Citadel Securities Calls for SEC Regulation of Performance Contracts Linked to Public Companies
Market maker Citadel Securities has written to regulators stating that performance market contracts linked to public companies should be regulated by the U.S. Securities and Exchange Commission (SEC) rather than the Commodity Futures Trading Commission (CFTC). The letter characterizes contracts tied to key performance indicators as swaps based on securities, which fall under the SEC's jurisdiction, and warns that if the CFTC continues to lead, the market will become fragmented.
Policy head Stephen Berger wrote that Congress established a dual-track framework because stock-linked products directly affect the integrity of the underlying securities market and investors. He pointed out that the SEC and stock exchanges have decades of experience in insider trading investigations and cross-market surveillance. Existing platforms have launched contracts based on metrics such as Kroger sales, United Airlines passenger volume, Tesla production, and McDonald's same-store sales, as well as contracts directly linked to weekly stock price performance. Prediction markets typically operate under CFTC-designated contract markets or exemption frameworks, with the CFTC viewing them as derivatives; in March, the CFTC issued a notice seeking comments and signed a memorandum of understanding with the SEC to address jurisdiction. CBOE and others have also applied to the SEC to issue binary options based on company metrics. Citadel's president previously stated that liquidity might be provided for non-sports event contracts. Overall trading in prediction markets has expanded to include sports, macroeconomic, and corporate events.
In market mechanics, buyers are institutions hedging earnings reports and customer traffic, while sellers are event contract platforms and market makers; the driving force is turning company operational numbers into tradable contracts, after which jurisdiction determines who can make markets and who must disclose under securities insider rules. Funds flow from the price difference of binary contracts to platforms and market makers. The beneficiaries are the SEC system with stock option surveillance and Citadel-like stock market makers, while those under pressure are prediction platforms that have rolled out company KPI contracts under CFTC licenses, as well as contract buyers with weaker information disclosure than the public companies themselves.
Source: Public Information
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The market-making giant is pushing KPI contracts into securities law because the stock ledger is its main arena. Once sales and passenger volumes can be bet on, they approach a shadow market of undisclosed performance, and the definition of insider trading will expand from "holding stock" to "holding yes/no contracts." The CFTC manages events, while the SEC manages securities, with company numbers caught in between. The warning of fragmentation implies that two sets of rules coexist, and arbitrage will breach the prices of both.
The capital path is that liquidity follows licensing. Citadel can take orders under the SEC framework using existing cross-market monitoring without having to grapple with state gambling laws on sports betting. If platforms are reclassified as securities swaps, the thresholds for qualified investors, reporting, and market-making obligations will rise, potentially pushing retail trading back to sports and elections. The memorandum of understanding indicates that both commissions have not clearly delineated their roles, and the lobbying letter is an attempt to define the rules before they are finalized.
Similar to the jurisdictional disputes over Bitcoin ETFs and the SEC's targeting of security tokens, the industry phase is that prediction markets are transitioning from election toys to corporate fundamentals. Whoever defines the legal attributes of KPI contracts will determine the second round stock prices during earnings week.
Structurally, this represents regulatory change: the same cash flow is being contested by two sets of codes. The mechanism is that the settlement price of event contracts depends on the issuer's operational facts, which simultaneously drive stock prices, thus requiring monitoring of insider trading and manipulation across markets; market makers choose the side with stronger surveillance capabilities to externalize risk to the platform's licensing costs.
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Contracts that can bet on earnings reports will ultimately be classified as securities.
Market makers choose regulation as a way to select their own monitoring systems.
The seam of dual-peak regulation is the birthplace of the next product.