Traders, gamblers, and political enthusiasts now have new platforms to express their views this election cycle through event contracts, though these new markets still need to gain the trust of Wall Street power players and navigate legal challenges to become significant investment options. Kalshi and Interactive Brokers have recently launched presidential election contracts on their developing platforms after Kalshi achieved a critical legal victory against the Commodity Futures Trading Commission (CFTC). Despite this win, the CFTC is appealing to shut down these markets. Nonetheless, the upcoming presidential election offers a substantial opportunity for the platforms to demonstrate their value to investors while the courts address the legal matters. Previously, the platforms mainly offered contracts based on events like economic data releases, which served as a preliminary test before introducing election contracts. Steven Sanders, Executive Vice President for Marketing and Product Development at Interactive Brokers, noted increased interest since the election contracts were introduced.
The contracts offered by Kalshi and Interactive Brokers operate similarly to futures and derivatives, expiring on a specified date. On both sites, the election contracts pay out $1 for the correct outcome and $0 for the incorrect one. Unlike Kalshi and Interactive Brokers, PredictIt and the Iowa Electronic Markets have been operational for a longer period under different CFTC regulations, each with position limits under $1,000. Polymarket, another prediction platform, operates on a blockchain basis but is not accessible to U.S. customers. John Phillips, co-creator of PredictIt, explained that while position limits help reduce risks and prevent market manipulation by individual traders, they can also hinder the effective use of these markets for hedging.
Kalshi CEO, Tarek Mansour, highlighted that traders can also engage with contracts covering key Senate races and potential control shifts in Congress. The platforms do not replicate traditional political polling methodologies, thus are not replacements for political surveys. Bob Elliott, CEO and CIO at Unlimited Funds, expressed that these contracts could provide a direct hedging mechanism against political outcomes, which are often challenging for managers to navigate. He cited the 2016 Brexit referendum as an instance where such markets could have been beneficial.
As of the latest data, the most popular presidential election market on Kalshi saw less than $8 million in trading volume since launching earlier this month, with Interactive Brokers showing similar activity levels. In contrast, Polymarket has achieved significantly higher volumes, with approximately $1.9 billion in its most popular contracts since the beginning of 2024.
Matt Thompson, co-portfolio manager at Little Harbor Advisors, identified volume, liquidity, and regulatory scrutiny as major hurdles for incorporating these contracts into portfolios. He noted the uncertainty in market reactions to different outcomes could render these contracts imperfect for hedging. If proven accurate, prediction markets might be valuable for consultants and fundraisers seeking additional election insights.
Some critics, including Cantrell Dumas from Better Markets, have raised concerns about potential manipulation by large traders for harmful purposes, such as swaying voter perceptions. Conversely, Phillips from PredictIt suggested that these markets might counteract fake news by encouraging informed trading. Koleman Strumpf of Wake Forest University added that while evidence of manipulation is lacking, varied rules across platforms could present arbitrage challenges, potentially impacting market efficiency.
An appellate court is expediting the CFTC’s appeal, although a decision is unlikely to arrive before the November 5 election. The CFTC has opposed taking an “election-policing role” and expressed concerns regarding the diverse contract offerings on Kalshi. Beyond legal hurdles, the platform’s growth and capacity to handle increased usage by Election Day will be crucial to their long-term viability. Kalshi’s CEO, Mansour, stated that their market makers, including Susquehanna, could manage trades up to $100 million with minimal market impact, though such trades have yet to occur. Discussions with institutional clients are ongoing, but as Elliott from Unlimited Funds observed, the markets must develop further in terms of liquidity to attract major hedge fund participation.
