The False Advertising of the CFTC
By Bryan Caplan
[O]ffering commodity option contracts to U.S. customers for trading, as
well as soliciting, accepting, and confirming the execution of orders
from U.S. customers, all in violation of the CFTC’s ban on off-exchange
Probably true. But the CFTC doesn’t merely say, “We’re just enforcing the law.” Its press release tries to justify the law they’re enforcing:
The requirement for on-exchange
trading is important for a number of reasons, including that it enables
the CFTC to police market activity and protect market integrity.
“Protect market integrity.” This sounds like it’s straight out of the Adverse Selection section of an intermediate micro textbook. But don’t be fooled.
If off-exchange trading really suffered from adverse selection, consumers would be reluctant to bet on Intrade: “How can I trust Intrade with my money if they’re not duly regulated?” Akerlof explained the whole thing in “The Market for Lemons.”
The CFTC’s real complaint is that consumers eagerly bet on Intrade because the company exemplifies market integrity: “I trust Intrade with my money because of their reputation, not government regulation.” Reputation: That’s the same mechanism, of course, that underlies eBay, Amazon Marketplace, and the whole cornucopia of internet commerce that the mainstream information economist of 1990 would have dismissed as free-market Fantasy Island.
If the CFTC really wants to protect market integrity, it should start by publicly admitting that if the CFTC ever served a useful function, that time has long since passed. Americans send money to Intrade because Intrade delivers the goods (and produces the positive externality of accurate forecasts in the process!).
In the information age, firms’ reputations are just a click away. That’s all the protection any consumer needs. The only people the CFTC is “protecting” are their own obsolete employees.
HT: Alex Tabarrok