In August, the Commodities Futures Trading Commission (CFTC) reversed the decision that has allowed the election prediction market site PredictIt to operate. Now, a lawsuit is underway to keep the site up and running.
The CFTC sent a letter to the site operators, indicating that the agency was revoking its No-Action letter. That earlier letter was effectively a promise by the CFTC that it would not take any enforcement action against PredictIt. That has allowed the site to operate for research purposes without fear of CFTC intervention since 2014.
The new letter, sent to Victoria University Vice-Provost Margaret Hyland, explained that:
the University has not operated its market in compliance with the terms of Letter 14-130 [granting no-action relief].
As a result, the CFTC instructed the University that all remaining PredictIt contracts and positions should be closed and liquidated. The site should return all balances to customers by 11:59 PM on Feb 15, 2023.
Numerous plaintiffs filed suit on Sep 9, including site operator Aristotle International. The lawsuit seeks to stop the shutdown of the markets.
The CFTC’s decision has already prompted criticism from some who see PredictIt as an academic tool. Over the years, it has been the source of valuable information about the functioning of markets.
What is PredictIt?
PredictIt is a prediction market website that allows individuals to make predictions about future events.
The other is a similar exchange from the University of Iowa, which has been active since the mid-1990s. It operates on a much smaller scale, however. In its application for No-Action relief, Victoria University (in New Zealand) asked for the CFTC to allow it to offer certain markets with more traders and enable users to deposit slightly higher dollar amounts than the University of Iowa markets permit.
Victoria University contracted with Aristotle International to operate the site. It has since become one of the most cited sources for election predictions.
The information gathered from the website is available to researchers around the world. Using such prediction markets to forecast future events has been a hot research topic for decades. That’s why the CFTC’s decision to shut the site down has met with such criticism from academics. Some argue that they will be losing a valuable research tool.
The lawsuit also argues that the CFTC is hurting site users in the process.
The complaint was filed in the Western District of Texas. The plaintiffs consist of PredictIt, Aristotle International, and several individuals representing both users and academics.
The crux of the complaint is that those investors and those individuals who rely on data from the market are being harmed by the “premature liquidation of dozens of contracts.”
By this, they mean markets whose outcomes will still be up in the air come Feb 15, 2023. PredictIt will need to decide how to split up the money for those contracts. Whatever plan it settles on will undoubtedly leave some speculators unhappy.
Further Explanation Required?
The plaintiffs say the CFTC hasn’t backed up its claim that Victoria University has violated the terms of the 2014 No-Action letter. They argue that the claim requires an explanation of which terms the University allegedly violated.
The complaint also alleges an injustice in the lack of forewarning and opportunity to comply. The plaintiffs allege that the letter has created chaos in the markets. Some of the most popular markets relate to the 2024 presidential elections. Their liquidation would result in those contracts being ended prematurely without a stated reason.
Those plaintiffs representing PredictIt users argue that there is no demonstrable reason why the CFTC could not allow the 2024 markets to run their course.
Violation of the Administrative Procedure Act?
The plaintiffs allege that the lack of notice and opportunity to achieve compliance constitutes a violation of the Administrative Procedure Act. That law governs how administrative agencies must handle decision-making. The complaint alleges:
the Revocation is arbitrary, capricious, an abuse of discretion, [and/or] otherwise not in accordance with law and occurred without observance of procedure required by law (internal quotations omitted).
Victoria University Sits Out
The complaint notes that Victoria University itself is not a party to the litigation. The complaint states that the University intended to continue operating the markets prior to the CFTC’s revocation. However, the school plans to comply with the new decision unless the CFTC reverses course again.
What do the Plaintiffs Want?
The plaintiffs are asking for the court to set aside the CFTC’s revocation. That’s due to the CFTC’s alleged failure to follow proper procedure and failure to provide notice and opportunity for compliance.
Failing that, they ask that open markets be allowed to continue beyond the Feb 15, 2023 shutdown date until they reach their natural conclusion.
Key Takeaways About the PredictIt Lawsuit
The announcement that the CFTC would shut down PredictIt come early 2023 sent shockwaves through the political betting community. Those who study such markers rue losing such a valuable mainstream tool.
The shutdown comes as the CFTC has opened a comment period regarding another company, KalshiEx. It has applied to legally offer contracts based on congressional control. If it receives approval, it would be operating as a regulated market rather than merely under No-Action relief.
The complaint makes a strong case that the revocation letter from the CFTC lacked the necessary level of detail. Indeed, reading the revocation letter, it was difficult to determine which provision of the No-Action letter the CFTC feels PredictIt violated.
However, the absence of Victoria University as a plaintiff will likely open the door for the CFTC to file a motion to dismiss. It may well argue that the No-Action relief was not granted to any of the parties that filed the lawsuit. The court may therefore find that they lack the necessary standing to challenge the revocation.
Whether the plaintiffs’ interests can withstand such an argument is a question we will likely see answered over the coming months. As a government agency, the CFTC has 60 days to file its response to the complaint. If there were a prediction market as to whether we see a motion to dismiss, the smart money would be on Yes shares.