Received CFTC ~r~s Section r;r;ort 

September 2, 2008 

VIA E-MAIL 

David A. Stawick 

Secretary 

Commodity Futures Trading Commission 

1155 21st Street, N.W. 

Washington, D.C. 20581 

,_, 

COMMENT 

Re: Concept Release on the Appropriate Regulatory Treatment of Event 

Contracts, 73 Fed. Reg. 25669 (May 7, 2008) 

Dear Mr. Stawick: 

The Coalition for Internal Markets appreciates the opportunity to comment on the 

Commodity Futures Trading Commission's ("Commission") Concept Release on the 

Appropriate Regulatory Treatment of Event Contracts, 73 Fed. Reg. 25669 (May 7, 2008) 

("Concept Release"). The Concept Release notes that the Commission is soliciting 

comment "on the appropriate regulatory treatment of financial agreements offered by 

markets commonly referred to as event, prediction, or information markets." The 

Commission defines event markets for the purpose of the Concept Release as contracts 

that "are neither dependent on, nor do they necessarily relate to, market prices or broadbased measures of economic or commercial activity." 1 

The Coalition for Internal Market~ ("CIM") is a coalition of public companies that 

sponsor event markets that are open for participation only by their employees or similar 

individuals. The Coalition presently is composed of Google, Inc. and Yahoo! Inc. 

Although the details differ with respect to how our internal event markets operate, we 

share a common belief in the use of internal markets as an accurate means of information 

aggregation, including pricing information, in the economic utility of such markets and in 

the benefits that they provide the public even when used as an internal forecasting and 

prediction tool. In light of our experience with the benefits of these markets, as discussed 

in greater detail below, we also support the availability of similar "public" markets. We 

believe that our experiences as operators of internal markets will provide the Commission 

with additional facts and insights with respect to the use of internal event markets by 

companies in the operation of their businesses. 

How our markets operate 

I Concept Release, 73 Fed. Reg. at 25669. 

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c:,J 
David A. Stawick 

September 2, 2008 

Page2 

Google 

Google has operated a prediction market since April, 2005. Its operation is 

patterned after that of the Iowa Electronic Markets, except that currently no money is 

used by its market participants. In Google' s terminology, each question that is the 

subject of trading activity is termed to be a "market." Questions are not binary in nature, 

but the 2 to 5 possible responses are mutually exclusive. 

Payment for correctly predicting an event is one unit of a fantasy currency. There 

is no pay-out for incorrect predictions. Traders wishing to participate in the market are 

given a supply of currency at the beginning of each calendar quarter. Trading is 

conducted via a continuous double auction in each market. Participation is limited to 

current employees and some contractors and vendors. There is no automated market 

maker, but several employees did create robotic traders that sometimes played this role. 

The market itself originates all contracts in the form of a long and short bundled 

position. Traders can purchase from the market a bundled long and short position for a 

single unit of currency and then decompose the bundle and sell any of the contracts in 

their purchased bundle. Traders are not, however, permitted to create short positions. 

Traders may also purchase a position from another trader that has purchased a bundled 

position from the market. Traders can also reassemble the contract bundles and sell them 

back to the market. Currency units at the end of each quarter can be redeemed for raffle 

tickets for a variety of modest prizes. 

Since its inception, the Google market has traded 25 to 30 separate "markets' each 

calendar quarter. The markets were designed so that each expired by the end of the 

quarter in which it was listed. New markets were then listed with the beginning of a new 

quarter. 

The markets listed on Google's internal prediction market relate to forecasts of 

product demand; to internal performance, such as whether a new product will leave beta 

on time; on company news unrelated to direct performance, such as whether the company 

will open a new office in a specified location; and to the external business environment 

that might affect planning decisions, such as the mix of hardware and software used to 

access Google. In addition, Google hosted a few markets unrelated or marginally related 

to Google' s business which were included for training purposes. 

Google has used its internal marketplace not only to make forecasts, but also to 

monitor and evaluate how information and attitudes are distributed within its 

organization. For example, Google has also used its internal market data to assess the 

strength of relationships between various working teams. Google has also used its 

prediction market data to measure how optimism about its business objectives varies over 

time and in different parts of its organization. 

Yahoo! 
David A. Stawick 

September 2, 2008 

Page3 

Yahoo! Inc. has been designing, building, and analyzing prediction markets since 

2002. Since that time, Yahoo! has experimented with internal markets. to identify 

promising new products and to guide strategic decision-making within the company. 

Yahoo!'s internal markets are open only to company employees or similar persons. 

Yahoo!'s internal markets operate using an automated market maker. Some use Hanson's 

logarithmic market scoring rule market maker and others use Yahoo!' s own dynamic 

parimutuel market maker. 

In addition to its internal markets, Yahoo! has fielded three prediction market 

experiments open to the public: the Yahoo!-O'Reilly Tech Buzz Game, the Bix American 

Idol market, and the Yoopick sports prediction market. Each of these publicly offered 

prediction markets is operated as a game, using virtual currency. Those wishing to 

participate are provided with virtual dollars to fund their trading account. The opening 

round of the Tech Buzz Game awarded modest prizes to the top traders. In subsequent 

rounds of the Tech Buzz Game and the other Yahoo! public markets, no prizes are 

awarded; rather the incentive is the reward of doing well compared to other traders. 

For example, the Yahoo!-O'Reilly Tech Buzz Game enables players to buy 

contracts in technologies that they consider to be popular and to sell those that they 

believe to lack merit. Contracts are listed in various, rival technologies. Players have 

access to the current "buzz" around each technology, as measured by the number of 

Yahoo! Search users seeking information on it. The fantasy market's object is to 

anticipate future search buzz and to buy and sell contracts accordingly. Thus, a player 

who believes one type of technology is undervalued might buy contracts in that 

technology, while a player who thinks that the technology is overpriced might sell its 

contracts, or buy a competing technology. The Tech Buzz game employs the dynamic 

parimutuel market design invented at Yahoo!, thus serving as a testbed for understanding 

and evaluating this new technology. See http://research.yahoo.com/node/207. 

The goals of Yahoo!'s public experiments are two-fold: to produce useful data 

about consumer trends and to evaluate alternative market designs for their efficacy. 

Having better data about consumer trends and search volumes helps Yahoo! improve the 

quality of its search engine, which is important to improving the public's ability to access 

information readily, and the relevance of its advertisements, from which Yahoo! derives 

billions of dollars in revenue annually. It also helps its product developers and others 

better anticipate future areas of consumer demand. 

Yahoo! also uses prediction markets by incorporating them into its content pages. 

For example, Yahoo! News highlights prediction market odds on its popular Election 

Dashboard product, which is viewed by tens of millions of people. See 

http://news.yahoo.com/election/2008/dashboard. 
David A. Stawick 

September 2, 2008 

Page4 

As part of its research into internal prediction markets, scientists within Yahoo! 

Research have published a dozen academic papers including data analyses of existing 

markets and designs for next-generation markets, filed half a dozen patent applications, 

and organized four workshops on the topic. 

Future Evolution 

CIM believes that the performance of the experimental prediction markets 

described above would be enhanced if traders were able to commit funds to their trading 

positions, even if the potential stakes are limited. CIM further believes that this step is 

necessary for these markets to reach their potential with the associated benefits to the 

public. This evolution can and should be fostered by the Commission under its 

Congressional mandate to foster innovation in the futures markets. 

