by year end, and 3.5% by July 2023 (the longest-term market they offer).

I lean toward the markets on this one; if they are wrong there is plenty of money to be made by betting so.