EVENT MARKET TRANSACTIONS ARE NOT GAM~~~~~p:_ 8 p~,1 g: I4S 

A COMMENT IN RESPONSE TO THE CFTC'S e.." ·''·''- '

1 

REG~~~~6~~ ~~~~~~~~~ ~~~~:~~g6~~am. OF n;E SECRETAR\M 

by 

Mark L. Bender1 

COMMENT 

July 7, 2008 

I. Introduction 

A. Definitions 

For purposes of this Memorandum the following definitions apply: 

Act means the Commodities Exchange Act codified as Title 7, Chapter 1 of the United 

States Code. 

Commission means the Commodities Futures Trading Commission. 

B. Background 

The potential societal value of Event Markets is so well established in both theory and 

practice that it is no longer open to serious question. However, a principal concern of 

some commentators is the perception of a disquieting similarity between Event Markets 

and traditional forms of gambling such as sports betting and lotteries. 

While the public policy merits of anti-gambling laws continue to generate spirited debate, 

there is little doubt that for the foreseeable future such laws will remain in effect in the 

United States at both the state and federal level. Event Markets will never realize their 

promise if their legality under these statutes remains in doubt. 

It seems clear that the Commission has the regulatory authority to preempt the 

application of state gambling laws to Event Markets. However, absent a rational basis for 

distinguishing between Event Markets and gambling, it will be difficult to justify 

exercising this power. 

Thus, in considering how Event Markets should be regulated, the threshold question is: 

are Event Markets simply another type of gambling within the meaning of anti-gambling 

laws? This is the question addressed by this Comment. 

II. The Legal Delmition of Gambling 

Laws that regulate or prohibit gambling commonly define "gambling" to be any activity 

that includes three elements: a wager, for a prize, where the outcome is determined by 

chance. For example, New York State's penal code defines gambling as follows2

: 
A person engages in gambling when he stakes or risks something of value 

upon the outcome of a contest of chance or a future contingent event not 

under his control or influence, upon an agreement or understanding that 

he will receive something of value in the event of a certain outcome. 

Read literally this standard three element test for defining gambling encompasses 

activities most people would agree are unlike traditional forms of gambling such as 

casino games, lotteries and the like. For example, the net economic benefit from buying 

insurance or trading commodities or securities may owe more to chance than the sagacity 

or skill of the purchaser/trader. Yet few policy makers would want to treat such activities 

as "gambling" in a legal sense. For this reason, statutes prohibiting or regulating 

gambling often specifically exclude from their application such activities. 

III. Event Markets Under the Three Element Defmition of Gambling 

Event Market transactions include each of the three elements of gambling under the 

traditional legal definition: the contract price, the chance for a monetary payout, and gain 

or loss determined by the uncertain outcome of a future event. However, Event Markets 

are a recent innovation and known by a relatively small community consisting largely of 

experts and academics. It is not surprising that gambling laws - most of which were 

adopted many years ago - do not carve out Event Markets from the legal definition of 

gambling. 

IV. How Event Markets Differ From Gambling 

"Chance" by its nature requires reference to a future event whose outcome cannot be 

known with certainty. Most gambling activities rely on future events that are contrived, 

trivial and immediate. That is, a gambling event is (i) created and conducted by the game 

organizer rather than a product of nature or independent human activity; (ii) without 

independent social or economic significance; and (iii) short-lived, with an outcome 

known within a very short time (usually a few minutes or even seconds). 

Casino games (including card games such as poker and blackjack, dice games such as 

craps, wheel games such as roulette, and mechanical games such as keno and slots) all 

share these characteristics. Most lotteries also have these three characteristics, but the 

initial time horizon is usually a few days rather than a few minutes. 

In contrast, Event Market transactions involve future events that are independent, 

significant and long-lived. Governmental election results, weather events, a nation's 

possible resort to military action or the dividend to be paid by Microsoft are typical of the 

future events underlying Event Market contracts. These events occur (or not) 

independently of both the contract market and the contract parties. These events have 

consequences far beyond the economic gain or loss of the contract parties - they impact 

thousands or millions of people. Finally, these events usually have initial time horizons 

of weeks, months or years. These differences between Event Market transactions and 

gambling are significant in two ways. 
First, Event Markets perform the socially useful function of information aggregation. 

