The West Virginia election betting saga involving FanDuel, DraftKings, and BetMGM that unfolded last week sparked a great deal of interest.
Secretary of State Mac Warner ended the debate by stating, “it’s illegal.” According to WV Metro News, even Gov. Jim Justice talked about the situation during his daily COVID-19 press briefing on April 8.
The appetite for betting on elections is palpable.
In 2016, Betfair’s presidential election markets in the United Kingdom saw a handle of about $140 million the day before the election. US presidential election betting is a big draw at offshore sites, in the UK, and across a variety of regulated markets.
West Virginia election betting prohibition
Indeed, West Virginia maintains a prohibition on some types of election wagering, as do most states. There was some speculation that this prohibition could be navigated via careful crafting of betting propositions.
High-level state politicians in West Virginia, and subsequently New Jersey, shot down the idea of offering election betting.
While FanDuel was the first to attempt to offer wagering on the 2020 US presidential election legally, there will likely be continued interest in doing so, especially as the world remains in quarantine.
But as of right now, there are more questions than answers as to how that would or could work. The US market has long viewed betting on elections differently, even though views on other events have evolved.
There are, however, some exceptions:
About the Iowa Electronic Markets
The Iowa Electronic Markets, or IEM, is:
An online futures market where contract payoffs are based on real-world events such as political outcomes, companies’ earnings per share (EPS) and stock price returns. The market is operated by University of Iowa Henry B. Tippie College of Business faculty as an educational and research project.
The IEM is not regulated; instead, it operates under two no-action letters from the Commodities and Futures Trading Commission (CFTC), which effectively shield the operation from CFTC action only.
The CFTC stated in the first no-action letter:
We do not believe that the operation of the 1992 Markets without seeking designation as a contract market or otherwise complying with the Commodity Exchange Act and the regulations promulgated thereunder, or without the registration of the Operators, would be contrary to the public interest. Our conclusion is based upon the facts that, among others, its operation is limited solely to academic and experimental purposes and the Operators receive no compensation.
A second authorization
A second no-action letter followed in 1993, which gave a waiver to a slight expansion of the offerings of the IEM. Once again, the CFTC focused on the academic nature and experimental purpose of the markets as the basis for the issuance of the no-action letter.
Entry of a second election betting market
In October 2014, the CFTC’s Division of Market Oversight responded to a request for a no-action letter from Neil Quigley, the deputy vice-chancellor of Victoria University in Wellington, New Zealand.
The request asked for a no-action letter that would allow Victoria University:
To operate a not-for-profit market for the trading of event contracts and the offering of such event contracts to US persons.
The letter from the CFTC noted:
Victoria University proposes the creation of a small-scale, not-for-profit, online market for event contracts in the US for educational purposes that will use the IEM as a model, with certain features that would vary from that model.
The request from Victoria University included the following conditions that the market would abide by:
- The university’s key employees overseeing the project will be three professors and one administrator.
- Neither the professors nor the administrator will receive any compensation or other payment, directly or indirectly, for operating the market.
- Neither the university nor any of the key personnel operating the proposed market is required to register with the commission, nor is any of these persons or entities a business affiliate of any person required to register with the commission.
- There will be no additional fees other than those necessary to cover the basic expenses of running the market, including the cost of credit card processing of deposits and withdrawals, fulfillment of the know-your-customer (“KYC”) process, and all other associated regulatory compliance and operating costs.
- Participants will execute their own trades, no brokerage service will be available or allowed and no commissions will be charged.
The granting of the request would enable what is PredictIt to exist.
Sandwiched between the no-action letters of more than 20 years apart, others have attempted to offer political markets with CFTC approval.
In December 2011, the North American Derivatives Exchange (NADEX) filed a submission with the CFTC seeking to offer “political event derivatives contracts.” In January 2012, the CFTC responded that it would commence a 90-day review on the belief that the proposal:
“May involve, relate to, or reference an activity” enumerated in Commission Regulation 40.11 (a)(1), including but not limited to “gaming, or an activity that is unlawful under any State or Federal law.”
The CFTC did not immediately foreclose on NADEX’s proposed offerings and instead noted that it presented “novel and complex issues.”
The comment period
The 90-day review triggered a public comment period. It elicited more than a dozen remarks from a range of respondents, including some of the world’s foremost economists.
A comment arguing in favor of NADEX’s position from 17 professors stated:
Concerns about gambling and manipulation are misplaced. Trading securities whose payoffs depend on political outcomes is no more “gaming” than trading securities whose payoffs depend on commodity or equity prices. Clearly, one can trade any security out of gambling motives, so the key question is whether the subject of these contracts is a “game,” or an economically important event. It is hard to argue that elections are not economically important events.
The group further argued:
there have been a couple episodes that appeared to be attempts by traders to influence perceptions of an election by manipulating prediction market prices. The evidence suggests that effects on prices are relatively short-lived, and effects on perceptions are often counter-productive for the manipulator (e.g., through media stories mentioning the manipulation). Onshore election markets will likely be significantly more liquid, making price manipulation even less attractive.
The CFTC-NADEX decision
On April 2, 2012, David Stawick of the CFTC,issued the ruling that:
Pursuant to CEA Section 5c(c)(5)(C)(ii) and Commission Regulation 40.11(a)(1), the Political Event Contracts shall not be listed or made available for clearing or trading on the exchange.
The preceding three examples are likely the most prominent examples of applications to offer political wagering made to the CFTC. There is an additional high profile instance that the CFTC took action against, which offered similar types of binary-option contracts. However, election wagering was not alleged in the complaint.
The CFTC and Intrade
In 2012, the CFTC filed a civil complaint against the Trade Exchange Network (TEN) who operated, perhaps the most famous prediction market to date, Intrade.
The complaint alleged “by offering for trading to US customers, confirming the execution of, and soliciting and accepting orders from U.S. customers for the trading of, commodity-option contracts (‘options’ or ‘binary options’) prohibited by the commission’s ban on trading off-exchange options,” in violation of a previously issued cease-and-desist letter from 2005.
Notably, the Intrade markets were not alleged to be offering betting on US presidential elections to US-based customers in the complaint, but instead, binary-options trades on:
- Future changes in the price of gold.
- Future changes in the US unemployment rate.
- The US gross domestic product figures.
- Predictions about the occurrence of specific acts of war.
The Intrade saga was the result of Intrade purportedly continuing to accept US-based customers for prohibited transactions. The CFTC is the only federal regulatory agency that has issued a no-action letter for the operation of a presidential (or political) wagering market.
Despite this, it does not mean that the CFTC would assert jurisdiction over all types of presidential betting or that all political wagers necessarily fall under the agency’s jurisdiction.
Even though the CFTC’s jurisdiction over specific types of political wagers may not be a certainty (the CFTC’s guidance here has been limited to fairly narrow questions). Most states continue to prohibit election betting via state law.