Election markets are far from a sure bet

Kalshi has big-name backing for its plan to offer futures contracts tied to election results. Will that win over a long-skeptical regulator?

A voting box on a trading floor

Whether Kalshi’s election contracts could be considered gaming or whether they serve a true risk-hedging purpose is one of the top questions the CFTC is weighing in its review.

Photo illustration: Getty Images; Protocol

Crypto isn’t the only emerging issue on the CFTC’s plate. The futures regulator is also weighing a fintech sector that has similarly tricky political implications: election bets.

The Commodity Futures Trading Commission has set Oct. 28 as a date by which it hopes to decide whether the New York-based startup Kalshi can offer a form of wagering up to $25,000 on which party will control the House of Representatives and Senate after the midterms. PredictIt, another online market for election trading, has also sued the regulator over its decision to cancel a no-action letter.

The recently closed public comment period on Kalshi’s proposal brought letters from a range of big names in tech, finance, and academia, debating how so-called prediction markets could affect elections, for better or worse.

Gambling on elections in the U.S. is generally outlawed — though it wasn’t always that way and is allowed in other countries, including the U.K. Kalshi describes its proposal not as Las Vegas-style gambling but as a prediction market where users buy and sell contracts on events based on their perceived probability.

Kalshi in late 2020 registered with the CFTC as a designated contract market, describing itself as the first regulated events-focused futures market. On its service, users can trade contracts on everything from the size of the Fed’s next rate hike to the high temperature in Chicago to the next Moon landing. Contracts pay out $1 if the underlying event occurs as predicted and are priced to correlate with that perceived likelihood, so a 40 cent price could be read as a 40% chance.

A few months after getting the nod from regulators, the company raised $30 million from a list of investors that included Sequoia Capital, Charles Schwab (the chairman of the financial services company), and Henry Kravis of KKR. The mix of Silicon Valley money and traditional finance speaks to Kalshi’s broad ambitions.

“We want to build an ecosystem that can rival the New York Stock Exchange or CME down the line,” CEO and co-founder Tarek Mansour told Protocol.

That ecosystem has not included election-focused markets to this point. But in July, Kalshi asked for permission to change that and launch two events contracts on the outcome of this fall’s midterms. Such contracts, Mansour said, can help people hedge against election risk and paint a more accurate picture of the race.

The CFTC has in the past denied similar applications, ruling that election prediction markets are gaming and do not serve the public interest. It has also taken action against international companies that allow Americans access to election trading. It has only allowed election contract trading on a smaller scale through limited approvals for PredictIt and Iowa Electronic Markets, which are both affiliated with universities.

Reducing risk or creating it?

Kalshi has a mix of tech industry heavyweights and academics backing its regulatory proposal.

Former top Obama economic adviser and Harvard professor Jason Furman wrote in to note that the White House regularly used prediction markets to understand the potential real-world impact of decisions.

“Elections are not games, and the outcome of political control of Congress has enormous public interest ramifications,” Furman said. “Election-focused prediction markets combine the economic significance of a powerful risk reduction tool for small businesses with the social significance of a powerful forecasting tool for researchers and policymakers.”

Elections are not games, and the outcome of political control of Congress has enormous public interest ramifications”

Dustin Moskovitz, the Facebook and Asana co-founder, wrote that the $25,000 bets allowed by Kalshi would be too small to have any influence over the “multi-billion dollar affairs” that are U.S. elections. (He’s been a major Democratic donor himself.) But the prediction market could, in his view, help people better understand elections.

“Rather than listen to pundits with a less-than-ideal track record and perceived partisan biases, the broader public can be informed by the unbiased market,” he wrote.

Reviving old concerns

But many of the same concerns remain a decade after the last proposal, from Nadex, was declined by the CFTC in 2012.

“When we think about what happened in 2020, do we really want another excuse for the American people to question the integrity of our elections?” former CFTC Commissioner Jill Sommers told POLITICO.

Dennis Kelleher, chief executive of the nonprofit Better Markets, said in an interview that the important role of commodity markets is “getting lost in the discussion” of the proposal. He wrote out a detailed argument against the proposal in a letter to the CFTC.

“The futures markets were not established as a new type of casino but to facilitate the provision of essential goods to Americans by enabling commercial entities to manage the price risk associated with their productive commercial activities,” Kelleher wrote.

Whether Kalshi’s election contracts could be considered gaming or whether they serve a true risk-hedging purpose is one of the top questions the CFTC said it is weighing in its review.

Mansour started his career on Wall Street and said he saw there how institutional investors were able to structure trades that essentially hedged against election risks to their business, such as for Brexit. There are speculators in every market, but Mansour argued that the differing risks Americans face with each election gives prediction markets a different value and purpose than gaming.

“When you roll a dice or do a roulette spin, you are creating a risk that doesn’t need to be there,” Mansour said. “In financial markets like grain futures or insurance or election markets, that risk is already there.”

As the CFTC reviews the proposal, it is facing a lawsuit over its decision to revoke the no-action letter that another operator, PredictIt, has used to offer political event contracts in the U.S. since 2014. The CFTC in August ordered PredictIt, which is run by a university in New Zealand, to wind down by February. A group of academics, users, and the market’s technology provider have filed for a preliminary injunction against that decision, seeking to allow the exchange to continue through 2024.

When you roll a dice or do a roulette spin, you are creating a risk that doesn’t need to be there. In financial markets like grain futures or insurance or election markets, that risk is already there.”