Statutory and Regulatory Background Encourages Innovation 

Congress has encouraged the Commission to administer the Commodity 

Exchange Act, 7 U.S.C. 1 et seq. ("Act") in a flexible manner, furthering market 

innovation to the greatest degree possible. Indeed, in enacting legislation to 

comprehensively regulate commodity futures trading in 1974, Congress was aware that 

non-traditional futures contracts, such as possible futures contracts on mortgages and 

ocean-freight rates, were being developed.2 It is clear that the broad definition of 

"commodity'' under the Act, which is in contrast to the prior practice of Congress of 

enumerating those "commodities" which were subject to the Act, underscored Congress' 

intent that the Act be sufficiently broad to apply to new and innovative futures contracts 

as they are developed. 3 

Equally important, in 1992 Congress added Section 4(c)(1) to the Act, granting 

the Commission broad authority to exempt any agreement, contract or transaction from 

any of the provisions of the Act.4 Congress added this broad exemptive authority "in 

2 See e.g. H.R. Rep. No. 975, 93rd Cong. 2d Sess. 76 (1974). 

3 In the absence of such a broad application of the meaning of"commodity'' it might be possible to return 

to the situation prior to the 1974 amendment wherein futures trading in some contracts was unregulated by 

the Commodity Exchange Authority, the Commission's predecessor agency, because the contract's 

underlying was not within the definition of"commodity." Prior to the Commodity Futures Trading 

Commission Act of 1974, the "commodities" covered by the Act were specifically enumerated. Thus, in 

order for the Commodity Exchange Act to apply to a new contract, Congress was required to amend the 

Act and enumerate the new "commodity." This meant that some futures contracts were regulated under the 

Act and others were not. By adopting such a broad and flexible definition of"commodity'' Congress 

clearly intended that all futures contracts that could trade on an exchange would be regulated under the Act 

as such. . 

4 See Section 203 of the Futures Trading Practices Act of 1992 (the "1992 Act") 
David A. Stawick 

September 2, 2008 

PageS 

order to promote responsible economic or financial innovation and fair competition."5 

As the Commission notes, "under Section 4( c), the Commission has the discretion to 

grant an exemption to certain classes of transactions without having to make a 

determination that such transactions are subject to the Act in the first instance." Concept 

Release, 73 Fed. Reg. at 25672. The Commission further notes that it may use its 

exemptive authority "to establish a set of regulatory provisions applicable to a defined 

class of products." Id. at 25673. 

Congress, through its enactment of the Commodity Futures Modernization Act of 

2000 ("CFMA"), again reaffirmed its intent that the Commission administer the Act 

flexibly and to further market innovation. A primary purpose of the CFMA was "to 

promote innovation for futures and derivates."6 The CFMA does so by replacing 

prescriptive, one-size fits all regulation with a system of principles-based regulation. The 

overarching principle of the CFMA is that the level and degree of regulation will vary 

depending upon the type of market participant and the nature of the commodities traded. 

Based upon this principle, the CFMA establishes a system of tiered regulation wherein 

the degree and nature of regulation varies depending upon the nature of the market 

regulated. Thus, some market tiers are subject to fewer or different regulation depending 

upon the nature of the market participants and the commodities traded. 

The Commission throughout its history has responded affirmatively to the 

Congressional mandate to foster innovation in futures trading and in futures markets. 

The Commission re-introduced exchange-traded options, initially through a very 

successful pilot program.7 It fundamentally altered the concept of what constitutes a 

futures contract by approving the introduction of financial futures, including approving 

the first contracts on broad-based indexes of securities. Even more significant, the 

Commission approved the first cash-settled futures contract, making it possible to 

construct and trade futures contracts on any intangible interest which is otherwise 

incapable of being delivered. Through this action, it has become possible to construct 

and trade futures contracts on various formulae or mathematical constructs, including 

indexes or other underlying interests that may not be related to price levels, such as 

contracts on weather and climate conditions, crop yields, bankruptcy filings, credit 

default events and events such as the possible merger of two companies. At the time of 

the introduction of these innovative contracts, doubts were raised with respect to whether 

such contracts could be considered to be contracts for future delivery of a commodity 

5 Section 4(c){l) of the Act provides that the Commission may exempt any contract, agreement or 

transaction from any of the provisions of the Act if the exemption is consistent with the public interest. 

The Conference Report to the 1992 Act stated that the public interest should include the national public 

interests of the Act, the prevention of fraud and preserving the fmancial integrity of the markets, in addition 

to promotion of responsible economic or financial innovation and fair competition. House Conference 

Report No. 102-978, p.78. 

6 Section 2(6) of the Commodity Futures Modernization Act of2000, Pub. Law No.l06-554, 114 Stat. 

2763. 

7 See 46 Fed. Reg. 54500 (Nov. 3, 1981). 
David A. Stawick 

September 2, 2008 

Page6 

within the meaning of the Act. Nevertheless, the Commission in each instance chose to 

facilitate innovation and these innovations are now widely accepted. 

Event Markets Fall Within the Act 

As the Commission noted in the Concept Release, "the regulatory purview of the 

Act extends to and includes transactions that are either structured as options or futures 

when such transactions involve interests that constitute commodities under the Act." 

Concept Release at 2561. As the Commission further notes, "A significant number of 

event contracts are structured as ali-or-nothing binary transactions commonly described 

as binary options." Concept Release at 25670. The Commission also points out that 

event contracts can also price consensus estimates of moving values, the same as any 

commodity futures contract. The internal prediction markets operated by the Coalition 

members currently list binary options on the occurrence or non-occurrence of a discrete 

event or of a number of mutually exclusive alternatives. 8 Accordingly, the primary issue 

with respect to whether and how these markets should be regulated by the Commission is 

whether the underlying subject of the contracts are "commodities" within the meaning of 

the Commodity Exchange Act, 7 U.S.C. § 1 et seq ("Act"). 

Congress has defined "commodity" under the Act in very broad terms. Prior to 

creation of the Commission, the Act covered only those underlying interests that were 

enumerated in the Act. The Commodity Futures Trading Commission Act of 1974, Pub. 

L. No. 93-463, extended the definition of "commodity" to include "all services, rights 

and interests in which contracts for future delivery are presently or in the future dealt in." 

Section la(4) of the Act. Congress, in 1974 was aware that non-traditional futures 

contracts were being developed such as possible futures contracts on mortgages and 

ocean-freight rates, and intended to include within the regulatory scheme governing 

futures trading "all commodities, goods, articles, services, rights, and interests which are 

or may be the subject of futures contracts."9 

The definition of"excluded commodity" under section la(13) of the Act provides 

additional clarity to the meaning of "commodity" under the Act. A commodity that is 

defined as an "excluded" commodity must, in the first instance, be within the broader 

definition of "commodity." Section la(13)((iii) and (iv) define an "excluded 

commodity" as including: 

(iii) any economic or commercial index based on prices, rates, values, or levels 

that are not within the control of any party to the relevant contract, agreement, or 

transaction; or 

8 Although the more typical contract currently used is a binary contract on a discrete event or several 

mutually exclusive alternatives, CIM's members may in the future also list contracts on moving values. 

9 H.R. Rep. No. 975, 93rd Cong. 2d. Sess. 76 (1974). 
David A. Stawick 

September 2, 2008 

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(iv) an occurrence, extent of an occurrence, or contingency (other than a change 

in the price, rate, value, or level of a commodity not described in clause (i)) that 

is-(I) beyond the control of the parties to the relevant contract, agreement, or 

transaction; and (II) associated with a financial, commercial, or economic 

consequence. 

