It’s take two of The Event Horizon podcast, as Pet Berisha of Sporting Crypto joins me again to talk about recent developments in prediction markets. Kalshi has surpassed Polymarket in trading volume, which has far more nuance to it than just the raw numbers.
We also talk about what’s happening at the CFTC (Brian Quintenz was ousted as the nominee since we recorded it), how South Park was a big moment for prediction markets, and what’s going on at a PM startup called Melee.
Prediction markets news roundup
Kalshi is launching more baseball markets: On Tuesday, Kalshi self-certified several new types of baseball markets:
The run or no-run first-inning market is a popular way to bet baseball at US sportsbooks. Kalshi is also rolling out runlines (not as popular) and game run totals.
Quintenz out: I sent out a quick newser on Tuesday night that Brian Quintenz is reportedly out as the nominee of the CFTC. This was more or less a formality at this point. The confirmation process was going nowhere, and his replacements were already being vetted by the White House. We’ve just been waiting for the other shoe to drop.
For now, the status quo of Acting Chair Caroline Pham (with no other commissioners) persists, which has undoubtedly been good for the expansion of prediction markets as Kalshi has turned into a robust sports betting exchange unchecked. There are at least some questions about the status quo now, after an advisory put out by the CFTC; more on that later. The delay in confirming a new CFTC chair has meant that the next nominee might not be able to dodge questions about prediction markets as easily as Quintenz did a few months ago. Kalshi has gotten a lot bigger, and a lot more people are learning about sports betting via prediction markets, including a growing number of senators. See:
Cortez Masto, Curtis Push CFTC for Answers on Enforcement of Illegal Gaming in Event Contracts (press release): “Today, U.S. Senators Catherine Cortez Masto (D-Nev.) and John Curtis (R-Utah) led four of their Senate colleagues in a letter to Commodity Futures Trading Commission (CFTC) Acting Chair Caroline Pham reminding the Commission sports betting is regulated by states and tribes, not the CFTC. The Senators underscore that by implicitly allowing some companies to offer sports betting activities as ‘event contracts,’ the CFTC is preventing enforcement of state and tribal gaming laws which inappropriately permits sports betting nationwide.”
“The CFTC is expressly prohibited from allowing event contracts that involve gaming, are unlawful under federal or state law or are contrary to the public interest,” wrote the Senators. “Despite this prohibition, the CFTC is permitting sportsbook gaming to inappropriately designate themselves as ‘event contracts’ with oversight by the CFTC. For example, some companies are claiming to allow legal sports betting in all fifty states. This action – and the CFTC’s unwillingness to stop it – contradicts both the letter and the intent of the law. The Commission cannot sidestep its statutory obligations by declining to enforce the prohibitions that Congress enacted. Doing so undermines the sovereign authority of states and tribes to regulate gambling within their jurisdictions and risks federalizing an area of law that the Supreme Court has held is reserved to the states.”
“The continued availability of illegal sport event contracts in all 50 states further reaffirms the need for the CFTC to enforce its own regulations mandated by Congress. Moreover, by claiming to be federally regulated by the CFTC, issuers of sports event contracts can avoid myriad state laws, including licensing and background investigations, minimum age requirements, federal anti-money laundering rules, and consumer protections such as addiction warnings and integrity monitoring. These rigorous standards are required by state and tribal licensed entities which the CFTC does not have the authority or the capacity to replicate,” the Senators concluded.
“Read the full letter here. Additional signatories include Senators Ruben Gallego (D-Ariz.), Alex Padilla (D-Calif.), Adam Schiff (D-Calif.), and Elissa Slotkin (D-Mich.).”
My take: The letter had been circulating in the Senate last week, in the hopes of getting more signers. I would imagine the final tally of six out of 100 senators was beneath expectations, especially with only one Republican joining the five Democrats.
Curtis being in the mix is the interesting part. Utah doesn’t have state-regulated gambling, but now Kalshi says sports betting is legal in 50 states. So Utah now has gambling. The libertarian streak of some Republicans giving businesses free rein is going to be in conflict with party members that don’t like gambling, and don’t like overriding states’ rights. It’s quite a conundrum if any Republican takes a minute to unpack what is happening with sports event contracts.
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The CFTC acknowledges that sports event contracts exist: If nothing else, Tuesday’s advisory was noteworthy in that it’s the first time the CFTC has really said anything about sports event contracts. A roundtable about prediction markets that was supposed to happen in the spring was canceled and never rescheduled.
The advisory doesn’t say that much that is material; again, the story is in the advisory’s existence at all. What it did say in a nutshell (from The Closing Line, my other newsletter): “The advisory notes that companies involved in the prediction markets ecosystem should be prepared for having to deal with the possible ‘termination of sports-related event contract positions’ based on state litigation and regulatory actions. A number of states have issued cease-and-desist letters to Kalshi for allegedly offering sports betting without a license. Kalshi is actively engaged in litigation with three states.”
