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> Before Kalshi, markets that allowed you to trade on economically relevant events were illegal or unregulated.

Totally untrue. PredictIt was legal and regulated and well-loved for many years, operating with the permission of the CFTC under a no-action letter. Then Kalshi hired former CFTC commissioner Brian Quintenz and soon, PredictIt was suddenly deemed by the CFTC to have committed still-unenumerated violations of the no-action letter.

This is a rotten way to do business and shame on YC for being involved in it.

https://karlstack.substack.com/p/a-textbook-case-of-regulato...

Buying out the regulators and making competition illegal is the moat YC needed to invest

I have no knowledge about this particular case but that is absolutely not how YC operates or thinks about its business. I've never heard a single comment from anyone at YC along such lines. I'm not moderating this subthread the way we normally would*, but IMO you guys should be more scrupulous about posting snarky smears.

* because https://hn.algolia.com/?dateRange=all&page=0&prefix=false&qu...

(edit: for anyone wondering, I didn't flag the GP comment)

+1 on this. This is not how any of us operate.

Regulation in this space is really tough and thorough - we've been battling through it for years now (also explains why this post is coming so long after the end of our batch!).

The facts presented above make your company look very shady, and this answer is not clearing up anything.

Like this most people will have to assume you really just paid off / bribed Brian Quintenz.

this insider article should clear up a few things! https://www.capitolaccountdc.com/p/gambling-on-politics-an-i...

It's paywalled and you not wanting to say anything yourself just smells bad

Indeed. Why not take up Scott Alexander's proposal if there truly is nothing untoward here?

https://astralcodexten.substack.com/p/mantic-monday-81522

> If someone from Kalshi wants to swear, in so many words, “We promise we put no effort into convincing CFTC to quash PredictIt”, I will believe them (although I would still suspect the CFTC was following a thought process like “now that Kalshi exists it would be embarrassing to let less-regulated markets exist alongside it”). Until then, I think cui bono remains the right question.

Here's your chance, 'tmansour: if you didn't do anything wrong, why not say so yourself?

I have no horse in this race or involvement with either party at all; I'm just interested because this feels like quite the betrayal of the usual ethos we'd expect from YC affiliation, and your responses on the topic so far are evasive enough to be a red flag in and of themselves.

“I have no knowledge about this particular case”

Respectfully, I think you should have stopped there, or perhaps earlier. There is quite a body of evidence already provided in this thread suggesting that Kalshi is an anticompetitive regulatory-capture play.

perhaps you could post said evidence?

I added an edit, indicating that this thread already has quite a bit of it.

The GP comment was specifically a smear about YC, which is something I do have knowledge about. I don't for a moment believe that YC would invest in "buying out regulators and making competition illegal". That would go against everything I have ever heard, in public or in private, and everything I understand YC to be about.

Just because we moderate HN less when YC or a YC-funded startup is part of a story does not mean I won't respond like a normal human being.

Maybe not YC -- that's a strange thesis for seed money -- but it wouldn't surprise me if this strategy flowed from Sequoia; not as a primary investment thesis, or even the primary reason for bribing* a former regulator, but rather as a happy side pot payout.

* Yes, the revolving door is bribery-by-any-other-name. Anger at this type of legalized overt corruption of our institutions is literally ripping the country apart.

Right on—this is my take, too.

I think it's unfair to jump to the conclusion that Kalshi is to blame for regulators banning PredictIt. From the link you posted, PredictIt promised the regulators they would:

* be small-scale and not-for-profit

* be operated for academic and research purposes only

It doesn't really say what "small-scale" means, but obviously, if PredictIt keeps being successful and growing, eventually they will no longer be small scale. PredictIt was always in a situation where they had to make a different deal with regulators, eventually, as long as they continued to grow.

If you want to blame the CFTC for shutting down PredictIt, Intrade, all of those other prediction markets, then yeah, I agree! I wish they had just been much more permissive long ago. We should blame the CFTC for being too strict. But it doesn't seem fair to blame Kalshi just because they might be the ones to finally convince the regulators to allow one of these.

I hope Kalshi is the group to figure this out, make prediction markets popular, and that prediction markets can finally get the attention from wider society that they deserve.

I went deep doing research on prediction markets a few months ago, and no, it's not an unfair conclusion.

Brian Quintenz is a Republican financial manager who was nominated to be a commissioner of the CFTC by Trump in 2017.[1]

During his time at the CFTC, as I recall, there was heavy bipartisan action, which he was praised for.

