Prediction Market Firms Contest CFTC Limits on Affiliate Trading
CFTC proposal requires independent surveillance and last-priority order book status for prediction market affiliates. Operators including DraftKings, Underdog and Novig argue this exceeds agency authority under the Commodity Exchange Act and will harm liquidity. CME and Sporttrade counter that outright bans or 20% ownership caps are needed. (58 words)
SCCG Take — The comments expose a regulatory gap: without clear cost-benefit grounding, final rules risk driving up operator expenses and reducing market depth. Regulators must weigh liquidity realities against conflict controls to avoid unintended contraction in U.S. prediction markets.
Prediction market operators that once emphasized their federal oversight now sharply contest the CFTC’s proposed rules on affiliate conflicts. The agency wants independent surveillance of affiliated trading desks and last-priority order book placement for those entities. Critics say the measures misread the Commodity Exchange Act and will damage liquidity.
Affiliate Rule Controversies
The CFTC identified inherent conflicts when a parent owns both an exchange and a betting entity. Its remedy stops short of a ban but requires affiliates to operate in a bona fide market-making capacity only. Novig called this focus a speculative risk in its 38-page letter, the longest received. Underdog chief legal officer Nick Lundgren wrote that mandating subordination adds little or nothing to protecting competition and market integrity while imposing substantial burdens that may ultimately land on the customers the commission seeks to protect. He added the rule likely does not fall within the commission’s authority under the Commodity Exchange Act.
DraftKings said the rules could force its market-making arm into a binary choice of ceasing operations or restructuring the corporate relationship, both options imposing significant costs. Fanatics urged the Commission not to finalize the rule as proposed. Kalshi offered to cap its affiliated trading arm at 5% of all quarterly exchange volume. Polymarket, which has no active affiliated trading arm, said the rule correctly recognizes the heightened conflicts of interest that can arise in the affiliated proprietary trading context and the need for additional safeguards.
Calls for Stronger Limits
CME Group and Cboe Global Markets told the CFTC an outright ban on affiliated trading arms would be preferable. CME cited the FTX-Alameda collapse and noted significant pressure to favor internal exchange interests in times of market stress. Sporttrade proposed a 20% cap on direct or indirect ownership of any market-making entity and warned that without a strict structural ownership limitation behavioral rules cannot prevent a vertically integrated exchange from using its exchange fee schedule as an economic moat to drive out independent liquidity providers. Susquehanna International Group, which owns 45% of the Rothera exchange, asked the CFTC not to treat that stake as an affiliation because it does not control the exchange.
As reported by Sportico, the CFTC will review these submissions over the next two months. The volume and intensity of the responses signal that overly prescriptive limits could force operators to absorb higher compliance costs or reduce liquidity provision, outcomes that would ultimately narrow customer choice in an emerging market still seeking regulatory clarity.
Reporting: Sportico
Generated by SCCG’s automated editorial system from published source reporting. SCCG Management holds editorial responsibility.
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