Like a lot of people I got an email yesterday telling me to close my Intrade account. This will not be a problem for me because:

Now I know it looks like I was terrible at predicting the election, but the real explanation is of course that I was astutely predicting the end of Intrade and managing my account to a level appropriate for that outcome. Though I assume there’ll be a $20 bank transfer fee to get those twenty cents out.

This CFTC suit is weird, huh? It’s effectively shut down Intrade for allowing US citizens to make illegal options trades, but its theory is a bit murky. One obvious thing about Intrade is that it is a little illegal to bet on U.S. elections and Oscar winners and all the other things you can bet on on Intrade, because it is a little illegal to bet on anything. This is America; you’re just not supposed to bet on things.

Except the things that the CFTC is willing to let you bet on.1 That’s a weird grab bag; you can bet on gold and orange juice and pork bellies and interest rates but not … well, not onions, but more relevantly, not elections. The CFTC is not a fan of election betting; earlier this year they rejected a request to allow trading of political event contracts on a derivatives exchange. And of course Intrade is for betting on elections, so of course the CFTC wants to shut them down.

Except that the CFTC isn’t suing Intrade for letting you bet on elections; it’s suing Intrade for letting you bet on the things that the CFTC lets you bet on. Go read the CFTC complaint; it doesn’t mention elections. The CFTC’s problems are with “binary options betting on the future prices of gold and crude oil, and changes in the U.S. unemployment rate and U.S. gross domestic product figures.” Which are just fine for betting on. Just not, it seems, on Intrade.

What is going on here? Why shut down Intrade right after the election, and why avoid any mention of its political markets? I have no idea but here are two guesses. One is simplicity: while you are clearly allowed to bet on crude oil, you are also pretty clearly only allowed to do so through the CFTC’s regulatory framework. It is plainly illegal, or as plain as these things get, to sell commodity options off an exchange, except subject to one of various CFTC exemptions, including selling those options to “eligible contract participants,” which in turn include various institutions plus individuals who have “amounts invested on a discretionary basis, the aggregate of which is in excess of” $10 million (or $5 million for hedging transactions). Intrade is not a regulated exchange, apparently2 didn’t bother to check if its investors were ECPs, and allowed trading in binary options on things that are obviously commodities (gold, crude) as well as things that are “excluded commodities” of the sort where the CFTC has a long history of regulation and has approved contracts that trade on commodity exchanges.

Those things are clearly in the CFTC’s purview, and if you allow US trading of them outside of CFTC control, they can get you, fairly straightforwardly. Election markets – which the CFTC has rejected as not being the sort of commodity contract it handles – are a bit murkier. You’ll note in this regard that the CFTC’s complaint doesn’t ask to shut down Intrade – just to ban it from trading commodity contracts, whatever that means – but that it had the effect of immediately shutting down Intrade in the U.S. The CFTC may not be able to prove that election contracts are commodity contracts, but Intrade will have trouble proving that they’re not. The CFTC never has to get into the dirty and unpopular-with-Nate-Silver business of shutting down the election markets; they’re just shutting down this here unlicensed crude oil market. The election markets are their own business.

One other guess is that there is some sort of rough market segmentation going on in the CFTC’s addled minds, and that they’re not going after Intrade specifically over its election markets because they’re actually not that bothered by them (or by their likely successors). The CFTC banned exchange-traded election contracts because it really doesn’t want big institutional money to trade on elections, for reasons that are obvious enough to the CFTC though perhaps mystifying to others.3 On the other hand, if you want to punt with a little bit of your money on Rick Perry, go right ahead, the CFTC won’t explicitly stop you. (You still can, apparently, at Iowa Electronic Markets. Not on Rick Perry specifically, he’s long gone, but you know what I mean.)

On the other other hand, if you want to punt with a little bit of your money on light sweet crude, it’d better be at least $43,000 worth of your money,4 or else you’d better be an eligible contract participant with ten million investable dollars. Then you’re good to go. Or alternatively go through an ETF, which for a small fee and some opaque tracking risk will give you very generic vanilla exposure to light sweet crude or a few other commodities of your choice.

This may read too much into the CFTC’s action, but at some level you can understand the appeal of that market segmentation. The CFTC has its roots as a defender of markets that let commodity producers and consumers to hedge their risks, rather than an overseer of exuberant gambling on oil prices. Letting random individuals bet $100 on a – to be fair – somewhat exotic short-dated binary option on crude prices seems contrary to that mission; you could just about imagine having legitimate consumer-protection worries about that sort of contract.5 Letting random individuals bet $100 on an election – an event that is naturally binary and that everyone kind of understands – seems less troubling. But letting people with an actual business interest in politics bet millions on an election, I guess, has troubles of its own.

