On 30 July 2026 the Commodity Futures Trading Commission proposed new rules on affiliations among the entities it regulates, and one part of it lands directly on the way most prediction market venues are built. Published in the Federal Register on 6 August 2026 as Conflicts and Affiliations (91 FR 50926, RIN 3038-AF76), it runs to seventy pages and covers clearing houses, brokers and swap venues. Its third section is narrower. It would stop a firm from trading its own money on an exchange it shares an owner with, then hand back one exception for an affiliate that does nothing but make markets, on conditions that must hold at all times.
Comments close on 5 October 2026. As of 21 August 2026 nothing here is binding and the questions the Commission left open are still open. A venue that waits for the final rule will be reading a document it had a chance to shape and did not.
The proposal opens by crediting what the category already built
The tone is not what a headline suggests. The Commission counts twenty seven designated contract markets and says roughly eight have an affiliated market maker trading on their own venue, a structure it calls especially prominent in prediction markets. It then lists what those venues already do unprompted: public disclosure of the affiliation, information barriers keeping the affiliate away from non-public information, rules against preferential treatment, and adjustments to ordinary price and time priority. The Commission says it recognises the value of those measures and that they have contributed to the integrity of these markets. (One caution on figures: the section proposing the rule instead says at least six venues let an affiliate trade as principal, and the document never reconciles the two counts.)
Then comes the sentence the rest of the section rests on. The existing framework of voluntary practices, the Commission writes, is "however constructive, uneven." Measures differ in stringency between venues, live in different documents, can be narrowed or dropped at any venue's discretion, and leave a participant trading across several venues with no consistent baseline.
Read from the operator's side, that is our own argument arriving from the other direction. The Manifest puts it as a bet about survival: the market that survives regulation is the one that was already behaving as if regulation had arrived. The corollary is the part nobody enjoys. Behaving well in a way nobody else can verify or compare is not a standard, and practices get codified by someone else.
Why a venue ends up owning its own liquidity
The Commission does not treat the affiliated market maker as a trick. It makes an affirmative case anyone who has tried to launch a venue will recognise. Independent market makers will not commit capital until a market shows enough volume to be worth it, and volume is hard to attract without quoted liquidity, so an affiliate tied to the venue supplies that first quote when nobody else will.
This bites harder in prediction markets, the Commission says, because such venues "characteristically list a large and continually refreshed population of individual small, short-lived, and idiosyncratic contracts," and an unaffiliated market maker will rationally put its capital into the few deepest contracts and leave the long tail unquoted. Because such contracts keep being listed, the need is treated as recurring rather than confined to launch, which is why the exception is standing rather than temporary. Cboe, in the comment record the proposal quotes, doubts an affiliate is needed at all. The underlying problem is real, though, and readers who followed our argument that depth matters more than headline volume will recognise it from the supply side.
The conflict the Commission says procedures cannot reach
What the Commission treats as different in kind is the gap between an affiliated broker and an affiliated trader. A broker acts as agent between venue and customer. A principal trading firm is itself the counterparty to a customer's trade, and its profits flow up to the owner the venue belongs to. The conflict therefore does not sit in decision making, where procedures could manage it. It "inheres in the exchange's economic position and persists, however scrupulously the exchange administers its conflicts procedures."
Three consequences follow, and the proposed conditions answer them one by one. A venue sets the terms everyone trades on, from latency and market data to whose order fills first, so affiliation gives it a reason to tilt them, and a principal trader turns any such edge straight into profit taken from the participant on the other side. A venue also holds non-public information on order flow and resting orders, and its incentive to tolerate a leak points the same way as the affiliate's incentive to use it. Most fundamentally, a designated contract market must run surveillance over its own market, so where the firm under surveillance is the affiliate the venue is "asked to investigate and, if warranted, discipline the source of its own revenue."
This is not only the regulator's view: in the comment record the proposal quotes, CME called such an affiliation the "most acute" of these risks and an "inherent and stark conflict." The legal hooks are Core Principles 16 and 12, at 7 U.S.C. § 7(d)(16) and § 7(d)(12), plus the rulemaking power at 7 U.S.C. § 12a(5).
Subordination is the condition doing the real work
The first and most consequential condition is order priority subordination. Under proposed Regulation 38.852(c)(1)(i) the matching engine would have to fill an unaffiliated member's bid or offer before the affiliate's at the same price, without regard to time priority, so the affiliate is filled last at every price level. It can post first and still be filled last.
The Commission preferred this to a volume cap or a phased sunset because it adjusts itself. Where nobody else quotes, the affiliate supplies the market; as independent liquidity arrives, it recedes into a residual role and earns less, which reduces the venue's dependence on it. But it has a hole the Commission names itself, because subordination only bites where there is a competing order to defer to. Where the affiliate is the sole quote at a price, which on a long tail of small contracts is the normal case rather than the exception, the condition does nothing and the others are the only protection left. The Commission asks whether they suffice, and nobody is better placed to answer than the venues. Subordination is also written for a central limit order book, and the Commission asks whether it works where matching happens otherwise, pointing in a footnote to a live venue's documentation of combination orders on Kalshi.
What bona fide market making would have to say on paper
The exception is open only to what the proposal calls a bona fide market maker, and proposed Regulation 38.852(c)(1)(ii) defines that through the programme filed with the Commission rather than through intent. That programme would have to state the affiliate's obligations, the performance standards attached to them and the consequences of missing them, on terms no more favourable than an unaffiliated member gets, require continuous two sided quotes in every product the affiliate quotes, name the minimum trading hours, limit permissible spreads, and bar directional positions other than in connection with quoting.