Well, there's a slightly more cynical take that he was indeed completely crooked.

My memory is foggy, and I don't have time to grab sources just yet as I have a meeting coming up so I'll update this shortly, but he was then turfed out of the CFTC under Biden and promptly hired by Kalshi.

Given his record, it's less of a jump to see what Kalshi is doing as shady, but more of a smoking gun... PredicIt, which had been operating under a no action letter (NAL) from the CFTC since 2014 just happened to have that letter withdrawn a few months after Kalshi raises $30m at a Series A to take their platform live.[2]

From my point of view, this is classic American lobbying mafia style stuff. Prediction markets have been prevented from flourishing for decades, and now that the time has arrived, the crooked CFTC et al have cleaned the house so their chosen startup that they're deeply in bed with can thrive.

The whole thing, quite frankly, stinks.

[1] https://en.wikipedia.org/wiki/Brian_Quintenz

[2] https://www.pymnts.com/news/international/2022/millions-comm...

So the guy the administration fired is somehow also the guy to make the current CFTC do what he wants? I’m sure he knows the rules and institutional concerns of the CFTC, but why would he have undue influence over the person who replaced him?

I hear what you're saying, but I feel there is an assumption made by your counter-argument which insinuates that the CFTC is a functional and non-corrupt organization. My perspective, based on my research, seems to suggest otherwise.

Unfortunately, this seems to be endemic of American politics and government organizations.

In Kalshi's case, Brian Quintenz aside, let's talk about Jeff Bandman, who spent close to 3 years at the CFTC.[1] Well, after doing so, he became a regulatory strategy advisor for Kalshi.

Here I quote a Bloomberg article[2] on Kalshi from earlier this year:

"Eventually they tracked down a former CFTC official, Jeff Bandman, who assured them the landscape was changing; he agreed to help them navigate the agency and its characters."

So yeah, I'll concede that there are a few un-generous assumptions that need to be made to fully paint Kalshi as a bad actor in this situation, but given the various pieces of context available, I don't feel it's an overstep to call behavior like this out.

Ultimately Kalshi is set to be a unicorn startup, and I wish the founders success in their endeavors—they appear to be exceptionally bright and hard working individuals—but what appears to have transpired for them to have their shot doesn't sit right with me.

[1] https://www.linkedin.com/in/jeffbandman/

[2] https://www.bloomberg.com/news/features/2022-05-26/kalshi-s-...

Archive link as the original has a paywall:

https://archive.ph/20220527010753/https://www.bloomberg.com/...

That article is super helpful - my take on it is that the fact Quintenz was a former hedge fund trader probably had a lot more to do with the approval than his later decision to work for Kalshi. And it’s interesting to note he was originally nominated to the CFTC by president Obama

What a ridiculous regulatory decision. They have to be "small scale?" So it's ok for anybody to do it, but if too many people actually do it, then no one is allowed to anymore.

This article had a bunch of interesting insider info on what went down (most of it was news to me as well): https://www.capitolaccountdc.com/p/gambling-on-politics-an-i...

Hard paywall. Can you archive it and post a link?

Wow ! .. :)

Without more detail this just sounds like a conspiracy theory. Hiring a former regulator is way too weak a link to conclude that Kalshi are pulling the strings at the current regulator.

If PI were operating on the basis of a no action letter they were unregulated pretty much by definition. A no action letter is basically a regulator saying that it won't take action against a market participant for doing things that would otherwise merit regulatory action.

(I'm not affiliated with any of these parties, just going by what I read in the comments and the various publications from CFTC.)

That is not what a no action letter is.

Scott Alexander did a post on it too: https://astralcodexten.substack.com/p/mantic-monday-81522

How is a non-profit trade-size limited prediction market in any way a competitor for Kalshi?

And predictit will have its day in court [1] where both sides will actually need to present evidence, unlike on an internet forum

[1] https://www.globenewswire.com/en/news-release/2022/10/06/253...

> How is a non-profit trade-size limited prediction market in any way a competitor for Kalshi?

Because it was one of the longest running and largest prediction markets to ever exist.

> trade-size limited

Kalshi is trade-size limited, too.

Specifically, PredictIt limits positions to $850, while Kalshi limits them to $25,000.

Which is definitely a significant difference, but still seems too small for cases like tmansour’s motivating example (“providing institutions with exposure to, or a hedge against, Brexit”). Though I guess it depends; if you bet $25,000 on a 99:1 long shot, then your position could be worth $2.5 million if it pays off.

