Crackdown Forces Intrade to Drop Americans

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CFTC charges Intrade with illegal off-exchange options trading.

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Americans hoping to get a head start on placing online bets for the 2016 presidential race may need to find another bookmaker.

The Commodity Futures Trading Commission (CFTC) recently filed a complaint in federal court against Trade Exchange Network (TEN) and its subsidiary, Intrade, which hosts a popular online “prediction market,” charging the companies for violating a ban on off-exchange options trading. Shortly after the filing of the complaint, Intrade decided to ban U.S. customers from participating in all of its real-money prediction markets.

While Intrade gained notoriety as a site for placing bets on presidential elections and the Academy Awards, the CFTC’s charges focus on the companies’ violations of rules requiring all options trades to take place on established exchanges in the U.S. unless the trades have been exempted. Furthermore, the CFTC announced that it would intervene “wherever [the companies] may be based, when their U.S. activities violate the Commodity Exchange Act or the CFTC’s regulations” – meaning that Intrade’s incorporation in Ireland will not presumably exempt it from CFTC enforcement.

After news broke of the suit, Intrade stated on its website that “due to legal and regulatory pressures” U.S. clients would have to cancel their open bets – and their accounts. However, more recently the company also vowed to “announce plans for a new exchange model that will allow legal participation from all jurisdictions – including the US.”

This is not the first time the CFTC has attempted to regulate trades on Intrade. The agency brought similar charges in 2005 against TEN, Intrade’s parent company, and issued a cease-and-desist order under which TEN agreed to stop soliciting U.S. clients and to provide online pop-up notifications notifying U.S.-based traders that their actions were illegal.  The CFTC now alleges that TEN failed to comply with the earlier order by never issuing the pop-up notifications to U.S. customers during the relevant time period for the most recent complaint.

Moreover, the CFTC alleges that Intrade illegally enabled bettors to “predict” – or bet on – whether commodities such as gold, oil, and gas would reach certain prices by specified dates. Other improper options trades include betting on future changes in the U.S. unemployment rate, currency exchange rates, and U.S. GDP levels, according to the Commission’s lawsuit. Under Section 4c(b) of the Commodity Exchange Act and Regulation 32.11, options trading may not be offered to U.S. customers where the options are not listed on an exchange or are not exempted from the Act’s requirements.

The CFTC also points out that Intrade did not limit trades to “eligible contract participants,” as required under Sections 5d(a) and 5d(b) of the Commodity Exchange Act. Section 1a(12) of the Act defines “eligible contract participants” as individuals with “total assets” or “amounts invested on a discretionary basis” in excess of $10 million or $5 million where the investor enters a transaction to manage risk in association with an asset owned or liability incurred. If contract trades are only made between these eligible contract participants, who tend to be more knowledgeable investors than most, boards of trade are exempt from meeting the typical registration requirements meant to protect those trading on them.

The CFTC alleges that TEN and Intrade were knowingly filing false annual certification forms, in addition to violating other provisions of law. Although the companies allegedly failed to restrict trades, they filed annual certification forms with the CFTC, which state that Intrade was only offering options to eligible contract participants.

The Commission is seeking permanent injunctions against both companies.  Civil money penalties for their alleged violations of the Act could be as high as $140,000 for each violation, or triple the defendants’ monetary gain.

The CFTC’s action against Intrade may lead other online “prediction” companies to ban U.S. users altogether to avoid potential liability instead of only ending their participation in commodity-based trades. Economists and other social scientists have expressed concern that the shutdown of Intrade in the U.S. will limit their access to forecasts about the future, leaving them with a scarcity of data to use in their research of social and economic issues.

In the meantime, it looks like those looking to predict the future in areas regulated by the CFTC using ‘prediction’ markets will have to do so with fake money—at least in the U.S.