Kalshi

Kalshi Inc. is an American financial exchange and prediction market offering event contracts. The platform was launched in July 2021. Kalshi has been described as a potential "new competitor for PredictIt", though Kalshi does not currently oversee election contracts.

Foundation
Founded in 2018, Kalshi was established by Tarek Mansour and Luana Lopes Lara. 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.

After attempting for 18 months, Mansour and Lara obtained a federal license from the Commodities Futures Trading Commission (CFTC) on 3 November 2020, registering as a designated contract market. Kalshi's case was strengthened by the presence of several prediction markets that operated without seeking regulatory approval, such as Polymarket and Augur. The name "Kalshi" signifies "everything" in Arabic.

Kalshi launched in July 2021. In January 2023, Kalshi experienced a workforce reduction of approximately 25%, resulting from a combination of layoffs and voluntary resignations.

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, the Oscars, tax changes, inflation, music festival cancellations, album sales and digital streaming milestones, Covid vaccine uptake, recession likelihood, and the potential for the United States to default on its debt by the year's end. The platform also covers markets related to presidential approval rating, significant legislation passing Congress, and U.S. Supreme Court cases.

Kalshi does not offer markets related to elections. Co-founder Luana Lopes Lara stated that the exchange focuses on events inspired by current headlines, as exemplified by the introduction of markets related to U.S. Supreme Court cases in December 2021. 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. Traders are not allowed to use margin to take positions on the platform. As of April 2023, the bet limit allowed on the platform is $25,000, although certain contracts allow a maximum wager of $7 million. Users are prohibited from wagering more than the amount they have deposited. Kalshi charges transaction fees per trade but does not rely on traders' losses for its revenue.

Comparisons with PredictIt
Kalshi has been described as a "new competitor for PredictIt", offering a similar experience but with regulatory approval as a traditional futures market. 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. In contrast, Kalshi operates as a designated contract market and allows users to invest up to $25,000 on a single contract (and up to $7 million on certain contracts). Additionally, Kalshi does not currently offer markets related to elections.

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. 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. Kalshi faces challenges in dealing with questions that have continuous answers and providing clear results to a large user base. 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.

Election markets proposals
Kalshi has faced regulatory challenges in its efforts to create markets regarding political control of Congress. The company has sought 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. 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 had 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. 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 would 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. The CTFC opted to request a second round of public comment on Kalshi's plans. The two Republican commissioners, who were 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. In September 2023, the CFTC rejected Kalshi's proposal to offer derivatives contracts for betting on congressional control. The CFTC deemed the proposal contrary to the public interest, citing concerns that the planned contracts would violate derivatives market regulations. The decision prohibits the listing, clearing, or trading of Kalshi's political event contracts. In November, the company filed a lawsuit against the CFTC over their denial of the company's bid. The lawsuit alleges that the CFTC exceeded its authority in blocking Kalshi's proposal to allow betting on the control of Congress. Kalshi has asserted 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.

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. 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. 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. 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.