The CFTC's American Odds Letter: When a Price Display Becomes a Deceptive Practice
By R Tamara de Silva
The CFTC has taken a position that, to the firm's knowledge, its staff has never taken before: the format in which a price is displayed can itself be a deceptive practice, even when every number on the screen is accurate. The format in question is the American odds convention used by sportsbooks, the familiar minus 150 and plus 200, applied to federally regulated event contracts.
The position arrives in a three-page letter dated July 30 from the Division of Market Oversight and the Market Participants Division, over the signature of DJ Hennes, who directs the second and is acting director of the first. It is addressed to every entity the agency regulates and to their affiliates, it is posted publicly on cftc.gov, and it asks every recipient to confirm receipt by August 31.
What is an event contract?
An event contract is a yes-or-no proposition packaged as a tradable contract. The contracts are framed as questions or event scenarios. Will a named candidate win. Will the Fed cut in September. Will a team win on Sunday. Each contract settles at one dollar if the event happens and at zero if it does not, and until the event resolves, the contract trades on an exchange at some price in between. That price is the market's live estimate of the probability. A contract trading at 60 cents means the crowd of buyers and sellers currently puts the chance near 60 percent. Buy at 60 cents and you risk 60 cents to make 40. The person selling to you is another trader who thinks 60 cents is too high. The exchange in the middle, a designated contract market in the statute's vocabulary, is a federally licensed marketplace that matches the two of you and, in these markets, usually clears the trade through its own clearinghouse. It earns its fees either way; whether the event happens is not supposed to matter to it.
American odds vs. contract prices and what the sportsbook format hides
American odds are the sportsbook convention for stating the same kind of probability, built around a hundred-dollar unit. A minus number tells you what you must stake to win one hundred dollars of profit: at minus 150, you put up 150 to win 100. A plus number tells you what a hundred-dollar stake wins: at plus 150, you put up 100 to win 150. Anyone who has spent time around sportsbooks reads the code without thinking about it. The letter's concern is everyone else.
Now put the two formats side by side. The letter's entire argument rests on this comparison. A contract priced at 60 cents and a line of minus 150 are the same trade. Sixty cents risked to win forty is three to two, and so is 150 risked to win 100. The implied probability of minus 150 is 150 divided by 250, which is 60 percent, which is the contract price. The other side matches as well: the 40 cent contract is plus 150. One market, two costumes.
One could ask: if the numbers are identical, where is the harm? The odds format strips out three things a customer needs. The probability is the first casualty, meaning 60 cents says 60 percent on its face, while minus 150 says it only to someone willing to do division. The second is the order book. An exchange shows bids, offers, and depth, what the letter calls “indicia of market depth,” and the odds format has nowhere to put any of that. The third, and the one that matters most, is the counterparty. On an exchange, the other side of your trade is another trader, and the spread between the bid and the ask is visible and goes to whoever took it. At a sportsbook, the house writes the line, takes every bet itself, and folds its margin into the number. Bettors call that margin the vig. It is why a coin flip gets priced at minus 110 on both sides. The two implied probabilities add up to about 105 percent, and the extra five points are the bookmaker's keep.
The house is, in the CFTC letter's words, "financially interested in the outcome of every wager." An exchange, in principle, is not. This is the most important fact about any trade- who is on the other side, and what do they want? On an exchange, the other side of your trade is a participant who disagrees with you about the probability, and the venue that matched the two of you collects the same fee whichever of you turns out to be right. At a book, the other side is the operator itself, and the number on the screen was written by the party that gains when you are wrong. Nothing about a minus 150 tells a customer which of those two worlds it came from. The format looks identical whether the price was discovered in an open auction or set by an interested party, and that, more than anything else on the screen, is what the letter means by misleading a customer about the nature of the transaction.
Staff cited behavioral research finding that the odds format leads to riskier betting, and the letter names the commercial danger plainly: a customer who cannot tell the 60 cent product from the minus 150 product can be steered from the one priced by a market to the one priced by the house, or, in the letter's phrase, confusion could be exploited to drive participants into “higher-margin, non-market-priced bookmaking products.”
What the CFTC letter says: Rule 180.1 and Core Principle 12
The legal spine is short. Section 6(c)(1) of the Commodity Exchange Act, codified at 7 U.S.C. § 9, makes it unlawful to use any manipulative or deceptive device in connection with a swap, and Commission Regulation 180.1 gives that ban its working form, modeled almost word for word on the SEC's Rule 10b-5. It has three limbs: schemes to defraud, untrue or misleading statements or omissions of material fact, and courses of business that operate as a fraud on any person. Everything here turns on the word misleading. A display can be arithmetically true and still, in staff's view, misleading about the nature of the transaction, and Rule 180.1 asks nothing more than that, done intentionally or recklessly. The letter adds that the National Futures Association's sales practice rule for its member firms, Compliance Rule 2-29, imposes the same duty, and it reminds the exchanges of Core Principle 12, the statutory obligation of a designated contract market to protect participants from abusive or unfair actions by other parties to a transaction.
That last citation reaches further than it first appears. The letter tells exchanges to review not only their own displays but the displays of their intermediaries, affiliates, and partners. In a market increasingly built on white-label arrangements between licensed exchanges and consumer-facing brands, that sentence makes the exchange answerable for its partners' screens. The letter closes with logistics: introducing brokers and futures commission merchants are asked to confirm receipt to one staff mailbox, designated contract markets to another, by August 31.
A caution about form is in order. This is a staff letter, not a rule. It went through no notice and comment, binds no court, and creates no obligation that was not already sitting in Rule 180.1. Its force is informal, which makes the choices staff made, what it put in writing, and who was copied, the more interesting questions.
