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

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

Policy

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

The U.S. regulator of platforms such as Kalshi and Polymarket suggests the industry is getting into bad compliance habits that may allow for market abuse.

By

Jesse Hamilton

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Edited by

Nikhilesh De

1 hr ago

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The U.S. Commodity Futures Trading Commission issued more guidance warning prediction markets about compliance missteps. (Jesse Hamilton/CoinDesk)

Summary

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The U.S. Commodity Futures Trading Commission issued more guidance to warn prediction markets platforms about how they’re managing their incentives programs.

The firms need to file properly and avoid programs that could incentivize bad behavior, the agency said.

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.

Kalshi

Polymarket

Prediction Markets

Regulation

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