Citadel Securities Urges SEC to Take Oversight of Some Wagers

(Bloomberg) -- Citadel Securities told regulators that prediction market contracts linked to publicly-traded companies should be overseen by the Securities and Exchange Commission instead of the agency that has taken responsibility for them so far, the Commodity Futures Trading Commission.

The firm wrote in a letter Wednesday that contracts tied to "key performance indicators" are security-based swaps that fall under the SEC's purview and warned regulators that oversight by the CFTC risks market fragmentation.

Prediction markets allow customers to place bets on nearly any event, from sports and inflation to celebrity weddings. KPI contracts, a subset of those wagers, are growing in popularity across some CFTC-regulated exchanges and allow people to trade on issues like Kroger Co.'s sales or the number of United Airlines Holdings Inc. passengers.

While the CFTC views these platforms as derivatives exchanges that fall under their jurisdiction, Citadel Securities said trades tied to public companies should be regulated differently.

"Congress established this framework for good reason: trading in equity-linked products directly implicates the integrity of the underlying securities markets, impacting our public companies and investors," Stephen Berger, global head of government and regulatory policy at Citadel Securities, said in the letter.

Berger also raised concerns about the risk of insider trading. He noted the SEC and equities exchanges have decades of experience investigating insider trading with "extensive cross-market surveillance capabilities across equities, options, and related products."

The letter comes as regulators grapple with the surging prediction market space, with novel products proliferating and increasingly bleeding into traditional markets. The SEC and CFTC issued a request for public input on the definition of a "swap" and "security-based swap" earlier this year and the heads of both agencies have said they want to harmonize their parallel regulatory regimes.