Kalshi, Interactive Brokers Election Prediction Markets: How They Work | Wilnesh News
Traders, gamblers and politicians now have new tools to express their views this election cycle in the form of event contracts, but new markets still need to win over Wall Street power players and the legal system to become investment stars . Kalshi and Interactive Brokers launched presidential election contracts on their emerging platform this month after Kalshi won a key round in his legal battle with the Commodity Futures Trading Commission. The U.S. Commodity Futures Trading Commission (CFTC) is seeking to shut down the market following an appeal, but the presidential election promises to be the perfect opportunity for these platforms to prove themselves to investors while the process plays out through the courts. Prior to this, these platforms mainly consisted of contracts that traded in small numbers around other events, such as economic data releases. Steven Sanders, executive vice president of marketing and product development at Interactive Brokers, said these were a “trial run” for the election contracts, which the platform launched less than a month before the Nov. 5 election. constructed within a period of time. “Things were going well before the election contracts, but since we put them on the platform, interest has increased a lot,” Sanders said. How it works The contracts offered by Kalshi and Interactive Brokers are designed to be consistent with futures and others. Types of derivatives are similar in that the contract expires on a set date. The election contract on each site is binary, they will pay $1 if the correct outcome is chosen and $0 if the wrong outcome is chosen. Unlike these two new entrants, PredictIt and Iowa Electronic Markets have been around longer and operate under different CFTC rules, but both have position limits below $1,000. The fifth area, Polymarket, is a blockchain-based prediction platform that is not open to US customers. John Phillips, co-founder of PredictIt, said that the position limits of old prediction markets prevented them from being influenced by any one trader and reduced the risk for users, but they also had disadvantages. “Position limits serve a useful purpose, but they come at a cost. The cost is that you can’t effectively use this market for hedging purposes unless (demand) is very small,” Phillips said. His team is working to create a platform more aligned with Kalshi and Interactive Brokers. The presidential election is not the only political outcome on which traders can take a stance. Calshe’s other contracts, for example, cover several key Senate races and ways to bet on control of Congress. “The presidential election is not the only thing that matters,” Kalshi CEO Tarek Mansour said. “The Senate matters, the House matters, the states matter.” The odds and betting platform does not use the methods used in traditional political polls, so It is not a substitute for political polling. Real World Uses One potential use of election contracts in the financial world is to hedge the outcome in a more direct way than taking a short position on the S&P 500. “Political outcomes, especially elections, are one of the more challenging things for managers to deal with and establish balanced risk controls,” said Bob Elliott, CEO and CIO of Unlimited Funds and a former member of the investment committee at Ray Dalio’s Bridgewater Associates. “For example, Elliott said this type of market would be useful during the 2016 Brexit referendum, and as of Monday evening, Kalshey’s most popular presidential election market had accumulated less than $8 million in trading volume since its launch earlier this month. Brokerage platform Polymarket appears to be seeing much higher trading volumes, with its most popular contract having a total trading volume of around $1.9 billion, but this has been open since the beginning of 2024, including for March. Matt Thompson, co-portfolio manager at Little Harbor Advisors, is betting heavily on politicians including former South Carolina Gov. Nikki Haley and former first lady Michelle Obama, who dropped out of the Republican primary. Saying that trading volume, liquidity and regulatory scrutiny “are barriers to actually incorporating them into portfolios right now,” the firm specializes in providing clients with strategies to reduce volatility. Thompson also said that because it’s unclear how the market will react to any given situation, Prediction markets may also serve non-traders, such as advisors and traders, if they prove to be accurate over time. “My strong feeling is,” said Koleman Strumpf, Burchfield Chair in Political Economy at Wake Forest University. These markets often perform as well or better than the polls, with 2016 being an important exception, but no one understands this correctly. More ominously, critics of election markets are warning that election markets could. Cantrell Dumas, director of derivatives policy at the advocacy group Better Markets, told CNBC. The group is concerned that someone might try to alter prediction markets on Election Day to dissuade voters. “More and more people have more incentives to try to spend more money in elections to give the impression that a certain candidate won or lost,” Dumas said. On the other hand, PredictIt’s Phillips He said he believed the market could serve as an “antidote to fake news” by stimulating traders to obtain more information. Wake Forest University’s Strampf said he hasn’t seen any convincing evidence that any major prediction market is being manipulated, adding that each platform’s different rules make arbitrage difficult, but the reverse is true. May reduce market efficiency. The appeals court has fast-tracked the CFTC’s appeal in the legal case, but the latest timeline suggests the dispute will not be decided before Election Day, Nov. 5. Kalsi offers a variety of contracts. In addition to the legal path ahead, how markets grow in the lead-up to Election Day — and how they respond to that growth — may also be key to their staying power. CEO Mansour said Kalshi’s market makers, including Susquehanna, can handle trades of up to $100 million and only impact the market for pennies, although he acknowledged that no such trades have occurred yet. He said Kalshi was in discussions with institutional clients, including hedge funds and family offices, about using the platform. However, Unlimited Funds’ Elliott said today’s market may still be illiquid enough to convince major hedge funds to seriously participate in this space, and the market for these types of contracts may be difficult to scale. “If large institutional investors are talking about this kind of liquidity, we’ve got a long way to go before large institutional investors choose these types of vehicles,” Elliott said.
