Is it possible that betting could actually help, and not hurt, in ensuring the integrity of an election?
For example: If a person had money riding on the outcome of a campaign, would they be more skeptical of the political sound and fury on television and social media? Would an election bettor even try to get to the bottom of wild rumors or seeming speculation?
They just might, or at least that’s what a lawyer for prediction market Kalshi suggested on Thursday before the U.S. Court of Appeals for the District of Columbia Circuit.
“A prediction market is one of the most important tools to actually combat misinformation, because … the traders have an incentive to verify, to fact-check in a way that is not susceptible to arguments about bias,” said Yaakov Roth, a partner at law firm Jones Day who appeared on behalf of Kalshi. “That’s why this is really a powerful tool to expose truth, because if somebody comes up with a fake poll, if you’re a good trader, you’re not going to immediately buy or sell based on that, you’re going to actually investigate it and make a reasoned judgment about it.”
Kalshi was in court to try to swat away an attempt by the Commodity Futures Trading Commission (CFTC) to pause a lower-court decision pending an appeal. That ruling, issued earlier this month, would authorize Kalshi to offer election-related markets.
Those markets would not be like the ones offered by sportsbook operators such as bet365 and BetMGM in Canada, where its legal to offer and accept action on U.S. election odds. Even so, Kalshi's election contracts would provide a way for would-be political punters in the U.S. to get down money on congressional and presidential races.
Market un-makers
The CFTC prohibited the company from listing the contracts last September, claiming they involved gaming and unlawful activity and were contrary to the public interest.
Kalshi then sued and won in district court. The CFTC is now worried the lower-court decision (which the regulator thinks is flawed) will lead to a surge in de facto election wagering, which it sees as a risk to election integrity.
"I don't mean to be dramatic, but Americans broadly believe that our democracy is under threat before this court even has an opportunity to consider the issues,” said Rob Schwartz, the CFTC’s general counsel.
The lower court decision is currently subject to an administrative stay to allow the appeals court to consider the CFTC’s motion for a firmer stay. The appeals court judges did not issue a decision on Thursday, although they did ask plenty of questions during the two-and-a-half-hour hearing.
If the lower-court ruling is unfrozen, it would allow Kalshi to offer election-related event contracts in short order, something it did for a brief time last week before the CFTC petitioned the appeals court for a stay. Roth said Thursday that there was about $50,000 in total trading in Kalshi's congressional election markets before they were shuttered.
You have the right to remain compliant
In the meantime, the only legal form of election wagering in the U.S. remains the limited form offered by “experimental” prediction markets PredictIt and Iowa Electronic Markets.
One line of questioning on Thursday had to do with alleged “harm” that could or could not be done if election-related event contracts are offered for trading. The level of harm will factor into the appeal court’s decision on the CFTC’s stay motion.
The CFTC’s chairman has said the regulator does not want to become an “election cop,” and Schwartz said Thursday that the election-related markets “are uniquely susceptible to manipulation” that can't be corrected as you would for oil or other commodities.
“And it's because the sources of information that they absorb and reflect are opaque and unreliable,” Schwartz said. “I am talking about polls with undisclosed methodologies or with bad methodologies, fake polls, pollsters with agendas, inaccurate news, fake news, on and on.”
Kalshi traders see significantly more rate cuts on the horizon pic.twitter.com/8jrLtGichU
— Kalshi (@Kalshi) September 18, 2024
Yet Kalshi claims the federal regulator is more than capable of cracking down on attempted manipulation. The company also believes its election-related contracts serve a legitimate business purpose for firms trying to hedge against economic risks that may arise if a certain party or candidate wins.
Moreover, Kalshi believes its traders have a role to play, helping the company and others to monitor markets for any funny business.
“Ordinary individuals” are free to trade, Roth noted. And while some of them may be there to gamble, even that serves a purpose.
“Ordinary individuals may also have legitimate hedging needs,” Roth said. “Many of them will not. And, as with any market, there are going to be people who are there for speculation, and that is critical to the operation of any market because it provides the liquidity.”
