US regulators will decide this week whether investors can place market bets on elections, a move that critics warn would muddy the distinction between trading and gambling on American democracy. The Commodity Futures Trading Commission, the main US derivatives regulator, is scheduled to decide by Friday if Kalshi, a retail-focused futures market, can offer contracts representing a bet on whether the Democrats or Republicans will prevail in the upcoming midterms.
Kalshi’s efforts to persuade authorities come as a new wave of companies target the army of everyday investors who provided a powerful but fleeting boom to markets by trading equities, options and crypto during the coronavirus lockdowns. It would also open the door to large institutions trading directly on the US election outcome for the first time.
But some campaigners have said the proposal crosses a line. “You can create a financial product or a gambling situation out of most events in the world. The question is: is that necessarily a good idea? And do you worry about market integrity and market manipulation of the underlying thing?” said Tyler Gellasch, president of the Healthy Markets Association. The US election system differs from many other democracies because of the volume of corporate cash that backs campaigns and influences elections.
The CFTC is asking the market whether political action committees — large groups of political donors — should be allowed to trade election derivatives. “It’s a lot to ask the CFTC to weigh in on gambling on democracy,” Gellasch added. Currently, if an investor has a view on the likely economic impact of a certain politician or party’s victory in an election, he or she can buy or sell the stocks, bonds or currencies likely to be affected. Banks can build bespoke derivatives speculating on politics, sometimes folding in several asset classes, but these contracts are traded bilaterally and are unregulated.
Kalshi wants to put this activity in a regulated market, starting with binary contracts that pay out if an investor guesses correctly which political party will be in control of each chamber of the US Congress. A correct guess leads to a payout, while if a user guesses the wrong way they lose their initial outlay. If Kalshi is approved by the CFTC, it could open the door for other exchanges to quickly apply to offer elections contracts.
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