CFTC Staff Letter 92-04a: No-Action Relief for University of Iowa Electronic Markets

CO MMODITY FUTURES TRADING COMMISSION · 20:13 K STREE1. N.W. WASHINGTON 0 C 20591 (202) 7!.<·8955 (?0?)2!.0·:153< fACSIMILE DIVISION OF TRADING AND MARKETS Pro~ess~r Geoige R. Neumann Professor of Economics · The Un~versity of Iowa Department of Economics Iowa City, Iowa 52242 Dear Professor Ne umann:
Chairman Gramm has· as;..:ed me to respond to your letter to the Commodity Futures Trading Commission (the "Cprrunission"), dated December 5 , -199 1. By your letter, you . r~qu~st , on behalf of the Iowa Presidential Stock Market ( Lhe "IPSM"), information regarding whether t he operation of the IPSM, ao described erei~ , would bring t h e IPSJ-1 u.nde r t he regulatory purview of t he Commission .. . Based upon the representations made ~n your l~tter, as supplemented by telephone conv ersal ions with Division of Trading and !<larkets staff, we understa nd that the facts are as follows . The IPSM is a so-called "political s LOC?k market" whos e purpose is to deter.mine whether markets can aggregate information and predict election outcomes more accurately than the alter a~ivc technology of public opin ion polling. The IPSM operates striclly. for experimental a nd academic purposes . It is .• s.ponsored and operated by faculty of the University of I owa . Neith~r the IPS~ nor the Uu iver sity of Iowa c na rgeo commisAions or .receives · a return in connection wit h its ope r.ation. To dale, nine political ::~ ock market's .have been operated, covering the 1980 u.s. Presidential election, the 1990 Iowa arid Illinois Senatorial election s, Lhe 1990 German P~rliamentary elections (operated in Bonn, Frilnkfu rt , and Leipzig), and the 1991 Dutch, Danish and Turkish elections. The results of these prior studies reveal that these po litical stock markets a ppear to reflect more accurately outcomes of poljtical e lections than public opin ion polls. I n the continued interest o f academic re search, the University of Iov;a j ntcnds to operate the 1 PSM Lo cover the 1992 presidential election. It also intends Lo run a ~arket on the 1992 . democratic party nomination (collectively, the 1992 presidential · election market and the 1992 democratJ c part y nomination market will be referred to al;l the "1992 Harkets "). You anticipate that, for the 1 992 election year,, upproxJmatel y 20 universiLLes will become involve d with the 1992 election year Markets, i nclud i ng Lhe UniversiLy o f Califortl i~ , Los Ang e les, the Californja Ins tiLut:.e o.f Technolugy, Nort:.h.,,escern Un i v e r sj Ly , Lhe

Profes~or Georg~ R. Neumann
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UniV(!r~ity oi Indiana, the Uniyersity of Ariz.ona and tti~ Un~v~rsity of Vir.cjini'i./ The n'?ml;ter of t_raqers partici)?ating ·.w~ll total. fewer · than 1000 ~- : Partl:Cl:pa·nts 1.n. the 1992 MaJ;kets ~1.ll pu~chase a · portfolio ot shares. in poUtical candidates .• · . Individual investors. will invest tnefr own money ·.to participate;.'~arid payoff's' :will'· be deterli'iin.ed _by 'the share of toe pop~lar .vote ~o'ri by ~ach bandidate. Tpe maximu~ investltlent by any single ·part~c'ipan~. is fiye ·hundred .· d<;>llars, but typica1ly., participa!lts ·invest, no ·mo~e·t~'n<twe'nty~ f1:ve dollars and some 1:nvest as ll.ttle as ten dollar.s •:-7 .· . :. . . ·' I • , .. • You describe the interest.issued to.l992 Market investors as one more closely re~embling, a . fut~t:es. contract .. ·than a stock. . In the past, you have conducted th'e ·unitfi!d ·States D)arkets solely in Iowa, and· the ·Iowa Attorney ·General '.s ,office 'llas given you . assurances that. these mBorkets are nat ·.in vi.olation .of Iowa s.tate . law. In 19.92, however, you plan to allow traders from. anywhere in the United States to participat~. Consequently~ _you' are coacerned