Importantly, the section la(13)(iii) definition recognizes that the index which is a 

"commodity'' need not be based on price levels, but may also be based on any economic 

or commercial index on a "rate, value or level" not within the control of the parties to the 

contract. Similarly, section la(13)(iv) leaves open the possibility that the occurrence, 

extent of occurrence or contingency need not be based on price, but may be on any rate, 

value or level that is not within the control of the parties to the contract, so long as it is 

"associated with a financial, commercial or economic consequence." Accordingly, the 

very broad definition of "excluded commodity" makes clear that a contract for future 

delivery of a commodity need not be based on fluctuations in the price level but may be 

based on any occurrence or contingency relating to any value not within the control of the 

parties to the contract that is associated with a financial, commercial or economic 

consequence. Options or futures contracts on weather, climatic conditions, bankruptcies 

or crop yields all can be described in this manner. So too, can the types of commerciallyrelated events, circumstances or contingencies listed for trading on our internal markets. 10 

Thus, it is clear that the Act does apply to certain, if not all, event markets and that 

clarification by the Commission of its views with respect to the operation of these 

markets under the Act is an appropriate and necessary step in fostering their 

development. 

CIM's Proposal 

CIM believes that the Commission should exercise its section 4(c) exemptive 

authority and propose rules specifically adapted to, and permitting, the operation of 

small-stakes event markets. CIM believes that small-stakes event markets of the kind 

first developed by the Iowa Electronic Markets 11 have the potential to provide significant 

public benefits and recommends that the Commission propose regulations under which 

such markets may operate, both as internal markets or as public markets. However, CIM 

strongly believes that the potential benefits of these markets should not be restricted to 

markets operated by academic or other non-profit entities. The members of CIM are 

public, for-profit companies that are committed to research and development and to 

introducing new technologies that improve the communication of knowledge. 

Accordingly, it is in the public interest and is consistent with the continued leadership of 

10 Our markets also include contracts that are intended merely to maintain trader interest in the market. As 

we explain in greater detail below, we believe that such contracts should be eligible to be listed on an 

internal event market pursuant to Commission rules adopted under the Commission's section 4(c) 

exemptive authority. 

II Concept Release , 73 Fed. Reg. at page 2570. 
David A. Stawick 

September 2, 2008 

Page8 

the United States in the information sciences for the Commission to permit for-profit 

companies to participate in the development and evolution of these innovative markets. 

In this regard, CIM believes that it is very much in the public interest for the 

Commission to apply the principles of its New Regulatory Framework proposal (and of 

the CFMA) in formulating a regulatory approach to the operation of small-stakes event or 

"prediction" markets. These principles are that the regulatory requirements that apply to 

a particular market tier will be appropriate to address four regulatory goals: 1) ensure the 

integrity of the market; 2) deter manipulation, 3) protect the market's financial integrity 

and 4) protect customers. 12 CIM believes that small-stakes markets-whether internal or 

public-share characteristics that would broadly guide the Commission's regulatory 

approach to such small-stakes markets. However, there are differences between internal 

and public small-stakes markets which would result in differences in how they might 

meet the regulatory goals and the procedures that the Commission should use in 

authorizing the markets to operate. 

CIM believes that the benefits of event markets can be realized through trading by 

interested persons with limitations on the amount any trader may risk in the market and 

limitations on a trader's overall losses. Unlike the traditional futures market, which 

provides commercial entities with a mechanism for hedging and thereby requires larger, 

commercial-sized exposures by traders, the information aggregation functions of event 

markets can occur when traders risk only modest sums. But permitting traders to risk 

even modest sums, we believe, yields a marked improvement in market performance over 

the current practice of experimental internal markets of offering_ fixed prizes as an 

incentive to traders or of certain public event markets of offering no external trader 

incentive. Accordingly, CIM believes that there would be significant public benefits if 

the Commission, through the exercise of its section 4(c) authority, establishes a 

framework for the operation of small-stakes event markets, making appropriate 

distinctions between internal and public markets. This new regulatory tier for smallstakes event markets would be a complement to the current statutory tiers of designated 

contract market, derivatives transaction execution facility and exempt board of trade. 

A small-stakes market tier would be characterized by limitations on the amount 

that a trader could risk at any one time, or lose over a defined period of time, as a 

consequence of trading in the market. CIM recommends that an appropriate limitation on 

the amount at risk at any one time or the amount that can be lost over the course of a year 

be U.S.$2,000, indexed for inflation. The market would be non-intermediated and would 

be required to be electronic. As explained in greater detail below, in reliance upon the 

4( c) exemption, the market would be able to list for trading futures or option contracts on 

any contingency, extent of a contingency or other event or occurrence except for classes 

of events, such as the outcomes of sporting events, that are prohibited by Commission 

12 "A New Regulatory Framework," Report of the Staff Task Force, 

http://www.cftc.gov/files/opa/oparegulatoryframework.pdf (February 2000) at v. 
David A. Stawick 

September 2, 2008 

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rule.13 These basic standards establishing the criteria for qualifying to operate a market 

in this tier would be incorporated in Commission rules. 14 

It is important to distinguish that small-stakes markets may be either internal 

markets or public markets. Although both may be used by companies in making 

business-related decisions, the two types of small-stakes markets serve very different 

functions. An internal event market is used by the company as a means of assisting in 

internal decision making. Internal markets limit market participation to persons with an 

affiliation to the company or institution operating the market. Companies use internal 

markets to provide employees with an anonymous means of providing feedback to 

management, of aggregating information through an anonymous, apolitical, democratic 

process for expressing opinion and as an alternative to existing information aggregation 

mechanisms within the company. Small-stakes markets may also be open to members of 

the public for trading, like the Iowa Electronic Market (which operates under a 

Commission no-action letter). Public small-stakes markets may serve a number of 

purposes, including permitting a company to gather information on issues relevant to its 

business from a large cross-section of the public, as a mechanism for a company to 

communicate with its potential customer base and as a means for a company to better 

discover and understand potential business and social trends which may affect its 

business. 

Market Operation Subject to Core Principles 

The operation of a small-stakes market, regardless of whether it is an internal or 

public market, would be subject to Core Principles. These would include, for example, 

the broad requirements that: 

• The market establish trading rules, which may be in the form of protocols or a 

disclosure document, which specify how trading, and trade matching, shall take 

place on the market, 

• The market establish a robust trade matching engine to match bids and offers , or 

in the case of a single market-maker model -to make bids or offers into the 

market,1s which may be developed and/or operated by technology service 

13 In concept, this follows the Commission's reasoning and form in its proposal for a derivatives 

transaction facility. See, "A New Regulatory Framework," at 10. See also "A New Regulatory Framework 

for Multilateral Transaction Execution Facilities, Intermediaries and Clearing Organizations," 65 Fed. Reg. 

77962,77969 (December 13, 2000). 

14 See e.g., Part 37 rules, !d. at 77982 

15 It is important to note that certain internal event markets have developed using, and currently operate 

under, a single market-maker model. In this model, an automated market maker is the universal 

counterparty to every trader. Generally, the bids and offers that the automated market-maker puts into the 

market are derived from an analysis of the interaction of buying (selling) sentiment of the market 

participants and the existing open interest. The automated market maker at any particular time, may have a 
David A. Stawick 

September 2, 2008 

Page 10 

providers and which captures information that can be used in determining whether 

violations of the trading rules or protocols has occurred; 

• The market establish rules, which may be in the form of trading protocols or a 

disclosure document, to deter trading and market abuses, and that the market have 

the power and capacity to address violations thereof; 

• The market establish appropriate criteria that participants must meet; 

• The market establish rules, which may be in the form of trading protocols or a 

disclosure document, detailing the financial framework which shall apply and 

which ensures the financial integrity of transactions entered into on its facilities; 

• As appropriate to the size of the market, the number of participants whether it is a 

public market and other factors, the market have a program to monitor trading on 

the market for fair and orderly trading and have and exercise authority to maintain 

a fair and orderly market; 

• The market provide information to the Commission as requested about the 

market, its operations and transactions thereon as well as other relevant 

information; 

• Internal and public small-stakes markets shall. make available to market 

participants information with respect to current prices, bids and offers in the 

market; public small-stakes markets shall make publicly available information 

with respect to actively traded products information on volume, open interest and 

daily opening and closing prices; and 

• The market shall keep books and records (including trading records) available in a 

form and manner acceptable to the Commission for a period of five years. 

