Bryan Caplan  

The False Advertising of the CFTC

PRINT
Single Parenthood: The Reason ... Mark Carney: Like William of O...
The U.S. Commodity Futures Trading Commission (CFTC) is suing one of my favorite websites and my primary source of news: Intrade.  The CFTC accuses Intrade of:
[O]ffering commodity option contracts to U.S. customers for trading, as well as soliciting, accepting, and confirming the execution of orders from U.S. customers, all in violation of the CFTC's ban on off-exchange options trading.
Probably true.  But the CFTC doesn't merely say, "We're just enforcing the law."  Its press release tries to justify the law they're enforcing:
The requirement for on-exchange trading is important for a number of reasons, including that it enables the CFTC to police market activity and protect market integrity.
"Protect market integrity."  This sounds like it's straight out of the Adverse Selection section of an intermediate micro textbook.  But don't be fooled. 

If off-exchange trading really suffered from adverse selection, consumers would be reluctant to bet on Intrade: "How can I trust Intrade with my money if they're not duly regulated?"  Akerlof explained the whole thing in "The Market for Lemons."

The CFTC's real complaint is that consumers eagerly bet on Intrade because the company exemplifies market integrity: "I trust Intrade with my money because of their reputation, not government regulation."  Reputation: That's the same mechanism, of course, that underlies eBay, Amazon Marketplace, and the whole cornucopia of internet commerce that the mainstream information economist of 1990 would have dismissed as free-market Fantasy Island.

If the CFTC really wants to protect market integrity, it should start by publicly admitting that if the CFTC ever served a useful function, that time has long since passed.  Americans send money to Intrade because Intrade delivers the goods (and produces the positive externality of accurate forecasts in the process!). 

In the information age, firms' reputations are just a click away.  That's all the protection any consumer needs.  The only people the CFTC is "protecting" are their own obsolete employees. 

HT: Alex Tabarrok



COMMENTS (23 to date)
O.T. writes:

The CFTC has rendered itself obsolete today. I hope Congress can start proceedings promptly to strip its jurisdiction down to what it was designed for. They accomplished nothing today for anyone but their own delusional empire-building purposes. I think you hit the nail on the head.

I just wonder who is paying these guys off. Someone felt very threatened by first NADEX and then Intrade, and the CFTC has been on a crusade to take both of them out since.

This agency smells awfully corrupt.

Steve Sailer writes:

The more insider trading, the more accurate a prediction market is. For example, Hollywood Stock Exchange encourages insider trading.

Some Paranoid Guy writes:

[Comment removed for supplying false email address. Email the webmaster@econlib.org to request restoring your comment. We'd be happy to publish your comment. Paranoid or not, a valid email address is nevertheless required to post comments on EconLog and EconTalk. If you can't trust us, we can't trust you.--Econlib Ed.]

Bob writes:

So what commodity are they referring to? Absent one, they have no authority. There are many other option agreements over which they exert no authority, hence they can't merely extend their domain arbitrarily and capriciously.

Bob McD writes:

I am an Intrade investor... never had a problem. My brother had an account with MF Global, regulated by the CFTC... his money disappeared... see the problem?

How about another one... I used to run a securities broker/dealer, regulated by the SEC and NASD (now FINRA)... I finally closed up shop when the required Supervisory Procedures document for our three person firm reached 222 pages, and our NASD examiners were asking to review my personal emails. Meanwhile, Bernie Madoff was sailing through his audits.

"Regulation" sounds good when it is presented in sound bites by the media and politicians, but very few ever see how it punishes and raises the costs of the innocent.

Tom West writes:

I think your confusing results with perceived intentions - and perceived intentions usually matter more.

If an unregulated market runs into real trouble, like fraud, then there's going to be a massive outcry that the government didn't even *try* to protect its populace from these criminals.

On the other hand, if it tried and failed, well, we all understand that the police can't catch *every* criminal... But at least the government tried.

Jason Ruspini writes:

This tone-deaf laissez-faire tack continues to undercut the possibility of real-money prediction markets in the US.

Intrade just had what looked like a sustained manipulation attempt on the POTUS contract for weeks. There are obvious possible externalities that would make most people discount the view that regulation is unnecessary.

Greg Q writes:

Now that InTrade charges a monthly fee, rather than charging on contracts, I don't trust it with my money. So I will shed no tears if it gets destroyed.

Rick Caird writes:

In agreement with Bob McD:

Regulators are always captured by the regulated. They do that with job offers and perq's. The only question with Intrade is "who benefits by pushing them out of the marketplace?".

DonM writes:

The difference between failing and cheating organizations regulated and successful and honest organizations not regulated is the point of the suit.

Not enough people trust their money to the corruptly regulated markets, preferring instead to trust the honesty of the unregulated markets. That reduces the opportunity for graft by the regulators.

They are just using the color of authority to attack a more successful competitor, and incidentally drive business to their corrupt partners.

Nice little business you have there. Pity if anything was to happen to it.

Silas Barta writes:

@Bob_McD: Your experience was better (no pun intended) than mine. InTrade changed the rules on me mid-contract (by changing the metric) one time, and another time kept some of my money without warning when I tried to withdraw.

Obviously, I don't support this action by the CFTC, but it doesn't help one's case when one does the exact things that people cite when justifying more regulatory oversight. I told them as much when I got the email notification about this.

