The Commodity Futures Trading Commission (CFTC) might be playing Whac-A-Mole with the idea of being able to bet on political action in America.
Last month, the regulator all but shut down PredictIt.org, which has been offering political futures markets legally since 2014. The operation, based out of Victoria University of Wellington in New Zealand, saw its βno-actionβ letter withdrawn by the CFTC, with demands to cease offering political trading markets by Feb. 15, 2023.
But as PredictIt fights for its American life, another operator is hoping the CFTC allows it to begin to offer markets on political futures.
KalshiΒ was given the green light by the CFTC earlier this year to offer markets on everything from a hurricane hitting New Jersey in 2022 (contracts for βyesβ are at 11 cents, to be settled at either zero or a dollar, like all Kalshi contracts) to what the peak mortgage rate will be by the end of the year (over 6% is the favorite, trading at 63 cents). Kalshi might find out by Oct. 28 if it will be able to start offering at least one political futures market, according to a Politico report.Β
The holy grail of events trading is upon us:
Election Markets
The CFTC is reviewing Kalshiβs filing and has requested the public (you!) to comment with your opinion.
We are closer than ever to making regulated election markets a reality: pic.twitter.com/1gpXpWUm5I
— Tarek Mansour (@mansourtarek_) August 29, 2022
And while PredictIt is offering future markets on head-to-head action — for instance, Ron DeSantis is the 88-cent favorite over Charlie Crist (13 cents) to win the Florida governorβs election, and DeSantis is also the favorite to win the 2024 presidential election (heβs at 28 cents, whereas former President Donald Trump is at 25 cents and incumbent President Joe Biden is at 23 cents) — Kalshiβs foray into political markets is a bit more vanilla. It’s specifically asking the CFTC to allow markets on which political party will control Congress after this yearβs elections.
It would appear, however, that if the CFTC allows these contracts, the floodgates will soon open.
At least one observer is hopeful the CFTC will give Kalshi — and other prediction markets — the green light.
“Legalized contracts on key election outcomes can be extremely important for how people invest and plan for the dramatic impact of elections,” said David Rothschild, an economist at Microsoft Research who has written extensively on prediction markets. “And the movement of these contacts help researchers understand the impact of various events along the way to the eventual outcome. Further, these types of contracts are less gambling than many other legal financial instruments, as they settle on an established real-world outcome rather than nested speculation. My hope is the CFTC recognizes this value, with limited downside, and allows legal contracts to flourish, and not just with Kalshi, per se, but for any exchange that wishes to move into the space.”
Petition underway
In an effort to get the ball across the goal line, Kalshi is actively asking its user base to petition the CFTC to allow futures markets on the upcoming congressional races.
βThe CFTC has announced that it is seeking public comment on Kalshiβs political control contract,β reads Kalshiβs website. βWe invite the broader Kalshi community to respectfully tell the CFTC what risks you face from elections and how you would use the contracts to hedge those risks.β
It’s worth noting, of course, how this plea is worded. There’s no mention of βbetting,β certainly, as the CFTC expressly prohibits companies from offering contracts that are a form of gambling.
So how might this squeeze through? Itβs all about hedging.
βEveryday Americans are always exposed to election risks,β Kalshi CEO Tarek Mansour said, according to the Politico article. βWe are trying to bring these tools to the masses. Youβre basically financially hedging a variety of different things in your life instead of just sitting down and thinking, βOK, this is just going to make my next four years worse.ββ
The CFTC will expressly be looking at two items, according to Politico. For starters, the commission will ask if this represents a form of gaming, which is prohibited. But even if it answers “yes” to that question, then the CFTC will ask if there is an economic purpose behind the contracts. Since it’s reasonable to imagine a Democratic-controlled Congress raising taxes more than Republicans would, there’s a hedging opportunity to invest in a futures contract on the Democrats winning Congress.
While there is hope the CFTC will allow these contracts — “The country is ready. Investors are ready. Bettors are ready. Itβs a question of whether regulators are ready,β Koleman Strumpf, an economics professor at Wake Forest University, said in the Politico article — it is worth noting the last time the CFTC took a look at this, it demurred. In 2012, Nadex sought the opportunity to offer political contacts, but the CFTC rejected the petition.
Have times changed? The answer is forthcoming, though it probably would be helpful to have a futures market on the outcome.