CIM contemplates that the manner in which internal and public small-stakes 

markets would meet the above Core Principles might differ significantly. This is 

consistent, however, with the Commission's recognition that there are a variety of 

acceptable practices which may meet the requirements of a Core Principle. For example, 

an internal market run by a company would have as its chief purpose the generation of 

information (by means of discovering prices in the market) for use by the company in the 

conduct of its business. Accordingly, an internal market would not be expected to make 

generally available to the public information with respect to market prices relating to a 

particular event contract. Indeed, it is conceivable that a company may treat the trading 

results of an internal market as confidential, proprietary information and require market 

participants, as a condition for participation, to keep their trading information 

net long or short position. This model benefits the market by providing a ready source ofliquidity and may 

be a more intuitive means of trading for novice traders than a traditional, double-sided auction market. 
David A. Stawick 

September 2, 2008 

Page 11 

confidential. In contrast, a public small-stakes market would be required to make 

generally available certain information, as is any other Commission-regulated public 

market. As provided in the Core Principle, this would include at a minimum the open 

and closing prices for the contracts traded thereon. Additional information generated 

through trading on the market, consistent with current industry practice, would be the 

property of the exchange operator and could be used by the market operator or sold to 

others. 

Under the Core Principles, the individual markets would establish the specific 

criteria that market participants would be required to meet. With regard to internal 

markets, the markets could be available to employees, direct vendors/vendees, 

contractors and others, as defined by the market, that are directly involved in the firm's 

business activities. The firms could establish additional requirements or criteria as they 

deem appropriate for access to, or the conduct of, their markets. For example, firms may 

wish to permit only certain _of their employees· from participating in the market, such as 

engineers; or they may wish to restrict participation by supervisors or persons with 

superior knowledge of the firm as a consequence of their position, or they may wish to 

include a limited number of invited experts to participate . The applicable criteria would 

be included in the rules or protocols of the market. 

In contrast, by definition, public markets would be broadly open to potential 

market participants. A public market would be required to establish appropriate 

participation criteria for potential market participants. Because of the small stakes 

requirements and the non-intermediated nature of the market, however, those criteria 

would likely be modest, and might be limited to proof of identity, being legally able to 

enter contracts, bona fide access to a credit card with a sufficient line of credit to ensure 

the financial integrity of the transaction, having access to proper and sufficient internet 

connectivity and other similar requirements. 

Included among the requirements that wopld apply to market participants in both 

internal and public small stakes markets would be adherence to the $20000 limit on 

losses or on funds at risk. Each small stakes market would be required to take reasonable 

steps to ensure compliance with the limit, including taking reasonable steps to detect and 

deter a trader from evading the limit by establishing multiple accounts at the same 

market. These might include checking for duplicate credit card numbers, conducting 

credit checks where appropriate and surveilling the markets for coordinated trading 

patterns. 

CIM believes that acceptable practices for these small stakes markets with respect 

to the nature of the trading mechanism should be broad. Some currently operating 

experimental internal markets operate through a mechanism whereby the market operator 

acts as the universal market maker and counterparty. This universal market maker takes 

into account market depth and trader sentiment in determining the bid and offer price for 

all contracts offered to the market. Market experience has been that this mechanism 

offers novice traders a more intuitive and accessible means of trading than a double-sided 
David A. Stawick 

September 2, 2008 

Page 12 

auction trading mechanism. In light of the fact that some experimental internal and 

public event markets currently make use of a single market-maker mechanism, CIM 

believes that it is an appropriate exercise of the Commission's section 4(c) authority to 

include such a trading model within the rules for this type of small-stakes market. 

Finally, the market would be required to have a robust electronic system for trade 

matching or for offering bids and offers to the market if using a universal market maker 

model. The electronic system and various other components of market operation could 

be provided by service vendors to the market operator. With respect to internal markets, 

the market could be operated by a vendor under contract to the sponsoring company or as 

a joint venture among two or more participating companies. 

Products 

As discussed above, internal and public event markets have relied upon offering a 

mix of contracts, including some based on popular-culture, to maintain trader interest. 

Thus, the offer of certain high-interest contracts provides the liquidity to the market that 

sustains trading in contracts that may provide greater public benefits with respect to the 

type of information provided.l6 CIM believes that this will remain true in the context of 

small-stakes internal and public markets. Unlike traditional futures markets, where 

liquidity providers, such as locals or other similar traders can earn significant returns 

from their trading activity, it is unlikely that small-stakes markets will offer liquidity 

providers such opportunities. Thus, although trading real funds may make market 

participants more serious with respect to their trading activities, market participants may 

still be motivated by access to the opportunity to trade a mix of contracts, including some 

that are popular-culture based contracts. 

Accordingly, CIM believes that as an exercise of its section 4(c) exemptive 

authority, the Commission should permit a broad array of contracts to be listed. This can 

be accomplished by using a structure similar to that of the Derivatives Transaction 

Facility which the Commission proposed as part of its New Regulatory Framework. 

Under that structure, the Commission approved the operation of the market and permitted 

the market to list contracts that under Commission policy or rule may not have been 

subject to regulation as futures contracts under the Act. 17 The Commission could 

16 Google, in the operation of its current internal market, uses such popular culture contracts as 'training' 

markets to acquaint novice traders with how the market operates. Google has also found statistically that 

the inclusion of popular-culture or 'fun' markets increases liquidity overall on the trading platform, 

including the liquidity of the contracts geared at eliciting information that is directly applicable to operation 

of the business. 

17 This broad structure has been carried over by the CFMA into the structure of the Act governing 

Derivatives Transactions Execution Facilities. Under section 2(g), a DTEF is permitted to list for trading 

any contract, agreement or transaction on an exempt or excluded commodity other than securities. Prior to 

enactment of the CFMA, the Commission adopted a similar structure under its section 4( c) authority which 

would apply to the market tier that it denominated as a Derivatives Transaction Facility. Such a structure 
David A. Stawick 

September 2, 2008 

Page 13 

include in this regulatory approach enumerated classes or categories of contracts that by 

rule would not be permitted to be traded on the section 4( c) exempt market. Through this 

approach, for example, the Commission could make clear that contracts on the outcome 

of specific sporting events and other enumerated types of contracts would not be 

permitted to trade on the small-stakes market. 

Market Authorization or Registration Process 

CIM contemplates that the Commission would establish separate procedures for 

the authorization or registration of internal and public small-stakes markets in light of the 

differing regulatory interests raised by these two types of markets. CIM suggests that the 

appropriate authorization process for internal event markets is by notice to the 

Commission, similar to that applicable to Exempt Boards of Trade. Section 5d of the Act 

provides that Exempt Boards of Trade may operate upon receipt by the Commission of a 

notice, provided in the form and manner established by the Commission, of the market's 

intent to operate as an exempt board of trade. CIM believes that the notification 

procedure which should apply to internal event markets would be quite similar to the 

notice registration procedures for Exempt Boards of Trade established by the 

Commission in Part 36 of its Rules, 17 C.P.R. Part 36. 

Specifically, CIM recommends that internal event markets be authorized to 

operate subject to the conditions noted above; that is, 1) the market limits participation to 

employees and other affiliated persons; 2) the amount traders may put at risk or lose is 

limited; 3) the market agree to adhere to applicable Core Principles, including 

recordkeeping requirements; and the products listed for trading not include any product 

that the Commission has prohibited. A notification provision would require the market 

operator to identify itself to the Commission and to certify that it complies with the safeharbor requirements for operation as an internal event market. 