Kevin writes:

Tom West:

I think your confusing results with perceived intentions - and perceived intentions usually matter more.

If an unregulated market runs into real trouble, like fraud, then there's going to be a massive outcry that the government didn't even *try* to protect its populace from these criminals.

On the other hand, if it tried and failed, well, we all understand that the police can't catch *every* criminal... But at least the government tried.

Just like during the financial crisis, right?

Noah Yetter writes:

@Jason Ruspini

You cannot manipulate a prediction market, only participate in it.

(Indeed this is true of all markets.)

Methinks writes:

Bob McD,

I could have written your comment and the regulatory burden is now driving out not just small potatoes like us but also much larger firms with fully-staffed compliance departments.

I only take issue with the Madoff part. Madoff's BD was always legitimate. The Ponzi didn't happen within the BD and was never subject to annual exams or forced to file FOCUS reports. I believe the complaint is that he was never audited.

Methinks writes:

They are just using the color of authority to attack a more successful competitor, and incidentally drive business to their corrupt partners.

Completely agree. However, I don't think the CFTC regulates anything comparable. I can't figure out why it did this except that maybe one of its client firms (let's be honest about who the SEC and CFTC actually work for) would like to launch a competing business and would like to get Intrade out of the way. Like occupational licensing, the real job of the CFTC is to protect politically connected insiders from competition.

Methinks writes:

Bob McD,

FINRA and CBOE now require a managing member to scour financial statements of all employees and their families and even outside FINOPs and their families. Every month. The pretext is that by imposing this massive burden (and it checks that you comply in every exam), FINRA is protecting the firm from front-running by its employees. Soon they'll be protecting you from bad trades by making you ask permission and provide justification for every trade before you're allowed to execute it. Now they just make you justify random trades you already did whenever they run one of their daily random sweeps just to be able to fatten a file and justify their existence.

No amount of attempted manipulation (and Noah's right, of course; markets - particularly liquid ones - cannot be successfully manipulated without the help of the government) can possibly do the damage that the regulatory bodies have done.

Brad D writes:

What a gratifying article - an economist calling a spade a spade. The CFTC, like a majority of all the other alphabet soup federal agencies, is seeking relevancy at the expense of voluntary and peaceful free-market participation.

And what will be done about it?

Nothing.

What will be the straw that breaks the camel's back? When will we decide as a nation that we've had enough utterly useless regulation? What will it take? How much more will Uncle Sam have to press on you - each of you here! to drive real change?

It's death by a thousand cuts, and we all stand by slowly bleeding to death unwilling to even put pen to paper and express our dissatisfaction.

Zach writes:

[Comment removed pending confirmation of email address. Email the webmaster@econlib.org to request restoring this comment. A valid email address is required to post comments on EconLog and EconTalk.--Econlib Ed.]

Jason Ruspini writes:

@ Noah Yetter

So no-one ever has market power.. an interesting theory. I guess the Hunt Brothers were just "participating" in the silver market and the bank traders were just participating in LIBOR, etc.

Jason Ruspini writes:

@ Noah Yetter

So no-one ever has market power.. an interesting theory. I guess the Hunt Brothers were just "participating" in the silver market and the bank traders were just participating in LIBOR, etc.

Methinks writes:

I guess the Hunt Brothers were just "participating" in the silver market

The Hunt brothers were trying to hedge an enormous fortune against the inflation of the 1970's. Worried about the implications of getting off the gold standard, as "any fool can print money", they were looking for a hedge. They started buying silver because a.) in 1973 it was still illegal for U.S. citizens to buy gold and b.) they thought it was a market to easily manipulated by the government.

The Hunts started buying spot silver and transporting it far from the U.S. government's claws to Switzerland. Eventually they bought futures contracts, but always took physical delivery of the commodity. Of course, they were joined by a bunch of other panicked inflation hedgers and silver prices steadily climbed higher. As did gold, btw (which the government so magnanimously allowed the serfs to finally own in 1974). And many other commodities. Were the Hunts just manipulating all that?

Long story short, the other side of their futures trades were members of the CME and the CRIMEX (aka, the COMEX). Those boys had powerful connections in washington and they were getting their behinds handed to them daily by the market. The Hunts happened to be the largest longs in silver. The cronies convinced Volcker to convince the banks to cut off credit to the Hunts and the CFTC to allow the exchange to prohibit any buy orders unless they're buy to cover and they jacked up margins. In other words, it is the government and its cronies that manipulated the silver market. The Hunts were just big buyers and you can't guarantee profit from that kind of "manipulation".

A little word to the wise: If you've bought enough size to move the market in one direction, you have enough size to move the market in the other when you try to unwind your position. And taking physical delivery is the least smart thing any novice with delusional dreams of manipulation can do. Attempting manipulation with futures contracts dumped before you have to take delivery is only marginally less crazy. The only way you can successfully manipulate the market is if you can a.) print money or b.) change the rules. Guess which entity has the monopoly on that.

Jason Ruspini writes:

Methinks:

If the Hunt Brothers were only trying to hedge inflation, why weren't they more active in the larger gold market, which was more liquid and more difficult to move?

Because the smaller market was, precisely, easier to corner? I believe that was an argument that prosecution made at the time.

Mike writes:

LIBOR is not a market, so I'm not sure how it's relevant to a discussion of market manipulation.

Comments for this entry have been closed
Return to top