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Is someone profiting on whether your company’s CFO says the word “synergies” during your earnings call?

In our continuing coverage of the insider trading and other risks arising in burgeoning prediction markets, the CFTC’s Division of Market Oversight issued an advisory on some of the potential perils of “mention markets,” which are described as follows:

Mention Markets allow market participants to take positions on whether a specific individual will use certain words or phrases in a defined or specified public forum, such as during a speech, on an earnings call, or on social media. Attendance- and interaction-based (e.g. by shaking hands, being photographed together, or engaging on social media) event contracts listed by DCMs have similarly depended on the discrete conduct of an individual.

The CFTC’s announcement notes “[t]hese contract types present a heightened risk of manipulation because their settlement turns on the discrete conduct of a person that may be neither independently generated nor externally verifiable.” These characteristics create some unique risks as compared to other event contracts, described as follows:

As the settlement of contracts in Mention Markets may be controlled by a single individual, a small group of individuals, or persons with access to or influence over the individual whose words, attendance, or interaction determines settlement, DMO staff may view Mention Markets as presumptively readily susceptible to manipulation and accordingly expect a heightened showing in support of any submission seeking to list such contracts. This view is grounded in several interrelated features.

Because the outcome of these contracts is often within the control of a small number of actors, the settlement condition is comparatively easier to cause, prevent, or influence for personal gain. For example, a contract might depend on whether the host of a live-streamed podcast utters a particular catchphrase; the host can easily fulfill this condition, and a trader may directly induce the outcome by submitting a question or purchasing an on-air acknowledgment. Those closest to the settlement outcome frequently possess advance knowledge—such as access to scripts, prepared remarks, guest lists, or unpublished content—which constitutes material nonpublic information and creates opportunities for trading advantages. This access also makes individuals more susceptible to influence by others seeking to manipulate the outcome, whether through social engineering, inducements, or public pressure campaigns.

These risks are compounded where Mention Markets settle on outcomes that lack independent verification or substantial public scrutiny. When settlement turns on conduct occurring in informal or private settings—or on the actions of a person not subject to public scrutiny—manipulation may be harder to detect and easier to conceal, and those with influence over the outcome may exploit their position with less risk of exposure. Even in high profile contexts, words or conduct that lack substantive meaning within the context of the relevant event, such as an unrelated buzzword recited during an earnings call or an incidental gesture at a public ceremony, may not attract meaningful attention or be subject to the same scrutiny and discipline as words or conduct that are material to the event itself.

This alert reminds me of how Marty Dunn would often include bizarre words and phrases in his remarks when appearing on panels at securities law conferences, based on dares emanating from his friends. It was always amusing to observe how the audience reacted to these non sequiturs, but no one ever proposed that we could make money on it! Hat tip to the Daily Update from Securities Docket for highlighting this fascinating prediction markets development.

– Dave Lynn