CIM believes that based upon the private nature of the market a notification 

process for market authorization is appropriate for internal event markets. Although as 

discussed above, there are public interest benefits in the ability of such markets to 

operate, the Commission's interest in formally vetting an application for registration and 

in conducting on-going market oversight is limited because of the essentially private 

nature of these markets' operation. For example, because companies offering internal 

markets can be expected to ensure that their employees are adequately protected when 

participating in an internal market, there would be few, if any, concerns about customer 

protection. For a company to do otherwise would risk jeopardizing the larger relationship 

between the employer and its employees. Moreover, because information derived from 

internal markets is generally treated as proprietary, traditional regulatory concerns with 

respect to the reporting of non-bona fide market prices to the public-either through 

manipulative or other abusive practices-- are alleviated. Finally, the conditions for 

would be an appropriate means of permitting small stakes markets to list a wide variety of contracts in 

order to maintain participant interest and thereby support market liquidity. 
David A. Stawick 

September 2, 2008 

Page 14 

meeting the exemptive relief, which constitute a safe-harbor, are sufficiently clear and 

understandable so that a market could self-certify to its adherence to the conditions of the 

safe-harbor. 

CIM believes that with respect to public, small-stakes event markets an expedited 

procedure for registration by the Commission is appropriate. CIM contemplates that as 

part of this expedited registration and review procedure, the market would be required to 

demonstrate its ability to operate in compliance with the relevant Core Principles. CIM 

believes that Part 37 of the Commission's rules provides a good starting point for the 

procedures to be used in the registration process for small-stakes markets. As under Part 

3 7 of the Commission's rules establishing the procedures to register DTEFs, the 

Commission should establish an expedited procedure whereby it approves or denies an 

application for registration as a public small stakes market. In this regard, CIM 

recommends that the Commission provide for automatic registration of a public small 

stakes market ninety days after a notice of registration and demonstration of compliance 

with Core Principles is filed. The Commission would be able to extend the period for an 

additional ninety-days for complex or novel notifications. After that period, the 

Commission would be required to disapprove a notice of registration or let the 

registration become effective. Individual contracts traded on the market could be listed 

for trading following self-certification by the market no less than one day prior to listing. 

CIM believes that Commission vetting of applications by public event makets is 

appropriate in light of the ability of the public to access the market and the requirement 

that the public market make generally available certain pricing and other information. 

Review of such applications will ensure that appropriate safeguards are in place before 

they begin trading. However, it is crucial that in establishing its procedures, the 

Commission provide the level of review of an application that is appropriately geared 

toward the small-stakes nature of the market. Review of an application would be more 

than a simple notice filing that would be required for an internal event market and that is 

currently required for an Exempt Boards ofTrade18, but in light of the limitation on the 

amount that participants can trade, review should be less than that of a DTEF. 19 In this 

regard, the nature of the review process must be modulated and in harmony with the 

small-stakes nature of the market. 

CIM also contemplates that the Commission specifically recognize in its 

procedures that markets may rely on third party software and hosting entities to initially 

set-up, or to operate, a public event market.20 CIM believes that the Commission's 

market registration procedures for public, small-stakes event markets should provide for 

the approval of standardized vendor-supplied trading and regulatory compliance 

18 See 17 C.F.R. §36.2(b). 

19 See 17 C.F.R. §37.5(b) 

20 Such companies may also set up and operate internal markets for companies. However, in light of the 

notice registration provision that would apply to internal markets, there would be no special procedure 

needed with respect to hosted markets. 
David A. Stawick 

September 2, 2008 

Page 15 

packages that can be offered to market operators as an off-the-shelf market solution or 

that the vendor can use such standardized and pre-approved systems to operate the 

market on behalf of a company. CIM believes that such a prior approval should be taken 

into consideration in a review under the normal 90 day review process to each new client 

of such a vendor. Instead of requiring each such· client company to complete a full 

market registration application, CIM recommends that the Commission approve the 

vendor's trading and compliance systems and that it permit an abbreviated registration of 

each public, small-stakes event market using the vendor's systems. 

As discussed in greater detail in our responses to the Commission's specific 

questions, small stakes event markets are capable of providing unique public benefits. 

This is especially true for internal, small-stakes event markets. By providing these 

markets with greater legal certainty, the Commission would further the public interest by 

assuring that their benefits would continue to be available. The Commission has authority 

under section 4( c) of the Act and under other provisions to provide legal certainty to 

these markets. Congress has encouraged the Commission to support innovation in 

futures trading and in futures markets. 

The Commission in its New Regulatory Framework, which was largely codified 

by Congress in the CFMA, recognized the merit of tailoring regulatory requirements 

depending upon the nature of the market and of the market participant. It would be a 

natural extension of the current regulatory scheme for the Commission to recognize the 

need for and appropriateness of a regulatory tier geared toward small-stakes event 

markets. The regulatory tier would provide for a streamlined registration procedure and 

would establish operating Core Principles that are consistent with the safeguards 

incorporated in the characteristics and access limitations of the market. 

CIM urges the Commission to propose and adopt rules establishing such a 

regulatory framework so that event markets, both internal and public, can reach their 

potential and thereby provide significant public benefits. 

With these recommendations in mind, we are pleased to respond to the 

Commission's specific questions. 

Public Interest 

1. What public interests are served by event contracts that are designed and will 

principally be traded for information aggregation purposes and not for commercial risk 

management or pricing purposes? 

2. How are these interests consistent with the public interest goals embodied in the Act? 

3. What calculations, analyses, variables, and factors could be used to objectively 

determine the social value of information to the general public that may be discovered 

through trading in event contracts? Should this be a factor in determining whether the 
David A. Stawick 

September 2, 2008 

Page 16 

Commission plays a role in regulating these markets? 

Event markets have great potential to serve the public interest goals embodied in 

the Act. However, it should be noted that until the Commission provides greater legal 

certainty with respect to the operation of these markets, their public benefits will remain 

largely untapped and theoretical. In this regard, it should be noted by the Commission 

that futures contracts traded for many years before Holbrook Working in his seminal 

works on futures trading articulated how futures contracts were used for hedging and 

price basing. 

This situation is not unique to event markets and has been true to some degree 

with respect to each of the major innovations made in futures trading. Trading 

experience and the behavior of particular instruments in various market settings is an 

important means of determining the relevant analyses and factors to make objective 

determinations about trading vehicles. For example, as noted above, one of the great 

advances in futures markets has been the reintroduction of options on futures contracts. 

Prior to the Commission's pilot program to reintroduce exchange-traded options, the 

degree to which they would be traded was unknown. Moreover, a full understanding of 

financial futures, including issues such as the role of the cheapest to deliver, was gained 

only after the contracts were listed and traded. Similarly, prior to their introduction, it 

could be theorized whether and how climate and weather contracts would be used, but 

their actual use by commercial interests could be studied only after introduction and 

trading. 

Despite the fact that the full extent of the public benefits of event markets will be 

discovered only after they are traded more widely, there is already a very significant body 

of academic scholarship attesting to the public benefits that may be derived from the 

trading of event markets.21 Based on experience of various experimental markets it is 

apparent that event markets serve the same public interests as traditional futures trading. 