Intrade Bars U.S. Bettors After Regulatory Action [DealBook]
ATTENTION U.S. CUSTOMERS [Intrade]
CFTC Charges Ireland-based “Prediction Market” Proprietors Intrade and TEN with Violating the CFTC’s Off-Exchange Options Trading Ban and Filing False Forms with the CFTC [CFTC, and complaint]

1. And maybe poker.

2. I use “apparently” loosely; they didn’t check with me!

3. You can read those reasons here and I recommend doing so because they are bonkers. When the CFTC says things like “the unpredictability of the specific economic consequences of an election means that the Political Event Contracts cannot reasonably be expected to be used for hedging purposes,” is there any possibility that that could be true? I mean, the specific economic consequences of everything are unpredictable, but zillions of dollars changed hands in the stock market alone based on election expectations. Go find a Wall Street Journal from the past two months and read the daily article about how people are dumping their stocks because they’re worried about dividend and capital gains rates going up in a second Obama term. “Cannot reasonably be expected to be used for hedging purposes,” CFTC, honestly, shut up.

But I digress! The interesting concern is that “the Political Event Contracts can potentially be used in ways that would have an adverse effect on the integrity of elections, for example by creating monetary incentives to vote for particular candidates even when such a vote may be contrary to the voter’s political views of such candidates,” which is also dopey if you read it literally, but if you read the word “vote” to mean not “vote” but rather “buy ads and stuff to promote a candidate on whom you have a lot of money riding” then you could just about imagine worrying about it. How much more evil would [the Koch brothers / George Soros] be if they could make money directly on their guy winning? Though of course they can currently make lots of money indirectly, so I don’t find this concern all that compelling, but I can sort of see why the CFTC would.

4. 500 barrels in the e-mini contract times $87ish per barrel.

5. Here, on the other hand, you can find a somewhat absurdist-libertarian argument that people flock to the small illiquid binary-option commodities markets at Intrade, rather than the vastly bigger and more liquid vanilla commodities markets provided by the commodity exchanges, the ETFs, etc., because they trust Intrade more. Maybe the tiny minority who use Intrade for their commodity trading do trust it more than they trust iShares or whatever, who am I to judge, but it seems to me that if you’re in the small-money pool that trades a more exotic product in much tinier sizes than what the big-money pool trades, you probably aren’t there because it’s a better-regulated, more transparent, more efficient, or otherwise better market. But if the point is “it’s not like CFTC regulation is all that hot either” then, yeah, fair enough.

21 comments (hidden for your protection)
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Comments (21)

  1. Posted by Guest | November 27, 2012 at 12:52 PM

    Well. I certainly bet wrong that Matt would use a chart in this post

    - UBS DealBreaker Quant

  2. Posted by ggg | November 27, 2012 at 1:16 PM

    Try to use 25% less words

  3. Posted by anon | November 27, 2012 at 1:19 PM

    Pork Bellies were discontinued last year due to a lack of volume/obsolescence resulting from transformation within the underlying industry. If only CME had a nickel for every time that product has been employed in descriptions of futures markets.

  4. Posted by RonSeanPaul | November 27, 2012 at 1:23 PM

    this was actually a great explanation of an absurd situation

    +1 on mentioning Rick Perry

  5. Posted by hhh | November 27, 2012 at 1:44 PM

    Try to use fewer incorrect words.

  6. Posted by Texashedge | November 27, 2012 at 1:46 PM

    I think you can blame Winthorp for that

  7. Posted by Guest | November 27, 2012 at 1:54 PM

    We are looking forward to the increase in volume and advancement of our underlying industry.

    [Redacted]
    Human Clone Farmer / Futures Trader

  8. Posted by DealBroker | November 27, 2012 at 2:22 PM

    I'd love to get GeezerOilTrader's take on this…

  9. Posted by CME | November 27, 2012 at 3:37 PM

    This is an unusual headline in that a tick in WTI is, in fact, 10$.

    The pork belly contract has been delisted for more than a year now, so time to drop that from your introductory schtick whenever and FCM or commodity related issue catches your eye.

    Footnote 4 ?? are you unfamiliarr with the concept of margin as it relates to futures trading ? Not that anyone trades mini crude, but the overnight margin is 3k ish, and as it is not deliverable, 43K figure is of no relevance.

    Futures, Futures brokerage, Commodity trading is not a strength of this writer

  10. Posted by PermaGuestII | November 27, 2012 at 4:01 PM

    It… Was… The… Dukes!

  11. Posted by PermaGuestII | November 27, 2012 at 4:02 PM

    Humor is not a strength of this ^ one.

  12. Posted by agreatdaytothink | November 27, 2012 at 4:15 PM

    Not one to judge, but you're kind of being a bully.

  13. Posted by Guest | November 27, 2012 at 5:15 PM

    Why's your writing all messed up?

