Key Highlights
- Better Markets urged the CFTC to ban exchanges from trading on their own platforms due to conflict-of-interest concerns.
- The group said the CFTC’s plan to allow affiliated market makers could be difficult to enforce fairly.
- Better Markets also raised concerns about clearinghouse risks and questioned the CFTC’s wider approach to regulating retail crypto trading.
The push comes as crypto and prediction markets continue to challenge the traditional separation between different parts of the financial market. Amanda Fischer said the organization believes these business combinations can create problems that cannot simply be solved with internal rules or policies.
FTX brought vertical integration into focus
Fischer pointed to 2022, when Sam Bankman-Fried sought approval for FTX to operate under a business model that would bring several parts of the market under one company.
Better Markets said it had warned about the model at the time. Fischer said the growth of crypto has since helped fuel what she called an “arms race” in vertical integration across products overseen by the CFTC.
In simple terms, vertical integration happens when a company controls different parts of the same market. In this case, an exchange could run the marketplace where people trade while also having a company or affiliate that trades on that same marketplace.
That is where Better Markets sees a major problem.
Six exchanges already trade on their platforms
Fischer said the CFTC has stated that six exchanges already conduct proprietary trading on their own platforms. The agency did not say which markets those exchanges operate in. Fischer said they likely include prediction markets.
The CFTC is trying to draw a line between proprietary trading and market making. Proprietary trading means a firm trades for its own benefit, while a market maker provides buying and selling activity to help keep a market liquid. Under the approach discussed by Fischer, exchanges would be stopped from proprietary trading but could still use affiliated firms as market makers.
Better Markets does not believe that line will be easy to police.
“The CFTC attempts to distinguish between firms prop trading & market making on their own exchange – prohibiting the former and allowing the latter. But that line is porous, and we argue it will be difficult to enforce,” Fischer said.
Why market making raises concerns
Because of that concern, Better Markets wants a complete ban on an exchange trading on its own platform. Fischer argued that if an exchange needs its own affiliated market maker because outside firms will not provide enough liquidity, there should be a question about whether the contract should be listed at all.
The group also questioned whether an exchange can fairly enforce its rules when it has a business interest in one of its members. Fischer said the same concern could arise if the exchange has an interest that goes against a competitor.
The concerns do not stop at trading. Better Markets also raised questions about clearinghouses, which help protect markets when one side of a trade cannot meet its obligations. Fischer said a clearinghouse receiving capital from an affiliate could create new risks and increase the chance of financial problems spreading through the market.
CFTC considers wider crypto rules
The issue comes as the CFTC works on a wider crypto regulatory framework. On October 5, the agency opened public comments on a potential framework for leveraged retail crypto trading.
The notice is not a final rule or a proposed rule. Instead, the CFTC is asking for feedback before deciding whether to move ahead with future rules.
The CFTC’s notice also asks questions about platforms that combine trading, clearing and custody, areas that are closely tied to Better Markets’ concerns about companies controlling several parts of the same market.
CFTC Chairman Michael Selig said the agency wants its future rules to provide “clarity, certainty, and consumer protections.” He also said the CFTC wants regulations that can prevent fraudulent schemes instead of waiting to act after problems occur.
Better Markets questions CFTC oversight
Better Markets, however, remains critical of the agency’s wider approach to crypto. Benjamin Schiffrin, the organization’s director of securities policy, argued that the CFTC is not the right agency to provide the level of investor protection needed for retail crypto customers.
“Unlike the SEC, the CFTC lacks an investor protection mandate. Its mission is to regulate the commodity and derivatives markets, which historically have been dominated by large institutions with very little retail investor participation. Because the CFTC’s rules lack the protections that apply when investors trade securities regulated by the SEC, the CFTC is the wrong agency to regulate transactions involving crypto assets by retail customers.” Benjamin Schiffrin said.
In short, the Central issue for Better Markets is simple: an exchange should not be both the place where trades happen and a player making those trades. The group wants the CFTC to address that conflict directly rather than depend on rules that may be difficult to enforce.
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