Prediction market roundup: CFTC issues advisory on mention markets

Among the most controversial event contracts offered on prediction markets are so-called “mention markets”, which allow users to trade on whether a prominent official will utter a certain saying during a given appearance.

Last month, the Commodity Futures Trading Comission banned a former teleprompter operator for US President Donald Trump from trading on prediction markets for a period of three years. The CFTC banned the operator amid allegations that he placed a series of illegal wagers on mention markets associated with Trump. Gabriel Perez, a longtime White House staffer, allegedly used advance knowledge of speeches made by Trump to place risk-free trades on the orations. Weeks later, the CFTC served notice that the markets carry heightened risk of manipulation.

In a staff advisory issued 22 September, the CFTC outlined a number of areas in which the markets are susceptible to undue influence. Specifically, it highlighted contracts where the “settlement turns on the discrete conduct” of a single individual. In many cases, those contracts may neither be “independently generated” nor “externally verifiable”, the memo reads.

Prediction markets are categorised as Designated Contract Markets by the CFTC. Under the Commodity Exchange Act, DCMs must abide by 23 core principles, including Core Principle 3, which prohibits the operators from listing contracts that are readily susceptible to manipulation. According to the memo, the CFTC expects DCMs interested in listing mention markets to “implement prophylactic trading rules” designed to detect and deter manipulation, the letter reads.

The advisory is not intended to be relied upon to create any “rights, substantive, or procedural,” matters that are enforceable by law, according to the CFTC. Further, the advisory does not provide any “no-action position” and may not be relied upon to create any new binding rules or regulations, the CFTC added.

NY-Polymarket file dueling lawsuits

When New York Attorney General Letitia James filed a groundbreaking lawsuit against Kalshi in July, leading prediction market experts wondered aloud which operator could be next.

They received an answer on Thursday when James added Polymarket to the list of operators she is taking to court. Following an investigation by the Office of Attorney General, New York Governor Kathy Hochul and James announced that the state is suing Polymarket for running an illegal gambling operation. Hochul, who is up for re-election in November, took particular exception with a policy at Polymarket that allows 18-to-20-year-olds trade on event contracts. In New York, it is illegal for those under 21 to wager on sports.

“By running an unlicensed gambling operation, Polymarket has done more than just knowingly violate state law, they have put New Yorkers at risk,” wrote Hochul in a statement.

On Thursday, Polymarket sought to move the lawsuit from state court to the US District Court for the Central District of New York, in Manhattan. The company also immediately filed a countersuit against James and officials from the New York State Gaming Commission.

“While the AG’s decision to copy/paste a recycled lawsuit is disappointing, we’ll fight for our users,” said Neal Kumar, who serves as chief legal officer for Polymarket.

As with Kalshi, New York has sought restitution, treble damages and pre-violation penalties against Polymarket. James is asking the court to impose a $100,000 fine against Polymarket for each attempt or each offer of sports wagering in New York.

The attorney general is also asking the court to impose fines of three times the amount of any gains Polymarket attained in the Empire State. New York is seeking at least $4.6 billion in damages from Polymarket, far below the $36 billion it has sought from Polymarket’s archrival Kalshi.

Kalshi strongly rejects reports of wash trading

A former quantitative trader on social media unleased a firestorm last weekend when he made explosive allegations that Kalshi manipulated their volume on crypto and perpetual futures trades over the last month.

The reports coincided with an analysis conducted by the Wall Street Journal, which reported that more than a third of the platform’s perpetual trades were clustered around trades of the same order size — $5,500 each. Perpetual futures, or “perps”, are derivatives with no expiration date that let traders speculate on an underlying asset price, using leverage. Over the last month, the $5,500 orders, in totality, amounted to $5 billion in volume, the Journal’s analysis found.

Among the allegations levied on social media platform X, users claimed that certain contracts tied to the price of Ethereum (ETH perps) amounted to “wash trading”. The illegal practise occurs when a trader simultaneously buys and sells the same security to create artificial market volume.

Kalshi vehemently rejected that the platform allowed wash trading, in a 1,800-word release entitled “The Facts Behind Kalshi’s Perpetual Volume”. In the post, Kalshi wrote that it offers market-makers a flat fee across a host of perp markets to maintain “resting liquidity”. Kalshi added that individuals have no motivation to engage in wash trading since the incentives do not reward “volume traded, but resting liquidity”.

“We mechanically block self-trades, and have surveillance watching for pre-arranged trades with a partner,” the company wrote in a statement. “We’ve seen no evidence of collusion or wash trades.”

When reached by the Journal, the CFTC did not confirm, nor deny, if it launched an investigation on the matter. Separately, Kalshi submitted a filing to the CFTC on Tuesday requesting approval to replace full-collateral requirements with risk-based margin trading on certain contracts.