  14. Posted by GeezerOilTrader | November 27, 2012 at 5:51 PM

    First of all, there have been derivatives and derivative market things happening around commodity markets since the beginning of time. Like women having missionary sex with fat RBOB traders, some survive; some don't. And goddammit, back in the 80s when we traded real fucking oil and not all this basis papered Coleco crude, we grooved to "Back in the Gangbang" by the Pretenders and fucking phrase "tail Vega" referenced a hot scheduler's piece of shit Chevy in EZ Serve's parking lot off North Belt. Where was I? Oh, derivative markets. Well I've got a newsflash for all you MENSA members out their trading anything but onions: One of the first references to a derivative is in the Book of Genesis, Chapter 29. It seems some poor feller named Jacob purchased an "option" for the right to marry a hottie named Rachel from a meat trader named Laban. This option was a 7-year deal to work for Laban and get Rachel as the payoff. But, sure as you-know-what, Laban "walked" on the original deal –like natural gas traders are wont to do— and was the first recorded default on a derivative. Now you Dodd-Frank consultants will say that the deal was a swap. Laban made Jacob marry another daughter, Leah, instead of Rachel. Jacob was a well meaning dumbass and probably had descendants working for Hill Petroleum back in the day because he contracted for ANOTHER option of 7 years labor to marry Rachel at expiry. From the description of that deal walking Laban, he probably had bloodline heirs working for Coastal States many generations later on. So, it's not uncommon for derivatives and their marketplaces to have troubles from time to time. Take the gasoline business. Please. Those fuckers changed the name of gasoline to RBOB. I guess product traders back then were wearing their support hose too tight and cutting off blood flow to their brains to name a pristine product like gasoline to RBOB. Back in the fucking 1980s when we sent out Xmas cards and we wrote our fucking names on those sons of bitches and didn't have our signature inked on in advance, the only time you ever heard "RBOB" was when the Apco guys wanted to know "RBOB and you coming to the gangbang later tonight after the OKC Oilman's Club meeting?" For example, I'm sure those white belt wearing fuckers at Cosden will be out chasing pussy in Mentone, TX, on the day their pre-printed well fucking wishes from our firm arrives at their office. And that hottie that used to run a part of Charter will probably be sitting nude out on Padre Island putting a back brush to her muff the day our personally signed Xmas card gets delivered to her firetrap on Bering Street, stuck in her mailbox with adverts and urologist bills. Back to that Intrade thing: you know oil trading participants have, -like Intrade- been doing pools and bets on EIA data, SemGroup's bills for Russian art, when Vitol will hire "dancers" to do shadow art again during the seasonal holidays coming up. We just don't do them electronically. Like real people we do it in person. Sometime the weather is just too bad down here to get out and wager on such bullshit. For example, one of the numbnuts on the natgas desk was telling us about some relationship trouble he has been having with his girlfriend who schedules West African crude oil for a big commodity company. Seem like the other day it was wet and nasty and dangerously foggy in southeast Texas when he woke up real early in the dark to go duck hunting. He says he snuck out of the bed he was sharing with his scheduler girlfriend, got dressed in his townhouse's laundry room, gathered the decoys, shotgun and shells, rain gear and his dog and started driving east but it was just too fucking foggy and miserable to go on. So he turned around and headed back to the townhouse. Again, he snuck in, shucked his duds, and slid into bed with his honey. He spooned up real close to her with a diamond cutter and licked her ear and whispered as lightly as he could, "It's just too nasty out there this morning…" His girlfriend didn't move and replied, "…And can you believe my boyfriend went duck hunting out in that weather?!?"

  15. Posted by EQ in Dallas | November 27, 2012 at 8:21 PM

    You must like Star Wars

  16. Posted by EQ in Dallas | November 27, 2012 at 8:32 PM

    Whose the contract holder for the massive dick that just showed up?

  17. Posted by güest | November 28, 2012 at 7:52 AM

    HMD

    - Nelly

  18. Posted by Louis Bacon | November 28, 2012 at 2:04 PM

    dude i think he is making fun of the CME here…. satire? poorly executed satire but then my comments get thumbs down too

    and um, "CME"…. the "CME" does not understand margin. Try shorting a gasoil crack and laughing all the way to your SPAN machine as it tells you that you have the same risk as being long it.

  19. Posted by Louis Bacon 2 | November 28, 2012 at 2:07 PM

    i am sorry, i deserve more thumbs down, gasoil is an ICE contract. I will go self flagellate. but seriously RBOB cracks have the same goddamn issue

  20. Posted by Pninen | November 28, 2012 at 11:05 PM

    Shame on CFTC. They ignore illegal conversion of $1.5 Billion of customer’s money at MF Global, and spend their time shutting down tiny intrade.

    All CFTC commissioners must resign in disgrace.

  21. Posted by top forex brokers | May 12, 2013 at 11:10 PM

    Hi Matt! Thank you for this interesting article. I enjoy reading it and i learn from your post. Definitely share this on my social network account for reference.