Futures trading benefits the public in two ways. Centralized trading provides 

useful information by aggregating the opinions of individual participants through a 

centralized market trading mechanism. Traditionally, this has been a consensus with 

respect to a future price level of a commodity, but it has also included consensus opinions 

on non-price information such as future crop yields, future interest rate levels, the level of 

regional insured property losses, bankruptcy filings or weather conditions. This permits 

market participants to make better informed decisions with respect to their allocation of 

resources, benefiting not only the market participant, but society at large. The public is 

similarly served by the operation of internal markets by benefiting from the more 

efficient allocation of resources that is possible when a company uses an internal market 

to assist it in its internal decision making. 

21 See e.g. Robert W. Hahn and Paul C. Tetlock, "Information Markets, A New Way of Making Decision," 

http:/ /aei -brookings.org/admin/ authorpdfs/redirect -safely. php?fuame= . ./pdffiles/phpo Y. pdf 
David A. Stawick 

September 2, 2008 

Page 17 

Secondly, traditional futures markets have benefited the public by offering 

individual market users the ability to hedge an exposure that they have. Although small 

stakes event markets will have limited ability to serve this function, public event markets 

certainly may. For example, manufacturing firms may have exposure to non-price related 

events, such as the timing of a scientific breakthrough. An event market would offer 

such a company one means to lay-off part of this risk. Of course, to the extent that the 

market is limited to small-stakes trading, direct risk-shifting through the market 

necessarily would be limited. Nevertheless, the consensus opinion that is indicated 

through the market price would provide the company with important information that it 

could use in determining its risk and how to address that risk. 

Accordingly, both internal and public event markets have the potential to serve 

the public interest in very much the same way as traditional futures markets. As the 

Commission notes in the Concept Release, Congress recognized that commercial 

interests are able to look at properly functioning futures markets to "facilitate the making 

of marketing, financing, and distribution decisions." Concept Release, 73 Fed., Reg. 

25672, note 14. Internal markets serve precisely this function for the companies that 

operate such markets. Public event markets serve this function, as well. 

C. Jurisdictional Determinations 

4. What characteristics or traits are common to or should be used to identify event 

contracts and event markets? 

Event contracts that take the form of futures contracts or options are amenable to 

the Commission's jurisdiction. Thus, the basic identification that need be made is 

whether the structure of the traded instrument is a contract of sale for future delivery or 

an option. Under CIM's proposal, if the contract falls within the definition of either of 

these instruments, then the Commission's regulatory framework would apply to those 

markets that register with the Commission under the applicable regulatory framework. 

This approach, using the Commission's exemptive authority under section 4(c), relies on 

a market's adherence to the terms of the Commission's rules in order for it to operate 

within the parameters of the exemptive relief.22 

5. How do these characteristics and traits differ from those of commodity futures and 

options contracts that customarily have been regulated by the Commission? How are 

they similar? · 

22 As explained above, this approach is similar to the Commission's proposal to establish administratively 

the regulatory framework that would have applied to Derivatives Transaction Facilities. See also section 

5a(g) of the Act. 
David A. Stawick 

September 2, 2008 

Page 18 

CIM has proposed including within the framework that would apply to this 

market tier certain provisions that may address possible differences between traditional 

futures contracts and contracts on events that have been traded in more experimental 

settings. For example, in light of the fact that most internal markets and experimental 

event markets have provided for either low notional amount contracts or limitations on 

the amount that may be traded, CIM has included such a limitation in the regJ.Ilatory 

framework that it is proposing. CIM has also proposed that this regulatory tier provide 

for non-intermediated trading and that trading be only electronic.23 These requirements 

do not necessarily address distinctions between event contracts and other types of futures 

contracts, but rather address particular characteristics of certain markets that may seek to 

trade event markets. 

These regulatory distinctions, however, would not prohibit event contracts from 

trading in other appropriate regulatory tiers, subject to greater regulatory requirements. 

For example, nothing in CIM's proposal would prohibit a designated contract market 

from listing a binary option for trading, for example, under the full regulatory scheme 

that applies to such markets. 

6. Are there criteria based on the provisions of the Act that could be used to make 

jurisdictional determinations with respect to event contracts and markets? 

7. Given the purposes and history of the Act, would it be appropriate for the Commission 

to apply a test premised on commercial risk management or pricing functions to 

demarcate the Commission's jurisdiction over particular contracts? If so, what factors 

could be used to make such a determination? 

As discussed above, CIM believes that the structure of the CFMA, including in 

particular the structure of permitted instruments that may be traded on a DTEF provides 

the best template for addressing the issue of what contracts can be listed for trading on 

the type of small-stakes market that we are proposing. Following the overall structure of 

the CFMA, the regulatory framework which would apply to trading in internal and public 

event markets would be largely determined by the nature of the participants permitted to 

trade on the market and the other access limitations that we have suggested. Using this 

structure, the most critical issue for the Commission is whether the regulatory framework 

applicable to the market tier is appropriately calibrated to the nature of the market and the 

traders thereon. 

8. Given the purposes and history of the Act, would it be appropriate for the Commission 

to apply any test premised on the economic purpose of certain types of transactions to 

23 By recommending that small-stakes event markets be non-intermediated, CIM does not mean to suggest 

that these markets could not operate as they presently do, using a centralized market maker which is the 

universal counterparty to all market participants. Rather, the requirement that markets be nonintermediated means that all market participants act in the capacity as principal and that no agency trading 

be permitted. 
David A. Stawick 

September 2, 2008 

Page 19 

demarcate the Commission's jurisdiction over particular contracts? If so, what factors 

could be used to make such a determination? 

As the Commission notes in the Concept Release, when exercising its section 4( c) 

exemptive authority the Commission need not make a jurisdictional determination.24 

Moreover, section 4(c) provides that the Commission may exercise its exemptive 

authority under that provision when "the exemption would be in the public interest." 

As the Commission notes, former section 5(g) included a public interest test for 

designation of individual contracts. That section 5(g) public interest test incorporated 

within its scope an "economic purpose test."25 The economic purpose test was used by 

the Commission in determining whether to designate individual contracts. The economic 

purpose test required that the proposed "contract reasonably can be expected to be or has 

been, used for hedging and/or price basing on more than an occasional basis."26 It 

should be noted that the public interest test of former section 5(g) of the Act was repealed 

by Congress in 2000. Congress instead chose to permit contract markets to self-certify 

that proposed contracts would be in compliance with the Core Principles of the Act. In 

light of Congress' repeal of former section 5(g) and its included economic purpose test, 

the Commission should avoid imposing new requirements which would appear to 

resurrect that provision. 

Nevertheless, section 4(c) itself contains a public interest provision separate from 

that of the former section 5(g) of the Act. The Commission could apply section 4(c)'s 

public interest standard by making clear in its adoption of an exemption under section 

4( c) that certain classes of contract do not come within the exemptive relief provided. 

For example, the Commission could make a determination that inclusion of. event 

contracts on the outcome of individual sporting events and other specifically defined 

classes of contracts would not be within the public interest. This would be an appropriate 

expression and exercise of its responsibility under the section 4( c) public interest 

authority separate from and different than the repealed economic purpose test. 

As CIM discussed above, certain event contracts relating to popular culture when 

listed on small-stakes markets serve the public interest by acting as liquidity catalysts. In 

this way, they are akin to the role played by professional traders in traditional markets. 

The Commission should take this into account in enumerating categories of contracts that 

may not be listed· for trading in this market tier. Taking into account the role that such 

popular-culture related contracts can play in maintaining interest by casual, small-stakes 

traders, the Commission should restrict only those contracts the listing of which on these 

markets the Commission determines to be specifically contrary to the public interest. The 

Commission in making that determination should consider whether the class of contracts 

24 Concept Release, 73 Fed. Reg. at 25672. 

25 !d. 

