Experimental predictions market site PredictIt may eventually be forced to shut down.
The site, which allows users to buy and sell “shares” in political propositions, has operated since 2014 under the grace of a “No-Action Letter” from the Commodity Futures Trading Commission (CFTC). That agency has now withdrawn its tentative permission.
A no-action letter is a promise of sorts by a government body that it will not pursue legal action against a particular person or entity for some activity they’re engaged in. Since PredictIt operates as a securities exchange of sorts, the Victoria University of Wellington sought permission from the CFTC to carry out its experiment. While not willing to authorize such products generally, the CFTC granted the university permission on certain conditions.
PredictIt had to remain small in scale and operate on a not-for-profit basis for educational purposes. The CFTC’s announcement states that it has determined that the university has not operated its market in compliance with those terms. Although it does not specify how the university has violated the terms, PredictIt has been growing in popularity and attention in tandem with the rise of sports betting in the US.
Educational Experiment or Betting Site?
Betting on political outcomes isn’t legal in the US. PredictIt has effectively filled that niche for many, even though the mechanics of futures trading differ from placing bets with a sportsbook. Many of the same sites covering sports betting and other forms of gambling (including Bonus) also cover political stories from a futures-trading perspective. Some people have made significant sums of money at it.
Winning shares in a PredictIt question pay out $1. In principle, this means the value of a share in cents is equal to the percentage chance of the prediction coming true, according to popular consensus. The university’s objective has been to gauge sincere public opinion using personal financial interest as motivation.
It seems likely that the CFTC has decided that, for the public at least, PredictIt has ceased to be an educational product.
What Will Happen to PredictIt Now?
PredictIt won’t shut down immediately. The CFTC has given Victoria University until February 15, 2023 to close out all open interest in its markets.
PredictIt has assured its users that all funds are secure. It will continue to accept deposits and withdrawals and even take new signups for the time being.
The only immediate impact of the CFTC’s decision is that PredictIt will stop adding new markets. Trading on existing markets will still be allowed up until the deadline.
That leaves one open question: How will PredictIt settle existing shares in markets whose outcomes won’t be determined until after the deadline? At the moment, the site has no answer:
No determination has been made on how markets with end dates after Feb. 15 will be settled.
For instance, one market asks, “Will Kamala Harris be on the 2024 Democratic ticket?” The answer to that won’t be known until after the Democratic National Convention sometime in summer 2024, over a year after the CFTC wants PredictIt to cease operations.
That may lead to some interesting moves and extreme volatility for such markets. Rather than predicting the outcome of the actual question, users must try to predict how PredictIt will resolve outstanding shares in those markets.
For instance, the value of Yes shares on the above question about Kamala Harris had held steady between 53 cents and 55 cents over the 24 hours prior to the CFTC’s announcement. In the 2 hours since the announcement, it first plunged to 49 cents, then spiked to 59 cents.