As the U.S. Commodity Futures Trading Commission (CFTC) takes a greater role in regulating prediction markets, it’s warning firms not to display prices for event contracts as if they were betting odds.
In a letter to firms operating prediction markets, along with futures firms that are involved with trading event contracts, the CFTC’s division of market oversight and its market participants division called on firms to “display clear and accurate pricing information for derivatives products.” It also warned that pricing contracts in formats used by gambling bookmakers is “likely to mislead” traders.
The regulator said that its staff is “concerned” by reports of certain CFTC-regulated contracts being marketed in the “American odds” format favoured by bookmakers, instead of quoting prices in nominal or percentage terms that reflect market pricing.
The use of this sort of potentially misleading pricing information for regulated products risks violating federal law prohibiting the use of manipulative devices, it warned.
“Displaying pricing information for derivatives products in bookmaker-style odds is likely to mislead market participants about the nature of the transaction into which they are entering and may deprive users of access to indicia of market depth and pricing impact,” it said.
Additionally, the practice of quoting contracts using betting odds could also create confusion for investors, and drive them into higher-margin products, it said.
“Market participants should display information, including pricing information, that indicates to consumers when a product is an event contract on a CFTC-regulated exchange, rather than a higher-margin, non-market-priced bookmaking product,” the regulator said.
It also called on firms to review their pricing practices, and their marketing, to ensure that they are upholding regulatory standards and not misleading investors.