Now You Can't Buy Your Crude Oil Futures In $10 Increments On Intrade

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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 dailyarticleabout 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.

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