We’re left to read tea leaves about what the CFTC is trying to communicate here. Again pulling from TCL: “Goodwin Law attorney Andrew Kim, who has been following legal matters around prediction markets, broke down what the advisory could mean on LinkedIn:”
“It may be that the CFTC is simply being cautious about what could happen if prediction markets lose their preemption fight against the states,” Kim said. “But the advisory makes me wonder whether the current CFTC (i.e., a CFTC without new leadership) will support sports prediction markets in that preemption fight — or whether it will simply stay above the fray. A CFTC exercising this kind of prudence about parallel authority may not share the view of prediction market operators that the agency’s ‘exclusive’ jurisdiction should exclude the states.”
What’s it all mean? It apparently means the CFTC doesn’t view sports event contracts as being unassailable under the law. But stay tuned.
Full advisory here:
Kalshi apparently did a partnership with a teenager (that deal is now over): Things are moving fast in prediction markets; we’re all just trying to keep up. But sometimes it seems like Kalshi’s marketing team doesn’t have much in the way of guardrails or any type of brakes. Someone sent me this on Twitter:
On its face, that seems slightly out of the ordinary but not that strange. The account apparently got a badge and some sort of a deal, tweeted a few times about prediction markets and moved on. But when you look in the replies, the account notes that they can’t work with Kalshi because they are not 18:
Kalshi, whether you think it’s a gambling site or not, still has a minimum age of 18, so partnering someone who is 15 is a head-scratcher. If you think Kalshi is at least in part a betting exchange (it definitely is), partnering with someone who is not even close to a legal gambling age is a bit crazy. Try to imagine the firestorm that would ensue if DraftKings or FanDuel worked with a teenager. Instead, this is just a random note in one of my newsletters that may or may not get more attention. C’est la vie.
Kalshi’s Competitiveness Still Limited Despite Parlay Debut (WSJ, paywall): “Kalshi’s move brings it closer to looking like a sportsbook, adding to investor concerns that it could develop competitive products with potentially better odds than traditional sportsbooks. But Kalshi is still limited in how much money it can take in from the sports-betting industry, and adding a parlay product could attract more legal scrutiny to prediction markets, Benchmark analyst Mike Hickey said.”
“Until it scales or becomes more robust, it doesn’t appear competitive,” Hickey said of Kalshi’s new product. “It seems like DraftKings and FanDuel still have an edge.”
“Kalshi’s parlay product is still bare-bones compared to what traditional online sportsbooks offer, Oppenheimer analysts led by Jed Kelly said in a note. They believe the product emphasizes that prediction markets are having a limited impact on DraftKings’ and FanDuel’s handle and engagement so far this football season.”
My take: Despite the above, DraftKings and Flutter (FanDuel parent) stock — the two companies that are most impacted by the expansion of sports betting via prediction markets — took a pretty big hit on Tuesday, at least partially on the prediction market sector’s advances. (Some of it appears to be on falling consumer confidence metrics, as well.) They were both down about ten percent on Tuesday.
The crazy part about the stock drops (at least partially on the Kalshi parlay news): How was this not baked into the market already? Did people really think this wasn’t going to happen? I suppose until everyone saw it with their own eyes, maybe they didn’t believe it. But I would have been more shocked if Kalshi didn’t launch parlays sometime this year.
Robinhood Explores Launching Prediction Markets Outside US (Bloomberg, paywall): “Robinhood Markets Inc. is exploring an expansion of its prediction markets product to countries outside of the US, a move that would broaden the reach of the already fast-growing and often controversial industry. The brokerage has been speaking to overseas regulators like the UK’s Financial Conduct Authority about how it might offer prediction markets locally, as demand for the space continues to grow. At issue is how such products might be structured and regulated — while prediction markets are considered futures products in the US, they’re often lumped in with gambling in other regions.”
One more note from the SEC-CFTC roundtable: A bit of good insight from Vixio’s Matt Carey (via LinkedIn)…. “Top executives from leading financial exchanges have expressed frustration with the self-certification model that exchanges like Kalshi use to quickly introduce new markets, including sports-event contracts. While specific discussion of sports-event contracts was virtually non-existent, the conversation did circle around to some of the current market conditions that allow for the contracts to be viable. Those include the CFTC’s self-certification model that allows Kalshi and other prediction markets, including the soon-to-launch Polymarket, to submit a market to the CFTC and begin offering it a day later rather than wait for specific approval.”
“I think the worst thing to have happen is to allow a product out the gate and then have the participants going at it in a certain direction, and then all of a sudden there’s a change, either at the regulator or somewhere else, where they have to pull back, relocate, bring it into a different regulatory environment,” said Terrence Duffy, CEO of the CME Group, which is the largest commodities exchange in the U.S. “It’s very disruptive for innovation.”
