Key highlights:
- Citadel Securities wants prediction markets to be regulated by the SEC
- Contracts based on KPIs of public companies should be treated as security-based swaps
- The company believes that the SEC’s regulation could mitigate the rising insider trading risks
American market-making firm Citadel Securities is gaining attention with its latest comments on the regulation of prediction markets. While these platforms are facing increased scrutiny across the globe, especially surrounding their regulation, Citadel is putting forward a different approach. The company wants contracts tied to public companies to be governed by the SEC rather than the CFTC.
Citadel Securities pushes for SEC oversight of prediction markets
According to a Bloomberg report, Citadel Securities has asked regulators to include prediction market contracts linked to publicly traded companies under the regulation of the Securities and Exchange Commission (SEC), rather than the Commodity Futures Trading Commission (CFTC). Citadel Securities’ Stephen Berger noted,
“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.”
The firm wrote a letter to the regulators, arguing that the contracts based on key performance indicators (KPIs) of public companies should be treated as security-based swaps. Citadel Securities believes that the CFTC’s regulation of such platforms could create differences in how similar financial products are regulated across markets.
Notably, the team asserts that financial innovation should not weaken the rules that protect US securities markets. As products such as equity options and security-based swaps already fall under federal securities laws, contracts linked to US public companies should remain under the SEC’s regulatory framework.
CFTC’s self-certification process questioned
Further, Citadel Securities questioned the CFTC’s self-certification system. It allows registered trading platforms to introduce new products without waiting for a full review from the regulator. As per the rule, a platform can certify a product of its own and potentially start trading on the next business day.
In contrast, the SEC-regulated venues have to go through formal review before launching a new product. The review includes public feedback and requires the SEC to approve the product before trading begins.
According to Citadel Securities, this difference between the SEC and CFTC’s approach could create a regulatory gap. The company stated that trading venues might use the CFTC’s faster self-certification process to launch products that should actually fall under the SEC’s authority.
Citadel Securities flags insider trading risks
Another major concern highlighted by Citadel Securities is the risk of insider trading. The company claimed that the prediction market contracts tied to public companies could create new risks around insider trading.
Recent incidents reported by CoinCodex further explain this growing risk. Former White House staffer Gabriel Perez has been fined for allegedly using insider knowledge to gain $107,500 from betting on the Kalshi prediction market platform. Another major figure who faced a similar situation is former US congressman George Santos. He allegedly earned around $17,839 via insider trading, and was hit by a permanent ban from Kalshi.
Amid this backdrop, Stephen Berger stated that the SEC’s oversight could mitigate these risks to an extent. The SEC has years of experience in tracking suspicious market activity across multiple financial markets. This could help them track similar issues in the prediction market. Citadel says that the SEC’s ability to monitor activity across stocks, options, and related products could help the regulator identify unusual trading patterns and possible misuse of information that is not made public.
Source:: Citadel Securities Wants SEC, Not CFTC, to Regulate Prediction Markets