Are political futures markets illegal?

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April 27 2007 5:31 PM

Are "Political Futures" Illegal?

The rules for gambling on political elections.

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Illustration by Rob Donnelly. Click image to expand.

In the run-up to the 2008 elections, Slate's "Political Futures" column is pooling predictions from Web sites that allow users to bet on the outcome of the presidential and congressional races. Isn't it illegal to take bets on elections?

Yes. Some states have laws that specifically outlaw gambling on political elections. And all states prohibit any type of large-scale gambling that's not explicitly permitted in their gambling statutes—like sports betting in Nevada. But since these political futures markets are Web-based, any gambling that takes place on them would likely fall under federal jurisdiction.

From that perspective, it's not exactly clear whether the election markets are gambling outfits or whether they're more like commodities exchange markets. Slate currently features election action from three online sites: NewsFutures, Intrade, and the Iowa Electronic Markets. News Futures users bet play money on the presidential races, so they're unlikely to be considered real gamblers. (Same thing at Casual Observer, which will be added to the roundup later on.) At Intrade, visitors can bet real cash—but the company is located in Ireland, which has looser gambling laws. On the IEM, traders can wager up to $500 of real money; it's the only U.S.-based political futures market that receives cash bets.

Why is the IEM allowed to accept cash? The government has said it won't prosecute. The Iowa markets were started in 1988 as a teaching aid at the University of Iowa's Tippie business school to give students experience in a real futures marketplace. In 1993, the not-for-profit entity received a "no-action letter" (PDF) from the Commodity Futures Trading Commission, which regulates certain markets associated with financial, commercial, or economic interests. CFTC staff said it would leave the IEM alone as long as it operates under certain stipulations—that it exists for academic purposes, doesn't engage in advertising, and administrators don't profit from it. No other political prediction market in the United States has gotten the same deal.

The CFTC may have issued a no-action letter to the Iowa markets, but no one knows for sure if it has blanket jurisdiction over all U.S. prediction markets. Those that do fall under CFTC purview might have some immunity from state and federal gambling laws. But others could be in violation of anti-gambling statutes. That's why U.S. futures Web sites—which predict everything from the weather to the likelihood that a celebrity couple will get hitched—mostly stick to play money.

Meanwhile, overseas futures markets can also get in trouble. The Justice Department has been cracking down on foreign-based betting Web sites in the last couple of years, arguing that the Federal Wire Act makes Internet gambling illegal. *  Ireland's Trade Exchange Network, which owns Intrade and TradeSports, was fined by the CFTC in 2005 for illegally soliciting U.S. customers to trade on its commodities markets.

Got a question about today's news? Ask the Explainer.

Explainer thanks Michael Gorham of the Illinois Institute of Technology, Robin Hanson of George Mason University, and James Overdahl of the CFTC. Thanks to reader Marcos Huerta for asking the question.

Correction, April 30, 2007: This article originally and incorrectly stated that the founders of the online gambling site Bodog were arrested and that the company is based in Costa Rica. The founder was not arrested, and Bodog has relocated to Antigua. (Return to the corrected sentence.)

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