What the Commission left out is as informative as what it kept. It declined to fix hours and spread numbers in the rule, on the view that one set of parameters cannot suit products this varied, leaving them to the venue subject to review under Regulation 40.6. It declined to require the affiliate to finish a period flat, since a genuine market maker can end a session holding a net position. And it declined a capital independence test, since a parent usually funds venue and affiliate alike. It asks for comment on all three.
Beside them sits an incentive parity requirement at proposed Regulation 38.852(b)(2): where a venue runs an incentive programme reaching affiliated principal traders, unaffiliated members must be able to join on terms no less favourable. Anyone who read Staff Letter 26-23, the advisory the Division of Market Oversight issued on 12 August 2026 and announced in release 9282-26, will see the two documents converging on one filing. We covered it in our piece on bought volume, and the point carries over: a programme designed without these answers cannot be papered over with them later.
Separation here means systems, staff and rooms
The guidance on what separation looks like is where the cost sits, and it is not a policy document. In the acceptable practices it would add to Appendix B, the Commission would have the trading platform, surveillance and recordkeeping systems kept logically separate from the affiliate's, with controls elsewhere against leakage and monitoring for access gained anyway. Staff would not be shared beyond administrative functions such as payroll and technology staff handling systems safeguards, and legal and compliance are expressly not administrative here. Office space would be separate, with physical barriers. None of it can be built inside a comment window, which is the point of reading it now.
Verification would not be left to the venue either. Proposed Regulation 38.852(c)(2) would put an independent third party regulatory service provider on financial surveillance of the affiliate under Regulation 38.604 as though it were a broker, reviewing the venue's conflicts procedures and certifying annually to the Commission and the board that every condition is met. It would be mandatory, not optional as for an affiliated broker elsewhere in the proposal, because an exchange "cannot credibly verify its own compliance in these circumstances." Without that certification the affiliate stops qualifying and has to stop trading.
A disclosure that cannot be clicked away
The condition we would defend hardest is the one a growth team will like least. Proposed Regulation 38.852(c)(3) would have the venue tell every trader, once per session and before their first order, that an affiliated market maker exists and what its relationship to the venue is. The notice would appear in the order entry interface, in plain language a non-specialist can follow, in full rather than behind a link, would state the subordination condition explicitly, and could not be dismissed without an affirmative acknowledgment.
Directive 02 of the Manifest asks that fees, spreads, settlement sources, custody arrangements and conflicts of interest be stated in plain language on the surface where the trade happens. That is this condition almost word for word, with the surface specified, and we argued the same about pricing in our piece on display as a compliance signal. The Commission offers a lighter alternative and asks for views: a general disclosure on the website and in the rulebook plus one notice at account opening. A disclosure delivered months before the trade is written for the file, not the reader.
Two places where the rule text does not match the preamble
Reading the proposed regulation against its own preamble turns up two mismatches, both in the rule for designated contract markets. We checked both against the Federal Register full text on 21 August 2026.
The first is in the definition. The preamble describes an affiliate market participant as a person who both facilitates trades on the venue and is under common control with it. In the codified text at proposed Regulation 38.852(a), the first limb is there and the second reads "[Reserved]." As printed, the definition has no affiliation element, so it would read on anyone who trades on the market.
The second is broader in effect. The lead in to proposed Regulation 38.852(b)(1) requires procedures for conflicts involving an affiliate market participant, and the Appendix B guidance discusses those separations in the same terms. But each of the five enumerated minimums beneath it, on systems, personnel, office space, documentation and disclosure, names an affiliate futures commission merchant instead. On the text as drafted, a venue whose affiliate is a market maker rather than a broker, which is the prediction market case, would have no enumerated minimum to meet.
The parallel swap venue rule shows this is drafting rather than intent. Proposed Regulation 37.1201 carries both limbs of the definition and uses affiliate market participant consistently throughout. The version that reaches prediction markets is the one with the slip. None of this is a scandal. Catching it is what a comment period is for, and it is better raised in September than litigated in 2028.
What we would put in a comment before 5 October
Comments are filed under RIN 3038-AF76 through Regulations.gov and published without redaction. Five things belong in this docket.
- Fix the two textual points above. Cheap now, expensive to argue about later.
- Answer the sole liquidity question. Where the affiliate is the only quote, subordination protects nobody, and on a thin long tail that is the ordinary case. At minimum the notice should say so plainly rather than describe a protection that is not operating.
- Keep the per-session notice. The Commission asked whether a lighter disclosure would do. It would not.
- Keep legal and compliance out of shared staff. Compliance reporting into the same room as the trading desk is not a separation.
- Say what your market maker agreement contains today. Hours, spread limits, obligations, consequences. A venue that can write that paragraph in September already had the answers, which is worth more than an argument about burden.
Chairman Michael S. Selig presented the proposal as principles-based rules meant to support novel market structures without excessive compliance cost, and said in an April 2026 statement that regulators "must be disciplined enough to administer the minimum effective dose of regulation." Specific operational answers are how that dose gets calibrated downward. Objections to the principle are how it goes the other way.
Vertical integration is a design choice, and design choices get defended
Nothing here says a venue may not own its market maker. It says that if it does, the ownership has to be visible to the person on the other side of the trade, the matching engine has to give that person priority, the market maker has to behave like one, and somebody independent has to say annually that all of it is true. Law firm analysis, including Davis Polk's client update, reads it the same way, and reporting by InGame and Sportico has settled on the same conditions. Every one of them is something a venue could have put in its own rulebook in 2024, and some did, in pieces. The Commission proposes to write them down anyway because voluntary and uneven is not a standard.
The definition of liquidity provision the Commission borrows from the FIA Principal Traders Group is that a liquidity provider quotes in all market conditions, not only when it suits its own position. That is the whole test. A venue that can show its affiliate meets it has nothing to fear from this docket, and if your firm would rather say so publicly than only in a comment letter, the commitment is open.