• that ·the operation of the 19.92 Markets: ·may. fall within the , regulatQry p1·.rview -of · the Commodity · Exchange 1 Act (the "Act·~) lt and the r~gu lations promulgated thereunder. i
  The 19~2 Markets will be.operated by four professors on the faculty at the University of Iowa. (the ~·operators"). As noted, you represent thal none of the Operators will receive any compensation or other payment 1 directly Or ind_irectly 1 for oper.atiflg the market •, You also represent that none of ,the Ope~atorl!i is otherwise~ required to register with ·the commission nor is any ·of the.· Operators .a:
  business affiliate. of. ·any p·~rson · required to register ·with ·the, Commission • In addition 1 none of· the Op!=!rators or any other person invohr.ed with the 1992 Markets wil1 engage. in ·any advertising in connection the.rewith. Participants primarily ·will be students and .·faculty at the various universities.:
  .Based upQri your representations ·concerning the purposes and· manner of. operation of th.e lPSM and -the 1992. Markets, .. we do n.ot believe that the operation of the 1992 Markets without seeking designation as a contract 11:1arket .or other~ise complying with the .JJ Past Markets at the University. of Iowa have had approximately 2oo traders • . £/ To date, all investments have been significantly les::o than five hundred dollars. J./ Sl 'at 7 u.s~ c. § 1 !lt seq. ( 19 8 a ) . ' ' . Commission rules and regulations referred.to herein are found 17 C.F.R. Ch. I ( 1991). .

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Professor-George R. Neumann
Commodity Exchange Ac.t and the regulations promulgated thereunder 1 or withQut the registration of the Oper~to~s, would be contrary to . the .public in~t:, •. Our conclusion is based upon. the facts tnat; . ailfo)ig ·OtherS 1 itS . Operation is . limited . Solely ·tO aCademiC and exp~rimental purposes and. the_ Operators· receive. no compensation. CQn~equently, . ba.sed upon yqur representations, the· Divisio~ of

• Tra~ing and Mark~ts ':'ill not re?omme~d 'that.:t:h.e Co~iss~on take'any
  enforcement act~on J.n · connect·1.on · WJ.th the operatJ.on · o~ the :1992 Markets based solely' upon the Oper-ators not s~eking designation as a cont;:ra~t; market, r:egistering und.er the Act ,·"r oth¢rwise ~complyi'ng .. with the Act 6r. Commission recjulati~ns ~ · : · . .-. ·· .' · ··. ~.. · .. · . ,.We. do_ not.· ren~e.r a.ny opini9.ri as t,.o wh~'ther ~hE! operation of· . t;:he ·1992. MarketS violates the. pi.ovisipn's .of .any. state law nor·. does :our ,_posit;i.on. excuse ·non ... compliance with any auc.h ·law• · .. :You must . independently confirm ·whether or l}ot the p(lrtic,ipation by institu- .. tions in qthe.r states·· is ·permitted. · · · · This le.tter is based upon the information that has been provided to us and is subject to .the conditions· stated above.;· Any different, changed .or omitted facts or conditions. might.·r.equire us to. reach. a different conclusion. In' this. regard, .we request that
• you. noti-fy us immediately in the .event that the operations of the
  IPSM or the 1992 Markets change in any way from those as represent￾ed to us. Finally, tl.!_ts ·.position . ~.s .. ~h~:t .. qf :·.t~e·. D.iv.isi9.n of. Traping and Markets on1y and de?es .. not .O~C~S.S!lr~ly .. represent the v'lews or-tne-commi:ssion·-o.r any ·other office or ·divis'ion of the cc:lriUiif~sion-. : · ·, · :. ·- · · · · · · ·:·.. · · · · · ""'-'-·--:--·----~---- .
• If you have any questions· concerning· this c,orrespondence,
  please contact me or Tina Paraskevas Sh.ea t an· atto~ney on ·my s~aff, at {202) 254-8955.,. .· · · ·· . TPS/~m cc: Daniel A. Driscoll, Na~ional Futures Association