The Commodities and Futures Trading Commission (CFTC) has an important decision ahead of it.
Kalshi, an online predictions market, has requested the right to offer contracts on the outcome of the upcoming midterms. It will receive its answer tomorrow, October 28.
Complicating matters for the CFTC is that it has just asked PredictIt, which has been offering a similar product, to cease trading as of February 2023. However, PredictIt is a not-for-profit site operating out of the Victoria University of Wellington for ostensibly academic purposes. Though not regulated by the CFTC, until recently, it operated under the grace of a No-Action letter from the regulator.
The situation is a bit different for Kalshi. It is a “Designated Contact Market” under the oversight of the CFTC. That makes its legality more formal than PredictIt’s and means it operates under the CFTC’s oversight and must comply with all federal regulations.
The parallels between the two are probably no coincidence. The CFTC reversed its position on PredictIt just weeks after Kalshi submitted its request. In that letter, Kalshi makes an indirect but unmistakable reference to PredictIt:
Since 2014, a similar contract has been available for trading on an unregistered trading venue that purports to operate under a No-Action Letter that was issued by the Division of Market Oversight in 2014 and granted relief to operate without complying with a number of aspects of the Commodity Exchange Act and Commission Regulations.
That has led some to speculate that the CFTC is shutting down an unregulated competitor to help Kalshi. However, an equally likely explanation is that the CFTC plans to deny Kalshi’s request and wants to nip any potential accusations of hypocrisy in the bud. Which way it decides should clarify the situation somewhat.
DSA’s Alexandria Ocasio-Cortez Comes Out in Favor of Kalshi
The CFTC has solicited public comments on the issue before making its decision. It has received 200 of these. They run the gamut from sarcastic jokes to self-interested takes by individual traders to a long and detailed argument in favor of such markets by a group of eight professors and researchers.
They also include a brief expression of support (purportedly) from Alexandria Ocasio-Cortez:
This is great! The people ✊🏽 deserve transparency about their political system, and giving them an unbiased source of information separate from polls conducted by monopoly corporations is extremely important. These contracts will make it much easier for the people ✊🏽 to understand what’s going on.
(The CFTC does not verify the identity of those leaving comments, so there is a distinct possibility that the comment is not genuine. However, it seems consistent with left-wing criticisms of the polling industry. Bonus has been unable to obtain either confirmation or refutation of its authenticity.)
Ocasio-Cortez is a US House Representative for New York, often known by her initials AOC. She’s also a prominent member of the Democratic Socialists of America and a polarizing figure in US politics. A hero to left-wingers, especially younger ones, she’s a frequent target by the right and sometimes spars with more moderate members of her own party.
However, she’s stayed relatively silent over the years on anything gambling-related, which makes it a surprise to find her comment here. Of course, Kalshi and its supporters deny that what it offers is anything like gambling. They would say it’s more like stock trading. However, there’s no denying that many users view such contracts much as they would the betting lines offered at a sportsbook.
The comment presents one of two main arguments for services like Kalshi and PredictIt. Polls traditionally offer the public’s best view into the currents of democracy. However, they’re vulnerable to many forms of bias. These can be conscious or unconscious and come from respondents or the pollsters themselves.
Confidence in polls is extremely low at the moment after they got the 2016 presidential election so wrong. More and more people are now following shifts in prediction market prices, believing them to be a better indicator of how events have changed candidates’ chances.
Kalshi’s Rationale for Election Markets
Although popular among academics, the thinking being attributed to AOC here is more akin to PredictIt’s stated justification than Kalshi’s.
PredictIt comes from the world of academia. Its purpose from the start was as a research tool.
Kalshi, on the other hand, is a financial company. As such, it has a different perspective and focuses more on the benefits to participants than observers.
The pitch Kalshi made to the CFTC emphasizes the use of markets as a tool for mitigating political risk. For instance, imagine that you believe a particular election outcome would hurt your business. If you think it will help the oil industry simultaneously, you might buy oil futures just before the election so that neither outcome will be all bad.
That being the case, Kalshi argues, why not just allow concerned parties to hedge directly? In its letter to the CFTC, it writes:
The Exchange believes it is time to offer these widely used but unregulated contracts on a fully regulated basis so that U.S. persons can hedge risks arising from political control on a market with robust safeguards and transparency.
The CFTC, being a financial regulator, may find that logic more compelling than PredictIt’s.
In a public blog post, however, Kalshi presented both arguments on equal footing:
Such contracts are squarely legal under the Commodities Exchange Act, and would provide significant benefits to the public by creating an election forecast pollsters would envy and allowing everyday Americans to hedge against election risk.