Private Prediction Markets and the Law

Author: Bell, Tom W.

Source: The Journal of Prediction Markets, Volume 3, Number 1, April 2009 , pp. 89-110(22)

Publisher: University of Buckingham Press

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Abstract:

This paper analyses the legality of private prediction markets under U.S. law, describing both the legal risks they raise and how to manage those risks. As the label “private” suggests, such markets offer trading not to the public but rather only to members of a particular firm. The use of private prediction markets has grown in recent years because they can efficiently collect and quantify information that firms find useful in making management decisions. Along with that considerable benefit, however, comes a worrisome cost: the risk that running a private prediction market might violate U.S. state or federal laws. The ends and means of private prediction markets differ materially from those of futures, securities, or gambling markets. Laws written for those latter three institutions nonetheless threaten to limit or even outlaw private prediction markets. As the paper details, however, careful legal engineering can protect private prediction markets from violating U.S. laws or suffering crushing regulatory burdens. The paper concludes with a prediction about the likely form of potential CFTC regulations and a long-term strategy for ensuring the success of private prediction markets under U.S. law.

Document Type: Research article

Publication date: 2009-04-01

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