(PredictIt also limits each market to 5000 participants, while as far as I can tell Kalshi has no such limit.)

I think they did the same to Polymarket in the US.

Not only that, but at least in the UK, bookmakers take bets for newsworthy events. (Like elections)

Prediction markets are a fantastic concept with a ton of value I think for everyone. So I wish companies in the field success and I hope they thrive despite regulators doing their best to destroy them, like PredictIt.

I think it's a shame Kalshi has managed to get their hooks into the CFTC and, rather than lobby to open the field to all prediction markets, instead lobbied for narrow permissions to operate only their stuff (in a limited, less useful way) while killing their competitors.

It's a terrible way to operate a business and it's a black stain on YC for funding a company using these kinds of underhanded methods.

I can only hope the regulatory environment improves and we get some improvements at the CFTC, but I think anyone familiar with US government institutions would bet against it. Perhaps someone could open a question about it on a prediction market.

Running a bucket shop is not innovation. Running a back-alley card game is not some brilliant new financialization of anything. Hustling financially illiterate or gambling-addicted suckers for their last quarters is really not about to herald a new era of anything interesting at all.

You would have to be a modern American to have so little clue about the types of frauds and scams that continue to be perpetrated to this very day that gave rise to the financial regulations we have now. There's always ways to improve regulation, but it's almost pathological how Americans refuse ever to acknowledge that there could be a huge body of law and volumes of history that might just explain the way things are. RTFM

Prediction markets are a way to cut through the fog and find truth. This isn't the equivalent of playing blackjack or roulette. In today's world, it's increasingly difficult to find people in the media who are telling the truth. Pundits everywhere can proffer predictions without being on the hook for anything if they're wrong.

Prediction markets let you more accurately know in advance pretty much anything: war, economic calamity, political outcomes like who will win an election, whether a drug will be approved, etc. and they are a genuine innovation over the current media landscape. Check out Metaculus for an example of the concept with imaginary points; it'd be more accurate if real money were allowed.

Gambling and addiction is a major problem, certainly, and I'm not arguing for zero regulation on gambling. (I could quibble on prediction markets being gambling, though they are closer to it than not.)

Regulators are so useless that they are perfectly willing to allow crypto, Las Vegas casinos and sports betting to exist and be advertised broadly (things with essentially 0 value to society), but an _actually_ useful form of dealing with probability and chance that can help people chart an uncertain world isn't allowed to exist.

Well, except in limited cases if you spend enough money greasing the right pockets and can take down a competitor too. :)

We've been committed to battling through regulations to open and expand the market for close to 4 years now.

As I posted above, here's more (insider) information about what happened with PredictIt: https://www.capitolaccountdc.com/p/gambling-on-politics-an-i...

what value do they provide other than speculation/gambling/betting?

So it's like placing bets?

This is branded as if it's some new type of stock exchange when in practice it's just another betting platform, no? Other than fancy UI, how is this any different in practice than oddschecker.com or betway.com (I'm not familiar with those sites, just a quick search)?

>inb4 all stock exchanges are betting platforms

An important distinction is that if you are an asset manager (i.e. gambler with other people's money), you aren't allowed on traditional betting platforms--only SEC and CFTC approved ones. Now you can bet on political outcomes with other people's money.

Asset managers aren't restricted to trading things on exchanges unless their docs explicitly say so. Many hedge funds place bets directly with investment banks, through exchanges in the US, overseas exchanges etc.

Hedge Funds were more or less created for the express purpose of getting around restrictions that traditional asset management structures place on fund usage. But yes, Hedge Funds, Private Equity, Venture Capital and Family Offices can basically do whatever they want within the confines of their investor agreements.

"traditional" = funds holding publicly listed stocks and bonds? Basically, mutual funds? If that's it, there isn't a "traditional" asset manager that is going to Kalshi to put bets on events.

Note in the post - the buyers who head to goldman to get exposure through a basket of positions are not "traditional" asset managers.

Put another way - the relevant asset managers were not restricted.

There's a fundamental difference between gambling and financial trading.

In gaming, you are trading on risks that are artificial, eg. betting on a dice roll or on a roulette spin. Those risks do not need to exist, and they risk solely for the purpose of betting.

In the derivatives markets, the risks you're trading on are not artificial, they're already existant. The purpose of markets is to transfer those risks from people that bear them and need to offload them (hedgers) to people that have appetite for them (speculators).

