CFTC says prediction markets are vulnerable to manipulation in Kalshi case appeal

The Commodities and Futures Trading Commission (CFTC), despite losing its initial case against prediction marketplace Kalshi, has filed a new motion in an attempt to stop the company from offering prediction markets for the upcoming elections in November. 

While the CFTC lost its initial case after a judge ruled the regulatory agency overstepped its authority in banning the contracts, the CFTC has fought to keep its rule in place while it works on its appeal. Though District Court Judge Jia Cobb ruled on Thursday that the contracts should be allowed, stating "...Congress did not authorize the CFTC to conduct the public interest review it conducted" on the contracts, the agency soon appealed to the DC Circuit Court of Appeals, which forced Kalshi to pause its election contracts eight hours after the company first listed them.

Now, the CFTC is arguing once again that the ruling in the case should be paused while the appeals process is ongoing. In a filing on Saturday, the agency argued that any financial damages Kalshi would face by missing out on the current election season "...pale compared to the harm that would flow from allowing election gambling on U.S. futures markets." 

The CFTC's reply in support of its motion to stay the judgment pending the appeal presents a technical legal argument over the definition of contested terms such as "gaming" and "gambling" and how they should apply in this case. "Because Kalshi’s contracts involve staking something of value on the outcome of elections, they fall within the ordinary definition of 'gaming,'" the agency argued, thereby giving the CFTC jurisdiction in the matter. 

Kalshi, in its filing opposing the stay of judgment, contests the idea that trading on election prediction markets is "gaming." "An election is not a game. It is not staged for entertainment or for sport. And, unlike the outcome of a game, the outcome of an election carries vast extrinsic and economic consequences," Kalshi's filing states. 

The CFTC and Kalshi seemingly agree that unregulated trading on prediction markets opens up the possibility for market manipulation. In its filing, the CFTC argues "documented cases of market manipulation have already been realized in the very markets Kalshi points to," citing Polymarket, which the agency claims "...experienced a 'spectacular manipulation' attempt by a group of traders betting heavily on Vice President Harris." 

Kalshi acknowledges the potential for malfeasance, but argues that unregulated marketplaces are already operating. "...Other election prediction markets (including Polymarket and PredictIt) are operating right now outside of any federal oversight, and are regularly cited by the press for their predictive data. So a stay would accomplish nothing for election integrity; its only effect would be to confine all election trading activity to unregulated exchanges. That would harm the public interest," Kalshi's filing states. 

Yet the CFTC, in its filing, calls the argument "sophomoric." "A pharmacy does not get to dispense cocaine just because it is sold on the black market," the agency wrote in its filing. "The Commission determined that election gambling on U.S. futures markets is a grave threat to election integrity. That another platform is offering it without oversight from the CFTC is no justification to allow election gambling to proliferate."