While the fate of PredictIt, the election-based prediction market, is not yet sealed, the future seems uncertain at best.
The company, the site, and some of its investors are challenging the Commodity Futures Trading Commission’s (CFTC) decision to pull a 2014 No-Action letter that was the site’s genesis. On December 1, 2022, a federal court in Austin, Texas, heard a motion filed by the CFTC to have the case dismissed.
If PredictIt (and the other plaintiffs) are not successful in their quest to block the revocation of the No-Action letter, the site will, in all likelihood, cease operations on February 15, 2023, at 11:59 PM, a date set by the CFTC.
The revocation of the No-Action letter issued to Victoria University, which partnered with Aristotle International to operate the exchange, will see the US with a single remaining permitted political futures market after the CFTC reportedly recommended the denial of an application by another company to offer politics-based futures contracts.
Though we still do not appear to have a statement from the CFTC confirming the denial of the other market, it appears that the University of Iowa’s Tippee College of Business-operated Iowa Electronic Markets will be the last lawful political futures market in the U.S. unless something changes in the coming weeks.
PredictIt grand experiment
The CFTC first approved a No-Action letter for the University of Iowa to operate a very small-scale political exchange with a very small number of traders and a small maximum dollar limit for each account back in the early 1990s.
In 2014, the government agency approved a second No-Action letter for Victoria University to operate a slightly larger, though still relatively small, political exchange. In the years following the 2014 No-Action letter, Victoria University, in conjunction with Aristotle International, would launch PredictIt, a site that became one of the most followed indicators of future political leanings in the United States, alongside sites like 538 and RealClearPolitics, which have made a name for themselves projection electoral outcomes.
However, unlike those other sites, which relied on expert predictions, PredictIt allowed anyone meeting the site’s requirements to test their expertise. While this was exciting for people who followed politics, the aggregate information, the so-called wisdom of the crowd, served as a fascinating and useful tool for study.
Over the years, PredictIt has provided useful insight to dozens of academics; the site also proved highly accurate at predicting electoral outcomes in past elections, including in the 2020 presidential election.
Value of prediction markets like PredictIt
Prediction markets are based upon the Efficient Market Hypothesis, which in the prediction market context is the idea that the price represents the likelihood of an event taking place based on all the relevant information.
In the context of a presidential election market, if a contract for Joe Biden to be president in 2024 were trading at $.52, then the market would be suggesting that there is a .52 probability that Biden would be elected. As the election passes, someone will go to $1.00, or at least $.99.
A lot like options trading
Prediction markets are effectively a market of binary option contracts: either an event happens or it does not. The contracts settle on the date of an election (or another specified date for other events.) This is not dissimilar from other types of options contracts, which are purchased for a designated date in the future, reflecting a likelihood that a company’s share price or commodity will be at a certain level.
They are really useful tools
Prediction markets are incredibly useful tools for forecasting uncertain future events.
Many of the biggest companies in the world have utilized internal prediction markets to do things such as forecast future business trends. The federal government has also periodically dabbled in prediction markets, though ultimately shut down one study after congressional outcry over some of the subject matter to be made available.
What does the future hold?
The likely shutdown of PredictIt will leave a significant hole in the advancement of the study of prediction markets and markets generally. By shutting down PredictIt, the CFTC will create an emptiness around election markets. While the Iowa Electronic Markets continue to operate, they do so on a much smaller scale than PredictIt and with far less fanfare.
Ultimately, the CFTC’s decision to revoke the No-Action letter may be determined to have been permissible, but the decision may well turn out to be shortsighted when we examine the costs and benefits down the road. Before the launch of PredictIt, other prediction markets operated.
Back in 2012, the CFTC took action against the Irish prediction market InTrade, for reportedly allowing Americans to invest in prohibited contracts. The interest in InTrade, however, reflected an interest of Americans in this type of product.
Why PredictIt filled a need
PredictIt would emerge as a permissible alternative, and while the contracts were limited in price, PredictIt became incredibly popular.
Through the conditions of the No-Action letter, it became a significant partner to the academic community. If PredictIt is shut down, it will be a setback.
Ultimately, I am unsure whether betting on elections should be legalized broadly. Still, I am confident that allowing people to bet, invest, or whatever you want to call it, on a market that is tied to an academic institution and the strict conditions of a No-Action letter is the optimal solution to fill a need for a product that many desire, in comparison to the alternatives that are out there.