This debate has been at the core of these markets since the dawn of derivatives markets. See this fascinating Court Case on grain futures: https://en.wikipedia.org/wiki/Chicago_Board_of_Trade_v._Chri....

At the time, there was a lot of debate on whether grain futures were gambling. The final decision by justing Wendell was not because (paraphrasing) "sure a lot of people will speculate, but saying that these markets exist purely for speculation is off - there's a subset of participants that need to hedge risk, and that makes these markets crucial" (note: intent to deliver was the early form of hedging).

The original response:

"[T]he plaintiffs chamber of commerce is, in the first place, a great market, where … is transacted a large part of the grain and provision business of the world. Of course, in a modern market, contracts are not confined to sales for immediate delivery. People will endeavor to forecast the future, and to make agreements according to their prophecy. Speculation of this kind by competent men is the self-adjustment of society to the probable .... It is true that the success of the strong induces imitation by the weak, and that incompetent persons bring themselves to ruin by undertaking to speculate in their turn. But legislatures and courts generally have recognized that the natural evolutions of a complex society are to be touched only with a very cautious hand. .... It seems to us an extraordinary and unlikely proposition that the dealings which give its character to the great market for future sales in this country are to be regarded as mere wagers or as ‘pretended’ buying or selling, without any intention of receiving and paying for the property bought, or of delivering the property sold, within the meaning of the Illinois act"

What about sports betting? People would still play those games so the "risk" isn't artificial.

There is no real market participant who could benefit from hedging in sports betting. Only sports betting operators themselves, and the teams (who are legally forbidden from participating in betting).

But in a commodity market there are real participants whose primary business model is production, being able to hedge against future price swings provides real value to these businesses.

Why is this different than the massive sports-merchandising part of a teams business, where they sell more stuff depending on whether they win or lose? I imagine they'd want to bet.. err i mean hedge to provide real value to their business.

(despite the snark, I'm also curious how the situation is different)

> There is no real market participant who could benefit from hedging in sports betting.

The entire local economy surrounding sports venues. For a small bar or restaurant near a stadium, the difference between a good season and a bad season can be huge. This is magnified to the nth degree in places like Green Bay, WI where renting out one's home for a single at home post-season game can easily net a family several month's worth of mortgage payments.

And all advertisers who have contracts with the teams, all shops selling their merchandise, and they'd all have a large interest in hedging their bets.

Sure, but this is a way that sports betting is less like gambling and more like legitimate risk management for some businesses.

> The purpose of markets is to transfer those risks from people that bear them and need to offload them (hedgers) to people that have appetite for them (speculators).

Considering how Capitalist governments behave in financial crashes, you mean:

"offload them to people who have appetite for slanted bets, or in case of significant losses, to the public who has no appetite for it."

Did the CFTC ever try to regulate the adtech industry?

Was there ever any formal waiver or guide lines?

its binary options, which have long and spotty history. The payout does not cover owernship of an asset and typically the payouts are adjusted to be overall quite disadvantageous for retail bettors. I would stay away, it doesn't matter how they try to rebrand it. do your own research on binary options as they say.

Binary options are only thought to be bad because they traditionally have been run by scammers like bucket shops. The binary part is a distraction - it's just because they were easier to describe to the victims.

As a type of investment though, there's nothing wrong with it - if risk-mitigation is what you need.

If the binary nature was a problem they could easily structure these to be non-binary, such as bet on a game and don't return 1/0 but the actual game score 21/15.

Who decides the outcome of each event? The Kalshi team?

For example en the Moon landing example, I guess NASA will make press release, but it looks impossible to automate reading it and deciding. (What if the starship colides with the Moon? What if they can't return? What if it explodes 5 seconds after landing? What if it's a joint NASA+ESA project?)

The determination of an event will vary by contract, but are all external sources of validation, listed in the contract up front. For example, the moon landing resolves to yes if NASA announces by X date. GDP is resolved by Bureau of Economic Analysis, Inflation by the Bureau of Labor Statistics, and so on.

Generally, event contracts are legal contracts technically. We have a team that spent a ton of time developing templates to incorporate all types of events (hard problem). Here's an example definition: https://kalshi-public-docs.s3.amazonaws.com/regulatory/ruleb...

>Landing is defined as making contact with the surface of the Moon.

This is hand-waving a bit, and not only doesn't address the OP's question (does a fatal collision count,) but is a good example of the ambiguities that could plague any "simple" contract.

