CFTC Warns Prediction Markets on Flawed Incentive Plan Filings

U.S. commodity derivatives regulators on Aug. 13 issued guidance that raises concerns about incentive programs at prediction market platforms. Like any trading venue supervised by the Commodity Futures Trading Commission, prediction market firms often look for ways to attract large traders and encourage firms to serve as market makers in order to deepen participation and trading volumes. But the CFTC said it is worried about how these practices are taking shape. The regulator warned event contract platforms that the number of filings tied to incentive plans is increasing, and that many of those filings are "procedurally or substantively deficient." That has hampered the agency's ability to determine whether platforms have "adequately notified the terms of the plan and adequately assessed the plan's compliance." The CFTC also said certain features of these reward programs "raise compliance concerns." Rewards targeted at high-volume participants, for example, could encourage them to trade "solely to meet volume targets, thereby increasing the risk of wash trading, prearranged trading, or other fraudulent, manipulative, or disruptive trading practices." Market maker programs — which encourage firms to take either side of the market — are another source of concern. These programs use allowances and rebates to guarantee net income or cover losses, and the regulator said that could also encourage fraud and market manipulation.