Event Markets do this because Event Market contracts (i) are based upon real-world 

events that are independent of both the Event Market operators and the contract 

participants and have social or economic significance, and (ii) have a longer time horizon 

that facilitates the discovery of hidden but valuable information about the underlying 

event will be discovered. 

By contrast, the primary reason why most people gamble is for entertainment. 

Gambling's contrived eve11;ts (the roll of the dice, the turn ofthe card, the spin of the 

roulette wheel) yield only the most trivial information. There is nothing of social or 

economic value to discover and aggregate. But for the entertainment value of roulette or 

craps, no one would care what number resulted from a spin of the wheel or a roll of the 

dice. Similarly, gambling events have a short time horizon because that tends to increase 

the volume of gambling by (a) increasing its entertainment value, and (b) increasing the 

number of events upon which wagers can be made within a given time period. 

Second, gambling's contrived, trivial and short-lived nature increase the risk that it will 

lead to an increase in the addictive, compulsive or other abusive gambling pathologies 

(and their attendant negative social effects) which are the impetus for most anti-gambling 

laws. The atmosphere created by gambling operators (e.g., bright lights of the "strip", the 

idealization of the "high roller" persona, and the appeal to the adoption of an "anything 

goes" attitude ("what happens in Vegas stays in Vegas"), is designed to heighten the 

excitement and adrenalin rush that encourages larger and more frequent betting. 

By contrast, Event Market participants are much less likely to suffer from these 

behavioral pathologies. Event Market contracts focus on real-world events of intellectual 

interest to the contract participants. With time horizons of months or years, Event Market 

contracts are hardly vehicles of immediate gratification. Thus, while investing in Event 

Market contracts may provide some entertainment value, it is far removed from the 

celebration of excess that is the hallmark of the gambling industry. The aspects of 

gambling that hold the greatest risk for encouraging abusive behavior is quite remote 

from the Event Market industry. A contract on the possibility of a hurricane landfall in 

South Carolina is unlikely to generate day dreams of James Bond at the baccarat table. 

VI. Event Markets and Sports Gambling 

Professional sporting events occupy a gray area in distinguishing between gambling and 

Event Markets. The Super Bowl is not contrived by a gambling operator like roulette at a 

casino. Further, the game is arguably non-trivial since its outcome does in fact affect 

large numbers of people and can have significant economic consequences. Finally, Super 

Bowl winner contracts could be offered many months in advance of the event. 

Consequently, it is not unreasonable to argue that at least some contracts on sporting 

events should also be exempt :from gambling laws. 

However, a key difference between sporting events and events like political elections and 

weather forecasts is that sporting event outcomes are far more susceptible to corrupt 

influence because a single individual (whether a player or a referee) may have the power 
to affect an outcome. This fact alone is sufficient reason to prohibit as a matter of 

prudence and public policy trading in sporting event contracts. 3 

Sports related trading that does not carry the risk of promoting corruption should 

probably be permitted. Thus, the corruption exception would not seem to be applicable 

to sports related contracts that are not tied to individual games, tournaments or seasons 

(e.g., will Barry Bonds be inducted into the Hall ofFame during his first year of 

eligibility) and should be permitted. · 

VII. Conclusion 

Event Markets are concerned with future events of social or economic significance that 

are outside the control of the Event Market operators and participants. The contracts 

traded on Event Markets have time horizons of sufficient length to allow the discovery of 

hidden information related to such events. Event Markets appeal to intellectual interests 

rather than emotions and entertainment. These differences imbue Event Markets with a 

societal utility that is missing from gambling and justifies very different legal treatment. 

1 The author is an attorney (J.D. Harvard Law School, 1976) in private practice in South Carolina with the 

law ftrm ofNexsen Pruet, LLC. 

2 New York State Consolidated Code; Penal Section 225 

3 As the Commission has already stated, similar prohibitions may be adopted for public policy reasons, e.g., 

event contracts on the possibility of political assassinations.