26 17 C.R.R., Part 40, Appendix A(a)(4). 
David A. Stawick 

September 2, 2008 

Page 20 

so restricted has traditionally been differentiated from futures contracts, whether the 

contracts are subject to alternative Federal or State regulatory schemes, whether their 

listing might touch upon National security issues or whether their listing would otherwise 

be clearly repugnant to the public interest. Although this is a different analysis of the 

public interest from the repealed economic purpose test, it is an appropriate measure of 

the meaning of the "public interest" standard included in the section 4(c) exemptive 

authority. 

9. What calculations, analyses, variables and factors would be appropriate in 

determining whether the impact of an occurrence or contingency will result in a 

financial, commercial or economic consequence that is identified in Section 1 a(13) of the 

Act? 

10. What calculations, analyses, variables, and factors would be appropriate in 

determining whether an economic or commercial index that is based on prices, rates, 

values, or levels should or should not qualify as an excluded commodity under Section 

1a(l3) ofthe Act? 

11. What identifiable factors, statutorily based or otherwise, limit the events and 

measures that may underlie event contracts when such contracts are treated as 

Commission-regulated transactions? 

As discussed above in its proposal, CIM believes that the Commission should 

exercise its section 4(c) authority as broadly as section 4(c) permits by exercising its 

exemptive authority (subject to the conditions of the applicable regulations) without 

definitively characterizing the instruments. Rather, the Commission should determine 

what types of event contracts would be repugnant to the public interest to be traded on an 

appropriately regulated internal or public small-stakes market. 

Clearly, gaming has been subject to alternative regulatory frameworks and 

contracts on the outcome of individual sporting events should not be included within the 

exemptive relief. The Commission has also raised the questions of whether listing 

contracts relating to terrorism or assassinations are repugnant to the public interest. 

12. What objective and readily identifiable factors, statutorily based or otherwise, could 

be used to distinguish event contracts that could appropriately be traded under 

Commission oversight from transactions that may be viewed as the functional equivalent 

of gambling? 

Gaming is prohibited under a number of Federal and state statutes, and the 

definitions contained in those statutes would be a good beginning point in differentiating 

bona fide event contracts from gaming contracts. Clearly, gambling has been commonly 

thought of in connection with betting on the outcome of individual sporting events and 

games of chance. Thus the Commission might construct a definition by way of 
David A. Stawick 

September 2, 2008 

Page 21 

examples, and expand the list or provide other guidance in response to case-by-case 

queries. 

13. The Commission notes that Section 12(e) ofthe Act generally provides that the CEA 

supersedes and preempts other laws, including state and local gaming and bucket shop 

laws, with respect to transactions executed on or subject to the rules of a Commissionregulated market, or with respect to transactions exempted from the Act pursuant to the 

Commission's exemptive authority under Section 4(c) of the Act. What are the 

implications of possibly preempting state gaming laws with respect to event contracts and 

markets that are treated as Commission-regulated or exempted transactions? 

14. Should certain underlying events or measures--such as those based on assassinations 

or terrorist activities--be prohibited altogether due to the social perception and impact of 

such events? What statutory or other legal basis would support this treatment? 

CIM' s members will not list such contracts for trading on their markets and 

consequently take no view on whether such contracts should be permitted under the 

Commission's regulatory framework. However, it is possible that the Commission may 

wish to consider whether it should differentiate between internal and public markets in its 

consideration of this issue. 

15. Are there event contracts, such as political event contracts, that should be prohibited 

from trading under the Act, or that deserve separate treatment or consideration, due to 

the nature and importance of their outcomes? What statutory or other legal basis would 

support this treatment? 

Event contracts on political events currently are traded pursuant to a Commission 

no-action position. The long history of trading in these contracts supports making such 

trading available to other market operators under a transparent regulatory framework. 

D. Legal Implementation 

16. Is it appropriate for the Commission to direct certain or all event contracts onto 

markets that are regulated differently from and perhaps less stringently than DCMs? For 

example, it may be warranted or necessary to treat event markets that aggregate 

information solely for academic or research purposes, event markets set-up for internal 

corporate purposes, or event markets that offer exceedingly low notional value contracts 

to traders differently than markets that possess the attributes of traditional DCMs. 

CIM believes strongly that it is in the public interest for the Commission to 

establish an additional regulatory tier for small-stakes internal and public markets. 

Establishing such a regulatory tier would enable those internal and experimental public 

markets to introduce small-stakes trading to their venues. This will foster market 

innovation, particularly with respect to the trading of internal event markets. 
David A. Stawick 

September 2, 2008 

Page 22 

In this regard, it should be stressed that a variety of companies currently operate 

internal markets and a number of experimental, non-monetary based public event markets 

are already trading. Our proposal is motivated by our belief in the great promise that we 

see in these current experiments and in their ability to further the public interest goals of 

the Act. We believe that these markets would be able to better fulfill their potential 

promise if market participants could put at risk limited amounts of their own capital to 

trade. This is a significantly different market model from that of DCMs, DTEFS or 

EBOTs. Accordingly, we believe that event contracts should not be forced to trade on 

any one type of market, but rather that the Commission should establish the regulatory 

framework whereby small-stakes internal or public markets can operate. 

If the Commission were to add a new market tier, event contracts could be traded 

on small stakes internal or public markets, on DCMs, on DTEFs or on EBOTs, depending 

upon the nature of the market participants. We believe that this result is consistent with 

the Act's structure and with the regulatory goals of the Act. It also recognizes that event 

type contracts have already been listed on DCMs and, under a no-action letter, on a 

market that imposes limits on the amount of capital that traders can risk. The experience 

of these very different markets in trading event contracts has not revealed any particular 

regulatory or public policy issue that would suggest that there is any reason not to 

provide the legal framework which would foster the growth of these markets. 

17. Is it appropriate for the Commission to use the Section 4(c) exemptive authority of the 

Act for implementing a regulatory scheme for event contracts and markets? In this 

regard, the Commission notes that it has the discretion to grant an exemption under 

Section 4(c) to certain classes of transactions without having to make a determination 

as to whether such transactions are subject to the Act in the first instance. 

18. Is the issuance of staff no-action relief, such as the relief issued to the !EM, an 

appropriate or preferable means for establishing regulatory certainty for event contracts 

and markets? Is a policy statement appropriate or preferable? 

Internal and public event markets have been offered on an experimental basis for 

some time. The Iowa Electronic Market ("IEM"), as the Commission notes, began 

operation under a Commission no-action letter first issued in 1992.27 A significant 

number of companies operate internal event markets and there have been a number of 

experimental public event markets operating. In light of the considerable practical 

operating experience of these markets, and the significant academic scholarship and 

public discourse of these issues, CIM believes that there is a sufficient factual and 

27 That letter was subsequently superseded by a more expansive letter issued in 1993. See Concept 

Release, 73 Fed. Reg. at note 5. 
David A. Stawick 

September 2, 2008 

Page 23 

theoretical basis surrounding the use, organization and operation of event markets for the 

Commission to undertake a rule making. 

CIM believes that proposing a regulatory framework and the adoption of rules 

will best provide the legal certainty needed if these markets are to continue to evolve and 

to meet their full public interest potential. In this regard, establishing a regulatory 

framework would be most useful with respect to the operation of public small stakes 

markets. CIM is of the view that rules adopted under the Commission's 4(c) authority 

would be a useful basis for addressing many of the issues that the Commission has raised 

in this request for public comment. 

19. What are the benefits and drawbacks of permitting certain event markets to operate 

pursuant to Commission established conditions that are similar to the conditions under 

which the !EM operates? 