Prediction markets vs. gambling: the line the letter defends
The narrow reading of this letter is that it concerns optics and it is a defensive measure issued while the boundary between these products and gambling is being litigated across the country, and the timing is surely no accident. The stronger reading, and the one the letter's own text supports, is that staff is defending the characteristic that actually distinguishes these markets from the gaming operators they are so often compared to because there are significant differences between event contracts and sports bets.
The difference between an event contract and a sports bet was never the subject matter; both can reference the same Sunday game. The difference is structural. On a regulated exchange, the price is set by competing traders rather than by the operator, the order book is public, the person on the other side of your trade is another participant, and the venue collects the same fees whichever way the event resolves. None of that is true at a sportsbook. That is why the letter, in the middle of a warning about deceptive practices, pauses to credit these markets with real transparency and a genuine price discovery function. The praise has a legal function: transparency and market pricing are the features that justify treating the product as a derivative in the first place.
One of the defining characteristics of the futures markets is that they are a zero-sum game among the participants. Every contract has a long and a short, and every dollar the winner takes out is a dollar the loser put in, less the fees. The venue holds no position and carries no edge; it cannot win and it cannot lose.
A casino runs on the opposite arithmetic. The house is a party to every wager and has priced every wager so that, across all of its customers, it must come out ahead; the vig is the guarantee. In the first structure, the participants play each other. In the second, everyone plays the house, and the house wrote the rules of the game. That difference is why a futures price means something. In a market where the participants take money from each other, the price is the running scoreboard of everything they collectively know, which is the price discovery the letter credits. A sportsbook's line carries information too, but it is the house's information, adjusted to balance the house's book and protect the house's margin, and no customer can see how much of the number is probability and how much is protection. And zero-sum actually understates the social case for futures, because the losing side often bought something real with its loss: a hedger paying speculators to carry a risk it did not want, which is insurance by another name.
None of this is a new fight. The exchanges fought it a hundred and twenty years ago against the bucket shops, storefront operations that displayed the Board of Trade's own quotations on their walls while taking the other side of every customer's order themselves. No order ever reached a market. The customer was betting against the shop, at the shop's numbers. When the dispute reached the Supreme Court in Board of Trade v. Christie in 1905, Justice Holmes drew the line on structure: the exchange, where competing traders set the price and contracts contemplated real settlement, was a legitimate market whose speculation was, in his words, “the self-adjustment of society to the probable,” while the bucket shop pirating its quotations was a gambling house that could be cut off. Same numbers on the wall, different business underneath. The law has been separating markets from books by their structure rather than their appearance since before the CFTC existed, and the American odds letter is the newest entry in a very old line.
Seen that way, the display convention stops being a cosmetic question. The price is the difference between the two businesses, made visible. A screen that shows 60 cents, with a bid and an offer behind it, shows the customer a market. A screen that shows minus 150 shows the customer a sportsbook, and it erases, in the one place a customer ever looks, everything that distinguishes the two. The bucket shop was a book dressed up as a market. The letter's concern is the mirror image, a market dressing itself up as a book, and an operator that does so is spending down the category's defining asset.
The courts are contesting the same line right now. New York is reportedly seeking at least 36 billion dollars from one platform on the theory that its sports contracts are unlicensed wagers, and more than a dozen states have taken these platforms to court. The Commission's answer in those cases has been that structure controls, not subject matter. The letter makes the same argument to the industry that the agency has been making to judges: if the distinction is going to hold, it has to be visible on the screen.
The August 31 deadline and scienter under Rule 180.1
Rule 180.1 does not punish honest mistakes. It reaches conduct that is intentional or reckless, what the law calls scienter, and recklessness in this setting means something close to knowing better. That is what makes the receipt confirmation the most consequential sentence in the letter. As of September 1, every registered exchange and intermediary in these markets will have confirmed in writing, to a staff mailbox, that it received a letter, copied to the Director of Enforcement, stating staff's view that odds-format displays are likely to mislead. Whether a display convention alone could carry an enforcement case is untested, and there are reasonable defenses. But the hardest element to prove in a 180.1 case is state of mind, and after August 31 no recipient will be able to say it was never told. In any later case, the August confirmation file is where an enforcement lawyer would start.
What to watch after August 31
Three things are worth watching over the next month.
The first is the screens themselves. The letter asks for compliance by August 31, and press reports say one platform has already agreed while others were still showing plus and minus lines days later. Whether the interfaces actually change is the simplest test of how seriously the industry takes the letter.
The second is the state courtrooms. A state filing will be tempted to quote a federal regulator saying these displays are likely to mislead. The letter's own logic answers the point: the displays mislead only because the products are different. But the Commission has now put language on paper, and both sides will use it.
The third is Rule 180.1 itself. The firm argued in Law360 in June that the rule strains as an insider trading tool in markets with no fiduciary to breach. It has now been handed marketing regulation as well. A one-paragraph rule adopted in 2011 is becoming, one staff letter at a time, the consumer protection code of the prediction markets.
One more thread, for readers of the firm's comment letters. The dividing line the letter defends rests on the premise that the venue holds no financial interest in outcomes. That premise is cleanest when nothing in the venue's corporate family trades on its own market, which is exactly the visibility the firm has asked the Commission to build into the event contract reporting rules. The clearer the line between market and house, the stronger the case for these markets becomes, in court and everywhere else.
The staff letter is available from the CFTC. R Tamara de Silva is the Managing Partner of De Silva Law Offices, LLC, a Chicago firm concentrating in CFTC and NFA regulation, event contracts and prediction markets, derivatives and futures compliance, and enforcement defense. The firm advises exchanges, intermediaries, and platforms on the registration, reporting, and marketing questions discussed above and can be reached at 312-500-8424 or info@desilvalawoffices.com.