(CN) — A market set up by a New Zealand university for educational purposes now turns over millions in wagers each year on political bets such as who will win the 2024 U.S. presidential election. The U.S. Commodity Futures Trading Commission has advised it to shutter.
The PredictIt website was born through a partnership between its creator American businessman John Aristotle Phillips and Victoria University in Wellington, New Zealand.
It launched in 2014 after the university received the blessing of the Commodity Futures Trading Commission’s Division of Market Oversight via a “no-action letter.”
In the letter, CFTC staffers highlighted the university’s assurances the betting market was meant for educational purposes—it claimed it would use the results for teaching materials in statistics and finance courses and as data for research papers — and would not turn a profit.
PredictIt also agreed to cap bets for each user at $850 for any given event — which it calls “markets” and “contracts,”— and not allow more than 5,000 bettors per event.
The site is now selling shares, i.e. taking bets on future political events, for 14 markets, including the Democratic 2024 presidential nominee (Joe Biden was listed at $0.58 early Wednesday afternoon and California Governor Gavin Newsom at $0.15) and the 2024 presidential election winner (Biden was trading at $0.34 and Florida Governor Ron DeSantis at $0.30).
Shares’ value changes over time corresponding to the market’s estimate of the probability of an event taking place and investors are free to sell them, according to PredictIt.
If they keep their bets going until the event occurs and their prediction is correct, PredictIt redeems each of their shares for $1.
While most of the site’s 80,000 users place small-dollar bets for fun, some have quit their jobs and rely on PredictIt as their main income source, investing tens of thousands of dollars in bets on the site that turns over millions in wagers each year.
But the CFTC’s Division of Market Oversight threw PredictIt’s future into doubt in August when it withdrew the university’s no-action letter, determining it “has not operated its market in compliance with the terms of the letter,” and advised the institution all listed contracts and positions on PredictIt should be closed and liquidated by 11:59 p.m. Eastern Standard Time on Feb. 15.
A group of PredictIt users, American professors who use it for data and two U.S. companies who manage it, including founder John Aristotle Philips’ firm Aristotle International Inc., sued the commission in September in Austin, Texas federal court.
They claim the agency violated the Administrative Procedure Act by providing no details about Victoria University's alleged violations or why it believed closing the market was the appropriate remedy.
With the drop-dead deadline fast approaching and U.S. District Judge Lee Yeakel, a George W. Bush appointee, declining to rule on their motion for a preliminary injunction, the plaintiffs appealed to the Fifth Circuit in December, a month in which they say 2,000 PredictIt traders, fleeing the sinking ship, withdrew all their funds and closed their accounts and trading volume dipped to 24% of its long-term averages.
But the New Orleans-based appellate court staved off PredictIt’s demise on Jan. 26, granting the challengers an injunction allowing the market to continue operating passed Feb. 15 pending resolution of their appeal.
Two Fifth Circuit judges, both Donald Trump appointees, signaled in an expedited hearing Wednesday they will side with PredictIt’s backers.
Kyle Druding, assistant general counsel of the CFTC, downplayed the significance of issuing and withdrawing no-action letters, which the commission argued in briefs are acts of prosecutorial discretion unreviewable by courts.
Druding stressed it is up the five-member commission, not the staffer who issued the letters, to decide whether to take enforcement action, which would be a lawsuit seeking civil penalties but could include referral to the Justice Department for potential felony charges for violating the Commodity Exchange Act.