I would think for ultimate compliance that Kalshi would be the first order-judges, but if the parties disagreed, these ultimately get decided upon by an actual Judge giving a good-faith determination of the question with a reasonable persons' definition of the terms.

He did answer. He said if NASA says so, then it's so.

Why are we acting like this isn't just a prediction market? Also as others have said PredictIt did it first and was fine until you hired a former regulator and got them shut down. Questionable business practices. How long will you survive until the next upstart throws enough money at someone higher up the regulatory chain and you yourselves get shut down??

It's a prediction market in some ways... though prediction markets have been historically associated with unregulated venues etc.

We're fully regulated by the federal government as a derivatives exchange, and that's a big difference in an of itself (it took us years to figure out the right model to offer derivatives dynamically, with events as underlying). Regulation allows us to plug into the financial ecosystem, and offer the asset class to hedge funds, market makers, brokers, etc.

For all intent and purposes, we're a financial exchange that offers derivatives on a broad range of things that have been offered before.

So it's a prediction market but you aren't legally allowed to be called a prediction market. In much the same way that Pyramid Schemes can operate as "Multi-Level Marketing", eventually the regulators will catch on and shut things down.

We are perfectly allowed to be called a prediction market. That is not what I was saying in my text.

We are fully regulated by the CFTC. Our ethos has been do regulation from day 1 and we spent 3 years getting regulated before we launched a single product. Regulators are already caught up and are working with us constructively to expand this marketplace and asset class.

I'm a big user of https://predictit.org/. But they are getting shutdown soon, so this is great.

One thing I'd suggest: add pictures to the events. Makes it much easier for me to navigate and identify markets. I.e. a Biden picture next to a Biden event.

They are getting shutdown specifically because of Kalshi, see the links in my other comment for some context

Ah, I see. That’s unfortunate. 3 years definitely requires a lot of resources.

They’ll have a monopoly for a bit then. Would ‘t be surprised if Robinhood dips their toes in.

We're evaluating the idea of adding pictures (they were there in an earlier version). Totally agreed it makes the site looks livelier.

This is oversimplifying complex investments to a point where no one is investing in anything anymore, just a lot of hand waiving a money exchanging hands

Bureau of Labor Statistics could announce a new equation for the CPI next month. Which means the inflation will be calculated to be much lower than everyone expected.

If you're betting on Bureau of Labor Statistics press releases, you just lost your bet just because a human decided to word things differently.

If you're investing in a complicated financial bundle, like actual contracts to buy sell oil, wheat, stocks. Then you could still be winning. Because a single politician can change your win to a loss when you're betting on words (like Inflation as calculated by a person in the US government), but a single human can't lose you money when you're investing in actual equities

This is more like a roulette table than an actual investment

There's a few points here - I'll try to address one by one:

1) Hand-wavy exchange of money. Most of the derivatives market, including some of the most traditional instruments like energy Futures, have massive amount of cash-settled activity, rather than physically-settled -- ie. nothing physical is actually exchange hands, and traders are purely exchange financial risk.

That doesn't make the transaction any less important and valuable: at the end of the day, participants are hedge financial exposure and cash-settlement is a great and more efficient way to get that hedge in.

2) Single-point of failure OR arbitrary change to the underlying. There's an extreme amount of scrutiny and safeguards around how CPI is calculated and how it is changed. CPI impacts trillions that are traded in traditional assets like interest rate swaps, inflation swaps, mortgages, etc. Also, CPI is a large factor in the Fed's decision to raise interest rates at every meeting. It cannot be changed by a single person, on a whim. And this tends to be true for all the data sources underlying our markets.

Arguably, a stock has much more key man risk (or "arbitrary whims risk") than something like CPI: eg. Elon ripping a bong and tweeting something's impact on Tesla stock.

3) More like roulette than actual investment. The lack of physical underlying doesn't make this any less of a financial instruments. Most liquid markets today do not actually exchange the underlying, eg. interest rate swaps, index futures, etc.

What differentiates a financial product from gambling is the presence of an economic purpose. A roulette spin does not need to happen - it happens solely to create an artificial risk for people to bet on. In the case of event contracts, things like an election or a CPI print already expose the market to risk... that risk already exists and our markets allow the transfer of said risk from people that have and can't bear it to people that have the appetite to bear it (that's actually the whole point of the commodity futures and derivatives market).

> Kalshi is partnered with LedgerX LLC (d/b/a FTX US Derivatives)

How has the FTX debacle impacted you, if at all?

https://www.coindesk.com/policy/2022/11/17/cftc-has-boots-on...

