Emergence of U.S.-Regulated Prediction Markets for the Presidential Race
As the presidential race heats up with less than a month to go until Election Day, two U.S.-regulated, dollar-denominated prediction markets have begun to take bets. Kalshi, a platform that engaged in a protracted legal battle with the Commodity Futures Trading Commission (CFTC) to obtain permission for election contracts, launched its presidential markets on a Friday. This was closely followed by Interactive Brokers’ (IAB) ForecastEx, which introduced its markets a day earlier.
Despite the novelty of these platforms, early trading volumes have been relatively modest. Kalshi reported approximately $344,101 in contract trading, while ForecastEx saw slightly higher volumes at $346,000. For context, Polymarket, a crypto-powered prediction market that prohibits U.S. users under a CFTC settlement, has facilitated over $1.2 billion in stakes on the presidential race between Kamala Harris and Donald Trump. This stark contrast highlights the challenges Kalshi and IAB face in attracting traders, especially as Polymarket has thrived while they awaited legal clarity.
Challenges and Opportunities for Kalshi and IAB
Economics professor Koleman Strumpf from Wake Forest University suggests that while it may be difficult for Kalshi and IAB to catch up to Polymarket, it is not entirely impossible. A key factor may be that some traders could migrate from Polymarket to these newer platforms, particularly as American users have reportedly employed VPNs to bypass geographic restrictions on Polymarket.
Moreover, historical trends indicate that a significant portion of trading activity typically occurs in the weeks leading up to Election Day. Strumpf emphasizes that more than half of all trades related to the election are likely to take place during this period, especially in close races like the current one. This creates a potential window for Kalshi and IAB to bolster their trading volumes as the election approaches.
Advantages of Polymarket
Despite the emergence of Kalshi and ForecastEx, Polymarket retains two significant advantages. First, it is theoretically accessible to users globally, whereas Kalshi’s products are restricted from foreign nationals and certain excluded groups. This limitation may hamper Kalshi’s ability to attract a diverse trading base.
Second, Polymarket does not impose explicit position limits on its contracts, unlike Kalshi, which has established rules governing maximum positions. Although Kalshi’s limits are relatively high, this could still pose a constraint on the overall market size and trading activity on the platform.
Price Differences Among Prediction Markets
As of early afternoon on a Friday in New York, the prices of “yes” shares for Kamala Harris were trading at 51 cents, indicating traders believe she has a 51% chance of winning the election. In comparison, Trump’s odds on Kalshi were reported at 50%. On ForecastEx, Harris led Trump by a wider margin of 53% to 47%. Conversely, Polymarket showed the candidates in a near tie, each at 49%.
Harry Crane, a statistics professor at Rutgers University, noted that these discrepancies in odds are not particularly significant. In political forecasting, polling data typically comes with a margin of error, generally around three percentage points, influenced by sample sizes. Similarly, prediction markets may exhibit a “margin of inefficiency,” where potential profits from arbitraging price differences are insufficient to incentivize traders to act.
Crane emphasizes that prediction markets don’t need to align perfectly to be informative. Over time, the data collected from these markets can be analyzed to evaluate which platforms have demonstrated more accurate predictive capabilities, enabling a consensus forecast that may prioritize one market over another.
Legal Developments and Future of Prediction Markets
Kalshi’s journey has not been without obstacles. The company filed a lawsuit against the CFTC last year after its application to list contracts regarding which political party would control each house of Congress was denied. Kalshi ultimately won the case, although the CFTC is currently appealing the decision. Following this legal victory, Kalshi listed congressional contracts on September 13, albeit briefly, before an appeals court froze the contracts. After the stay was lifted on Wednesday, Kalshi not only reinstated its congressional contracts but also self-certified its presidential contracts. Self-certification allows CFTC-regulated entities to list products without prior approval from the agency.
Following Kalshi’s lead, IAB quickly moved to launch ForecastEx. The CFTC has also indicated it is considering a proposal to prohibit political event contracts at regulated exchanges, which could have implications for the market landscape. The agency has urged the appeals court to expedite the case, citing that its proposed regulation may be significantly influenced by the court’s decision on the merits. However, it appears that the CFTC has abandoned efforts to prevent trading of these contracts before the election. The proposed timeline indicates that briefs will be filed by November 22, more than two weeks after citizens cast their votes, with oral arguments scheduled for December 2.
In summary, the emergence of regulated prediction markets like Kalshi and ForecastEx presents both opportunities and challenges in the landscape of electoral forecasting. As the election draws near, the ability of these platforms to capture market share and provide accurate predictions will be closely observed by traders and analysts alike.