Prediction market Kalshi’s derivative contracts based on US congressional election results came under the spotlight during a discussion on innovative exchange products at FIA Expo, with Summer Mersinger, a member of the Commodity Futures Trading Commission, elaborating on why she dissented from the agency’s fight to prohibit them.
Election event contracts have become a hotly contested issue since the CFTC issued an order last year prohibiting Kalshi from listing what it called Congressional Control Contracts. The agency cited concerns about unlawful gaming and other activities and said the contracts were not in the public's interest.
Kalshi has been locked in a legal battle with the CFTC since then. In October – just weeks before the US elections – a D.C. Circuit Court of Appeals cleared the way for Kalshi to offer contracts based on the outcome of the Presidential election, on the grounds that the CFTC had provided “no concrete basis” to conclude that election contracts could harm public interest.
Speaking on the panel at Expo on 19 November, Tarek Mansour, the CEO of Kalshi, said that after the Court of Appeals decision, the platform saw about $1.4 billion in trades predicting the outcome of the election in a matter of days.
“Our volume overnight went somewhere around 200 to 300x and it kept scaling. We did $1.4 billion of transactions over 11 days. In the end, we had to stop taking deposits because we hit our deposit regulatory reserves. We did raise some capital, but we did not raise the capital in time to adjust it,” he told the audience.
“If we’d had another month or so of trading, and without these deposit reserves, I think we would be talking about $20 to $30 billion of transactions, which we can charge at a 2.5% rate,” he added.
Founded in 2018 by Mansour and Luana Lopes Lara, Kalshi allows people to express a yes-or-no view on the outcome of specific events – for example Federal Reserve decisions on interest rates, climate change initiatives or geopolitical developments. It received approval from the CFTC to launch non-political prediction markets in 2020 when it was officially appointed as a Designated Contract Market.
“Exchanges are very hard to build,” Mansour told the audience. “There is all the regulatory work that you have to do, but there is also a network aspect to it. You have to build up liquidity and there is a point of criticality that you have to get to but is really hard to get to. Once you get to that, everything becomes easier.
“We've always had a very strong belief that elections were the thing that could bring it all to the point of criticality. It is such a strong catalyst that can transcend all the normal rules of onboarding new customers and getting enough demand. We fought very hard for the election market.”
While the CFTC, chaired by Rostin Behnam, has taken an aggressive posture towards political prediction markets, not all the commissioners share the sentiment. Earlier this year, Mersinger dissented on a CFTC order to prohibit political event contracts. Speaking on the panel at Expo, Mersinger stressed that the contracts themselves are not enumerated in the Commodity Exchange Act, as required for the Commission to prohibit them.
“It really boils down to the fact that we have a law, it is on the books, and we need to apply the law as it has been written, and we have not been doing that. That is something that has been a real concern for me,” she said.
“The other issue I have had with this is the fact that we do not get to decide what products people put their money in. As the Commission, we do not decide if something is a better hedging tool than something else, and that came up in some of the decisions that came out of the Commission, which was these are not good economic hedging tools. My feeling is that that is not up to us; that is up to the markets,” Mersinger said.
“Part of our mission is to foster responsible innovation, and when we have a registered exchange being innovative, we need to make sure that we are applying our rules evenly and fairly and not picking winners and losers. Unfortunately, that is what we were doing with some of the decisions coming out around Kalshi’s products and also in the rulemaking that we have put forward related to event contracts.”
Insights on Innovation
The conversation on Kalshi’s prediction markets was part of a wider panel discussion on innovative exchange products, covering how and why innovative products are created, the obstacles exchanges have faced along the way, and what it takes to be successful. On this last point, panellists offered several key ingredients needed to launch innovative products.
“An obvious one is customer demand, but the twist on that is you need to have a broad, diverse customer base, all wanting the same product but for different reasons,” said Rob Hocking, senior vice president and global head of product innovation at Cboe Global Markets. “You need to be able to create a market, and everybody trading the product needs to be able to have an edge in whatever they're using that product for.”
Randolf Roth, a member of the Eurex Frankfurt executive board, agreed saying, “The most crucial point is distribution. You need to have a group of people with different trading interests coming together at the same time.”
Jim Hyde, head of business development and strategic partnerships at NYSE and a long-time participant in US options markets, said the most important criteria is for products to be either solving a problem or improving on a workflow. “As our CEO always likes to say, make something that was analogue into digital,” he said.
Speaking from a regulatory standpoint, Mersinger stressed the importance of regulators maintaining impartiality. “It’s about not treating the institutions that you're most familiar with any better than those who are coming in with new and innovative ideas,” she said. “It’s about making sure that we're not putting our hands on the scale on any one side, and that we are keeping a level playing field when it comes to regulation.”
