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Protecting Private Prediction Markets

By Tom W. Bell and Glen Whitman

My draft paper, Private Prediction Markets and the Law, offers a variety of detailed suggestions about how to protect the former from the latter. Specifically, I offer strategies for avoiding the scope of CFTC regulation, for discouraging liability for illegal insider trading, and for ensuring that a private prediction market does not offer gambling. Because I've already blogged about the CFTC angle several times, I'll pass over that topic. Here, though, is my conclusion about how to guard against illegal insider trading and gambling laws:

Publicly-traded firms subject to U.S. law can minimize the risks of illegal insider trading by either making public all prices and claims traded on their prediction market or by:

• Keeping trading by traditional insiders separate from trading by others;
  Broadening safeguards against illegal insider trading to cover all traders;
  
• Treating the market's claims and prices as trade secrets; and
  
• Seeding the market with decoy claims and prices.

Although the skill-based trading emphasized on private prediction markets should in theory remove them from the scope of gambling regulations, a prudent firm could help to ensure that result by:

• Forbidding traders from investing their own funds in the market; and
  
• Requiring its agents to participate in its market.

As should perhaps go without saying (but as hereby will not), any firm implementing these legal strategies should back them up with ample record-keeping. Each person who trades on a firm's market should, for instance, receive clear notification that the market does not deal in CFTC- or SEC-regulated instruments, and that it does not offering services subject to oversight by any state gambling commission. Better yet, traders should be required to access the market only through a click-through agreement in which, among other things, they consent to that stipulation.

[Crossposted at Agoraphilia and Midas Oracle.]

Full post as published by Agoraphilia on May 21, 2008 (boomark / email).