Kalshi

Kalshi Inc. is a U.S.-based financial exchange offering event contracts. The platform, launched in July 2021, is the first federally regulated exchange for trading on real-world events and enables both retail and institutional investors to make wagers on diverse events spanning from economics and politics to entertainment and culture. Kalshi has been described as a potential "new competitor for PredictIt", though Kalshi does not currently oversee election contracts.^[1]

Foundation

Founded in 2018, Kalshi was established by MIT alumni Tarek Mansour and Luana Lopes Lara.^[2] The idea for the company emerged during their tenure as financial analysts, where they identified challenges faced by investors attempting to hedge their investments amidst uncertainties such as the Brexit referendum. The founders note that the absence of a direct safeguard against unfavorable outcomes was what prompted them to envision a platform that would allow investors to engage in wagers on future events, providing a means to hedge uncertainties and capitalize on insights.^[3]

After attempting for 18 months, Mansour and Lara obtained a federal license from the Commodities Futures Trading Commission (CFTC) on 3 November 2020,^[4] registering as a designated contract market and becoming the first federally regulated event-based trading exchange in the United States.^[5][6] Kalshi's case was strengthened by the presence of several prediction markets that operated without seeking regulatory approval, such as Polymarket and Augur.^[4] The name "Kalshi" signifies "everything" in Arabic, intended to reflect the platform's comprehensive approach to trading.^[7][8]

Launch and further developments

Kalshi launched in July 2021 and processed $10 million in trades by December.^[3] The platform has garnered support from prominent investors like billionaires Charles Schwab and Henry Kravis, who have contributed $40 million to the company. The company has also received backing from Sequoia Capital,^[9] SV Angel, and Tinder co-founder Justin Mateen^[10] and was a part of Y Combinator’s Winter 2019 batch.^[7] Its board includes Alfred Lin.^[11]

Since its launch, Kalshi has attracted millions of users. Numerous early adopters were avid followers of prediction markets, reportedly enticed away from similar platforms like PredictIt and Polymarket.^[4] In November 2021, the exchange saw approximately 1 million contracts in weekly trading volume,^[12] which grew to 2 million contracts per week in May 2022.^[4] As of April 2023,^[13] its monthly trading volume stands at around $10 million.^[14]

In January 2023, Kalshi experienced a workforce reduction of approximately 25%, resulting from a combination of layoffs and voluntary resignations.^[14]

Trading services

As a trading exchange, Kalshi allows both retail and institutional traders to place trades on various future events, spanning topics like weather and climate change,^[8][15] the Oscars,^[16] tax changes,^[17] inflation,^[18] music festival cancellations,^[19] album sales and digital streaming milestones,^[20] Covid vaccine uptake,^[2] recession likelihood,^[21] and the potential for the United States to default on its debt by the year's end.^[22] The platform also covers markets related to presidential approval rating, significant legislation passing Congress, and U.S. Supreme Court cases.^[8]

However, Kalshi does not offer markets related to elections.^[23] Co-founder Luana Lopes Lara stated that Kalshi focuses on events inspired by current headlines, as exemplified by the introduction of markets related to U.S. Supreme Court cases in December 2021.^[11]

Trading is based on opinions about specific yes-or-no questions. Users pick a side and price (1 cent to 99 cents), and when the opposing yes and no sides total $1 per contract, a trade occurs. Whichever side turns out to be correct keeps the full $1. The contract price reflects the market's estimated probability of an event happening. The exchange provides contracts that payout $1 for correct selections.^[7] Traders are not allowed to use margin to take positions on the platform.^[12] As of April 2023, the bet limit allowed on the platform is $25,000,^[14] although certain contracts allow a maximum wager of $7 million. Users are prohibited from wagering more than the amount they have deposited.^[4] Kalshi charges transaction fees per trade but does not rely on traders' losses for its revenue.^[16]

Comparisons with PredictIt

Kalshi has been described as a "new competitor for PredictIt",^[1] offering a similar experience but with regulatory approval as a traditional futures market.^[24] PredictIt operates as a nonprofit research project, restricting the number of traders to 5,000 per event and capping trade sizes at $850 per person per question.^[23] In contrast, Kalshi operates as a designated contract market^[20] and allows users to invest up to $25,000 on a single contract (and up to $7 million on certain contracts), surpassing PredictIt's limitations significantly.^[23] Additionally, Kalshi does not currently offer markets related to elections.^[23]