The CFTC’s next moves will be closely watched. Kalshi is not the only firm building an events-contract marketplace. Polymarket, for instance, offers blockchain-based event-contracts trading, but only to users outside the U.S. The firm was ordered to close to Americans following a CFTC fine earlier this year.

One of its contracts asks whether the CFTC will approve Kalshi’s proposal. So far, its users are leaning toward no.

Update: The description of the CFTC deadline has been clarified.


Judge Zia Faruqui is trying to teach you crypto, one ‘SNL’ reference at a time

His decisions on major cryptocurrency cases have quoted "The Big Lebowski," "SNL," and "Dr. Strangelove." That’s because he wants you — yes, you — to read them.

The ways Zia Faruqui (right) has weighed on cases that have come before him can give lawyers clues as to what legal frameworks will pass muster.

Photo: Carolyn Van Houten/The Washington Post via Getty Images

“Cryptocurrency and related software analytics tools are ‘The wave of the future, Dude. One hundred percent electronic.’”

That’s not a quote from "The Big Lebowski" — at least, not directly. It’s a quote from a Washington, D.C., district court memorandum opinion on the role cryptocurrency analytics tools can play in government investigations. The author is Magistrate Judge Zia Faruqui.

Keep ReadingShow less
Veronica Irwin

Veronica Irwin (@vronirwin) is a San Francisco-based reporter at Protocol covering fintech. Previously she was at the San Francisco Examiner, covering tech from a hyper-local angle. Before that, her byline was featured in SF Weekly, The Nation, Techworker, Ms. Magazine and The Frisc.

The financial technology transformation is driving competition, creating consumer choice, and shaping the future of finance. Hear from seven fintech leaders who are reshaping the future of finance, and join the inaugural Financial Technology Association Fintech Summit to learn more.

Keep ReadingShow less
The Financial Technology Association (FTA) represents industry leaders shaping the future of finance. We champion the power of technology-centered financial services and advocate for the modernization of financial regulation to support inclusion and responsible innovation.

AWS CEO: The cloud isn’t just about technology

As AWS preps for its annual re:Invent conference, Adam Selipsky talks product strategy, support for hybrid environments, and the value of the cloud in uncertain economic times.

Photo: Noah Berger/Getty Images for Amazon Web Services

AWS is gearing up for re:Invent, its annual cloud computing conference where announcements this year are expected to focus on its end-to-end data strategy and delivering new industry-specific services.

It will be the second re:Invent with CEO Adam Selipsky as leader of the industry’s largest cloud provider after his return last year to AWS from data visualization company Tableau Software.

Keep ReadingShow less
Donna Goodison

Donna Goodison (@dgoodison) is Protocol's senior reporter focusing on enterprise infrastructure technology, from the 'Big 3' cloud computing providers to data centers. She previously covered the public cloud at CRN after 15 years as a business reporter for the Boston Herald. Based in Massachusetts, she also has worked as a Boston Globe freelancer, business reporter at the Boston Business Journal and real estate reporter at Banker & Tradesman after toiling at weekly newspapers.

Image: Protocol

We launched Protocol in February 2020 to cover the evolving power center of tech. It is with deep sadness that just under three years later, we are winding down the publication.

As of today, we will not publish any more stories. All of our newsletters, apart from our flagship, Source Code, will no longer be sent. Source Code will be published and sent for the next few weeks, but it will also close down in December.

Keep ReadingShow less
Bennett Richardson

Bennett Richardson ( @bennettrich) is the president of Protocol. Prior to joining Protocol in 2019, Bennett was executive director of global strategic partnerships at POLITICO, where he led strategic growth efforts including POLITICO's European expansion in Brussels and POLITICO's creative agency POLITICO Focus during his six years with the company. Prior to POLITICO, Bennett was co-founder and CMO of Hinge, the mobile dating company recently acquired by Match Group. Bennett began his career in digital and social brand marketing working with major brands across tech, energy, and health care at leading marketing and communications agencies including Edelman and GMMB. Bennett is originally from Portland, Maine, and received his bachelor's degree from Colgate University.


Why large enterprises struggle to find suitable platforms for MLops

As companies expand their use of AI beyond running just a few machine learning models, and as larger enterprises go from deploying hundreds of models to thousands and even millions of models, ML practitioners say that they have yet to find what they need from prepackaged MLops systems.

As companies expand their use of AI beyond running just a few machine learning models, ML practitioners say that they have yet to find what they need from prepackaged MLops systems.

Photo: artpartner-images via Getty Images

On any given day, Lily AI runs hundreds of machine learning models using computer vision and natural language processing that are customized for its retail and ecommerce clients to make website product recommendations, forecast demand, and plan merchandising. But this spring when the company was in the market for a machine learning operations platform to manage its expanding model roster, it wasn’t easy to find a suitable off-the-shelf system that could handle such a large number of models in deployment while also meeting other criteria.

Some MLops platforms are not well-suited for maintaining even more than 10 machine learning models when it comes to keeping track of data, navigating their user interfaces, or reporting capabilities, Matthew Nokleby, machine learning manager for Lily AI’s product intelligence team, told Protocol earlier this year. “The duct tape starts to show,” he said.

Keep ReadingShow less
Kate Kaye

Kate Kaye is an award-winning multimedia reporter digging deep and telling print, digital and audio stories. She covers AI and data for Protocol. Her reporting on AI and tech ethics issues has been published in OneZero, Fast Company, MIT Technology Review, CityLab, Ad Age and Digiday and heard on NPR. Kate is the creator of and is the author of "Campaign '08: A Turning Point for Digital Media," a book about how the 2008 presidential campaigns used digital media and data.

Latest Stories