CFTC Warns Prediction Markets Over Trading Incentive and Market-Maker Programs

The U.S. Commodity Futures Trading Commission (CFTC) has warned prediction market operators that certain trading incentive and market-maker programs could increase the risk of market manipulation and other prohibited activity.

In guidance issued Wednesday, the derivatives regulator said it has seen a rise in filings from designated contract markets (DCMs) seeking to introduce incentive programs designed to attract high-volume traders and boost liquidity. However, the CFTC said many submissions have been “procedurally or substantively deficient,” making it difficult for regulators to determine whether the programs comply with existing requirements.

The agency highlighted particular concerns about rewards tied to trading volume. While such incentives can increase prediction market liquidity and participation, they may also encourage traders to execute transactions primarily to meet volume thresholds. According to the CFTC, this could raise the risk of wash trading, pre-arranged transactions and other fraudulent, manipulative or disruptive trading practices.

Market-maker incentive programs are also facing increased scrutiny. Prediction markets commonly encourage professional trading firms to provide liquidity by maintaining orders on both sides of a contract. However, the regulator warned that arrangements involving stipends, rebates or guarantees covering market-maker losses could create incentives for improper trading behavior.

The warning comes as the CFTC takes an increasingly prominent role in shaping the rapidly expanding U.S. prediction markets industry. The regulator has supported federal oversight of event-contract platforms amid legal disputes with states seeking to apply local sports betting laws to their operations.

In June, the CFTC proposed its first dedicated U.S. prediction markets rule, including a framework for reviewing event contracts. The agency has also relied on guidance and advisories to clarify how existing DCM regulations apply to prediction market platforms.

In July, the CFTC separately cautioned operators against using overly standardized or incomplete contract certification filings. The latest guidance signals that while the regulator continues to support the development of regulated prediction markets, platforms must ensure that programs intended to increase trading volume and liquidity do not undermine market integrity.