Regulatory Body Moves to Impose Halts on PredictIt Operations
The Commodity Futures Trading Commission (CFTC) has revoked its previous decision that supported PredictIt, an online political exchange, and is now taking steps to shut it down. This was disclosed in a court filing on Friday before the US Fifth Circuit Court of Appeals. Last month, the court had given PredictIt an injunction allowing it to keep existing markets open, beyond a recommended February 15 deadline set by the CFTC.
However, in Friday’s filing, the CFTC stated that the August 4 revocation letter was retracted, and a new letter was sent on Thursday. The CFTC argues that this makes the injunction irrelevant, and they want the court to dismiss PredictIt’s appeal.
The new letter highlights allegations of violations, and the Victoria University of Wellington in New Zealand, which formed PredictIt in 2014, has been requested to respond with objections by March 20. A footnote from the letter signed by CFTC Division of Market Oversight (DMO) Director Vincent McGonagle states that responses should only come from the university and not from Aristotle International.
CFTC Lists PredictIt Violations
The new letter and court filing provide insights into why the CFTC wants to shut down PredictIt. The 2014 no-action letter set out a series of requirements for the university, which proposed operating the exchange for research purposes.
Previous letters showed that PredictIt violated these terms but didn’t specify the violations. Friday’s court filing by the CFTC states that the DMO shared its findings with the University in June 2022. In this meeting, federal regulators claimed that Aristotle, and not the university or its faculty, had been operating the exchange. The division also claimed that Aristotle paid a university subsidiary in return for managing PredictIt and that the exchange offered several markets that were not permissible under the no-action letter.
According to the court filing, the university began to include Aristotle in communications between it and the CFTC during the nearly two-month period from the meeting to the issuance of the August 4 letter.
Prior to issuing the August 4, 2022 letter, DMO staff had explained to the University the basis for withdrawing the 2014 no-action letter, as the March 2, 2023 letter confirms," the CFTC’s court filing stated. "Neither Plaintiffs, nor the non-party University (which submitted an unsworn letter to the district court) ever disclosed that information at any point in this litigation to date.”
In Thursday’s letter, the DMO said that the political exchange was supposed to run similarly to one operated by the University of Iowa. In particular, the commission required the exchange to be a small nonprofit organization with fees only covering basic expenses for running the markets.
“However, statements on the Platform’s website indicate that Aristotle was charging a 10% fee on all profits and a separate 5% fee on all withdrawals for so-called ‘costs related to running this site,’” the letter said. “This fee structure appears likely to generate funds far greater than those necessary to operate a small-scale market.”
The letter also revealed 17 markets the DMO claimed PredictIt offered in violation of the no-action letter, which permitted markets on key economic indicators and elections and political events. Markets offered outside the permitted scope include the 2015 Nobel Peace Prize recipient and the number of tweets Donald Trump or Alexandria Ocasio-Cortez would post in a week.
CFTC Opposes Trading Through 2024
Unlike the August letter, the DMO did not indicate when PredictIt should end existing markets. In its court filings, PredictIt and other plaintiffs wanted the existing markets to continue to their natural conclusion. Ending markets prematurely would cause irreparable harm to traders invested in them.
However, based on “persistent violations,” DMO believes PredictIt would continue to break the rules if trading continues through 2024. In addition, it also provided a recommendation on compensating traders.
“This would therefore cause additional unreasonable use of taxpayer resources for the Division to verify that the University has begun to comply with the Letter’s conditions and continue to do so over the next nearly two years,” Thursday’s letter stated. “To the extent the University believes that withdrawal of the Letter would cause downstream injury to third parties, we believe the better course would be for the University, Aristotle, or others to remedy them, if at all, by compensating any injured parties directly.”
Aristotle Responds to CFTC’s PredictIt Claims
Late Friday afternoon, Aristotle issued a statement that said the CFTC’s new letter is proof that the agency acted illegally when it issued the August 4 letter. While this admission of wrongdoing is welcome, the Commission’s new letter is a desperate attempt to escape the consequences of its prior ill-considered action by avoiding judicial review and the ruling we have requested requiring the Commission to treat those affected by its actions fairly,” the company said in a statement.
Aristotle General Counsel David Mason also said the company strongly disagrees with “the CFTC’s characterization of the facts.” He added that the company has been open with regulators and addressing their concerns.
“We are disappointed that the CFTC continues to insist that traders and others impacted by its regulatory decisions have no voice in decisions affecting them,” Mason said. “We plan to continue to fight this prejudiced attempt to shut down this useful market.”
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