Regulatory history

Although Kalshi lacks formal standing with the Securities and Exchange Commission (SEC), its current offerings are limited enough that it is expected to operate under the regulations of the Commodity Futures Trading Commission (CFTC) alone. Matthew Kluchenek, a partner at Mayer Brown, stated that the SEC may intervene if the contract market is perceived to have an impact on securities prices in other markets.^[12] Kalshi has engaged in talks with brokerage firms to include its platform in their listings and with other investment firms to act as market makers on the exchange. Orders on Kalshi remain on the books until a second trader is willing to take the opposing side of the contract, potentially resulting in lower volumes and liquidity. The company has an affiliate called Kalshi Trading, which trades and provides liquidity for many of its contracts.^[12]

Kalshi faces challenges in dealing with questions that have continuous answers and providing clear results to a large user base.^[7] The company aims to attract larger investors who may leverage it for hedging purposes and capitalize on opportunities presented by less-informed participants. However, broader adoption faces hurdles, such as the zero-sum nature of prediction markets and the need for increased liquidity to entice larger investors.^[11]

Election markets proposals

Kalshi has faced regulatory challenges in its efforts to create markets regarding political control of Congress. The company seeks approval from the CFTC to introduce election contracts resembling options or futures. These contracts are "cash-settled, binary contracts" based on questions such as which political party will control a specific chamber of Congress.^[17]

Kalshi's application faced delays as the CFTC closely examined whether Kalshi's contracts could effectively serve as hedges. Commissioner Caroline Pham, one of the CFTC's top two Republican officials, dissented on the decision to review Kalshi's political event contracts in August 2022. She argued that the underlying activity of the contracts, which involves political control, is not prohibited and that the agency has not established a clear test for what goes against the public interest, eliminating the need for a public interest test. In October 2022, the commission staff recommended against Kalshi's proposal to introduce higher-stakes futures contracts related to the control of Congress resulting from the midterm elections, and the CFTC delayed a decision on Kalshi's application. It is currently considering whether to approve a similar proposal from Kalshi for the 2024 elections and has requested public input on the matter.^[14]

In June 2023, Kalshi proposed a new plan that would allow hedge funds and other major Wall Street firms to wager up to $100 million on which US political party will control Congress. Under the plan, all users could wager up to $250,000, but large trading firms could trade $50 million on the outcome of the next congressional elections, with those demonstrating an economic hedging need allowed to bet even more. To implement this plan, Kalshi can self-certify its safety and legitimacy, enabling a quick listing of the contract. The CFTC has previously expressed concerns about such contracts and may take steps to scrutinize or thwart the move.^[25] The CTFC opted to request a second round of public comment on Kalshi's plans. The two Republican commissioners, who are in the minority on the CFTC's board, dissented against the prolonged process, arguing that the question of whether Kalshi's products constitute prohibited "gaming" should be addressed directly through a clear rule. Commissioner Summer Mersinger expressed frustration with the delay, noting that it left all parties without a definite answer.^[26]

Kalshi asserts that introducing political trading on their platform would enhance oversight and protection compared to existing options, potentially making political trading markets more accessible to a broader audience. They highlight the long-standing interest in election trading in the United States, which has traditionally existed in an underground manner. The executives state that they aim to change this by bringing political trading into the open, making it accessible to everyday Americans who face election-related risks, such as the impact of Congress' composition on issues like tax policy and argue that by offering these tools, individuals would be empowered to financially hedge against various aspects of their lives.^[9]

The central issue the CFTC is considering is whether political events, or election trading, should be considered illegal gaming or be treated more similarly to other types of futures trading, like pork futures. Others have concerns about potential excessive gambling and implications for election integrity.^[23]

Support and opposition for Kalshi election market proposals

Consumer advocacy groups, such as D.C.-based Better Markets, express fears that such trading could turn elections into a new vehicle for day trading and further erode public trust in election results. Better Markets' CEO, Dennis Kelleher, has even mentioned the possibility of filing a lawsuit if the CFTC approves the Kalshi proposal.^[27] In August, in a letter to the CTFC, senators Jeff Merkley, Sheldon Whitehouse, Ed Markey, Elizabeth Warren, Chris Van Hollen and Dianne Feinstein urged the CFTC to reject Kalshi's proposal, raising concerns over electoral integrity.^[28]

Kalshi's proposal is backed by prominent figures in the financial industry, including Vivek Ranadivé, co-owner of the Sacramento Kings, Jason Furman, a former White House economist, Intercontinental Exchange, which operates the New York Stock Exchange, as well as several former CFTC officials.^[27][29] Some market participants, including Angelo Lisboa, managing director of JPMorgan's private wealth management division, have expressed their support for Kalshi's proposal, recognizing election risk as a significant concern for their clients and noting the potential impact of bringing such capabilities to a broader population that lacks access to large banks' resources.^[30]

See also

• iPredict
• Intrade
• CME Group

References

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