As we have noted, we believe that it would clearly be in the public interest for the 

Commission to establish a regulatory tier for small-stakes, non-intermediated, electronic 

markets. These are among the conditions of the IEM no-action letter. CIM believes that 

these conditions differentiate our market model from the other models that are currently 

subject to the regulatory framework of the Act. As we have also noted, we believe that 

the public benefits of event markets will be enhanced if the experimental markets as 

currently operated are provided a legal framework under which that they can evolve into 

Commission-regulated, small-stakes markets. 

However, we also believe that the additional conditions of the IEM letter, that the 

market be operated for an academic purpose and by a non-profit entity should not be 

incorporated in any statement of general applicability. As the operation of internal and 

experimental public event markets by our companies demonstrates, furtherance of public 

understanding and scholarship relating to these markets is not dependent upon their 

operation within an academic setting or by non-profit entities. We believe that any such 

restriction would harm the development and research that is already taking with respect 

to event markets and would be contrary to the public interest. · 

E. Market Participants 

20. Would it be appropriate to allow market participants, and in particular, retail 

customers, to trade on Commission-regulated event markets with the knowledge that the 

Commission may not be able to effectively monitor the measures or events that underlie 

certain event contracts? 

One benefit of establishing a regulatory framework is that the Commission, 

through the issuance of acceptable practices under applicable Core Principles, could 

provide guidance to markets on establishing contracts with precisely stated, objective and 

transparent pay-out criteria, including appropriate mechanisms for verification of the 
David A. Stawick 

September 2, 2008 

Page24 

occurrence of a pay-out event. Markets registered under this provision would be obliged, 

as are designated contract markets, to operate the market consistent with the applicable 

requirements. The Commission's main role, as it currently is, would be limited to 

general oversight of the markets. Moreover, the Commission under a regulatory 

framework could reserve and incorporate the Act's private right of action provision, 

ensuring that aggrieved private parties would have an avenue to obtain recourse. 

21. What unique protections and prophylactic measures are appropriate or necessary 

for the protection of retail users of event contracts and markets? 

CIM's proposal suggests a number of protections that would protect retail market 

participants. First, to the extent the market is an internal market, market participants 

must have an affinity relationship with the market organizer. Secondly, the markets 

would limit the account of capital that participants could put at risk or lose. Finally, as 

provided under the Core Principles, the market rules could be provided to participants in 

the form of a Disclosure Document. These are significant safeguards which would 

distinguish this market tier from other market tiers regulated under the Act. 

22. What are the implications of permitting the intermediation of event contracts, 

including intermediation on behalf of retail market participants, both with respect to 

trade execution and clearing? 

CIM's proposal for a new market tier includes the condition that the market be 

non-intermediated. Intermediation would introduce a significantly different market 

model from the model that CIM has proposed. First, limitations on the amount of capital 

that a market participant can place at risk or lose in a small-stakes market would require 

intermediaries to invest in systems to carry a large number of small accounts, which as a 

practical, business matter would probably be unattractive. Moreover, the use of 

intermediaries would increase the regulatory and self-regulatory oversight necessary to 

operate the market, defeating the purpose of the market tier, which is to reduce the 

regulatory requirements commensurate with the safeguards built into the framework, 

such as the limitations on loss. Finally, the use of intermediaries is contrary to the way 

that internal markets operate. By their structure, internal markets restrict participants to 

those having a direct, preexisting relationship with the company through employment or 

similar affiliation. 

23. Are there any types of trader or intermediary conduct, peculiar to event contracts and 

markets, that should be prohibited or monitored closely by regulators? 

We are not aware of any such behavior. 

24. What other factors could impact the Commission's ability, given its limited resources, 

to properly oversee or monitor trading in event contracts? 
David A. Stawick 

September 2, 2008 

Page 25 

We believe that it is very possible for the Commission through the construction of 

a sound and appropriately calibrated regulatory framework to oversee these markets 

using its available resources. 

* * * * * 

The Commission has raised important and timely issues in its Concept Release. 

Our companies have operated internal event markets and/or experimental public event 

markets for a number of years. We believe that markets listing futures and binary option 

contracts on various non-traditional underlyings have significant potential public benefits. 

Moreover, we are active participants in the very significant theoretical research and 

development taking place with respect to the operation of experimental event markets. 

Based on our experience, event markets have the potential to further the public interest by 

facilitating commercial interests in "the making of marketing, financing and distribution 

decisions" or by "disseminating pricing information" that indicates consensus opinions 

on future events that are obtained through fair trading facilities or mechanisms. 

Also based on our experience, we believe that the benefits of these experimental 

markets will increase if they are permitted to evolve into Commission-regulated smallstakes futures markets. We believe that these benefits are most likely to be derived if the 

market model which is used is geared toward the special characteristics of the markets as 

they are currently developing. This model includes a number of the characteristics shared 

by an event market that is currently operating pursuant to a Commission no-action letter, 

and include, limitation on the amount that market participants can have at risk in the 

market (or lose within a defined period of time); non-intermediation of the market, and 

operation through an electronic trading platform. 

These market characteristics distinguish this market model from any of the other 

regulatory market tiers under the Act and Commission rules. Accordingly, CIM believes 

that it is in the public interest for the Commission to adopt rules establishing a regulatory 

framework geared toward the special characteristics of these markets. In doing so, the 

Commission will be furthering the regulatory and public interest goals of the Act. 

Moreover, this approach follows a template established by the Commission under 

its New Regulatory Framework and codified by Congress in the CFMA. This successful 

template establishes differing degrees and kinds of regulation dependent upon factors 

including the nature of traders permitted access to the trading platform. Unlike the 

EBOT or DTEF, which are based on limiting access to eligible parties that meet high net 

worth requirements, the new regulatory tier would be restricted to small-stakes trading. 

In the case of internal markets, market participants would additionally be required to be 

employees of or have a similar relation to, the market's sponsoring company. 

CIM further believes that the Commission should use its section 4( c) authority to 

describe broadly those contracts which may be listed on the exempt market under rules 
David A. Stawick 

September 2, 2008 

Page 26 

established by the Commission. Finally, CIM does not believe that its proposals should 

force all event markets to operate under the same regulatory tier. Consistent with the 

current statutory and regulatory structure, market operators could continue to choose to 

offer such contracts in different tiers under the regulations relevant to that market tier. 

CIM believes that experimental event markets which its members have operated 

have demonstrated significant public benefits. The Commission has in the past 

administered the Act to further the Congressional directive that regulation of the futures 

market not impede market innovation. CIM believes that the Commission has the 

opportunity to foster beneficial innovations as Congress intended and commends the 

Commission for its foresight in seeking public comment on these issues. We look 

forward to cooperating with the Commission in its consideration of an appropriate 

regulatory framework for these exciting markets. 

We would be happy to discuss our comments or any of the issues raised in the 

Concept Release at greater length with the staff. Please feel free to contact Paul M. 

Architzel of Alston & Bird, LLP, outside counsel to the Coalition of Internal Markets at 

(202) 756-3492, Bo Cowgill of Google, Inc. at (650) 380-2213, or David Pennock of 

Yahoo! Inc. at (212) 571-8140. 
David A. Stawick 

September 2, 2008 

Page 27 

For Google, Inc. 

Hal Varian 

Title: V.P. and ChiefEconomist 

cc: Acting Chairman Lukken 

Commissioner Dunn 

Commissioner Chilton 

Commissioner Sommers 

Terry Arbit, General Counsel 

Respectfully submitted, 

For Yahoo! Inc. 

Preston McAfee 

Title: Vice President and Research Fellow 

Ananda Radhakrishnan, Director DCIO 

Richard A. Shilts, Director DMO 

David VanWagner, Chief Counsel DMO 

Bruce Fekrat, DMO 

LEGAL02/30875291 vi 
David A. Stawick 

September 2, 2008 

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