LedgerX is the only entity in the FTX empire that is fully shielded financially by virtue of being federally regulated by the CFTC.

These are exactly the types of situations where regulation matters most! We have seen no impact from that fallout and our customer funds are fully separated in a segregated member account held safely at SVB.

> Everyone faces different risks: inflation, extreme weather, mortgage rates

Even as a relatively sophisticated investor (compared to the median) I wouldn't really know how to hedge correctly on these markets.

For example if inflation is high, how many units do I buy. Am I fully hedged, or can I lose the bet AND lose in real life?

I think users need to understand these things to use it. Some of that is education, and some will be tools.

For example, enter your salary, expenses, budget etc, and it recommends a bet, and then shows you the outcomes if you win or lose.

It should be clear that for example YOUR cost of living might go up more than inflation because you buy different things from the inflation basket.

This is a bit like insurance, in the sense you may pay for health insurance, or travel insurance then find your thing isn't covered.

I would also be interested in the tax implications. For example you do a bet to hedge your foreign holdings of say GBP. GBP goes down so you win from the bet and lose in real life. But you still pay tax on the bet (or do you ... ?).

I think this is a cool idea.

I think the more useful idea for the everyday person is something akin to a "1kg of tomatos a week prepaid subscription for 5 years" aggregated over their typical shopping.

That all said trying to tame the future is a hard beast. And expensive to insure yourself against all the things. Especially likely things, like shit getting more expensive!

There used to be betting on horse races, now these guys (well, not just them, but still) let you bet on the results of _human_ races. Will SCOTUS uphold civil right R ? Come make money off of it! Or - hedge your bets, and if the pseudo-democracy gets further downgraded - at least you'll be a little richer, at the expense of the poor saps who believed in "Golden Miller" or "Hoofs of Thunder". Oh, sorry, I meant to say "Elena Kagan" or "Brett Kavanaugh".

Just wonderful!

That's one view of this - I'd say it's pretty cynical though... Reminds me of how people reacted to insurance when it was first being introduced to the broader population "gambling on human lives/death! terrible!!".

While it's true to some extent, insurance is indeed crucial: one of the counter-parties is meaningfully reducing the risk of catastrophe, or extremely detrimental outcome at the very least.

This can be extended to all sorts of events, including Covid, the economy, politics (Brexit had devastating consequences), hurricanes, etc.

I'm not quite getting it yet.

"Biden approval rating" https://kalshi.com/events/538APPROVE-22NOV23/markets/538APPR...

How is that comparable to an insurance and not just simple betting?

So, what do you think about providing insurance to convenience store robbers against being caught by the cops? This will meaningfully reduce the risk of an extremely detrimental outcome for them.

So lets say I think inflation is going to continue to go down and return to 2% by 2023. At the same time my shares of SPY and QQQ are continuing to go down due to increasing rates.

Is the point of this platform to serve as a hedge against other asset classes or is this supposed to be thought of as a completely separate asset class and not as a hedge against other investments?

I see the gambling aspect of it of just betting on outcomes, and that is interesting to me; however, I am curious how your team thinks about it.

It is a separate asset class yes. But it ties to other markets in a number of ways.

In your example, there's two things you could do depending on your usecase: 1) You think inflation will go up and capitalize on it. Today, you might think that a good way to do that is to short SPY. That's good, not great - because it's a proxy: inflation could still go up, and you SPY could go up as well (correlation is not 1:1 for a number of reasons).

The best way to express that view is by buying inflation event contracts: more direct, no basis risk, cleaner.

This use-case was super common when I was at Goldman and Citadel, which is where we got the idea.

2) You hold SPY but worry about the exposure of your holdings to inflation: you can use event contracts to hedge that exposure very precisely... think of it as a precise, meticulous surgery on your portfolio to eliminate (or even take) risks that are very difficult to eliminate with traditional instruments.

Yeah that is exactly what I want. I bought SPXS a few months ago and took a bath on it because irrational markets longer than i can stay solvent blah blah. Will take a look into this more thanks!

One other question, how did Citadel and Goldman do this before your platform existed? Were they big enough to just call up some bank and create a specialized product for them?

How do you prevent insider trading? Does your regulation account for that? For example how would you prevent an high ranking NASA employee who knows and/or influences the decision of a moon landing from misusing the platform?

The definition and prosecution of insider trading in CFTC regulated markets has a much shorter history than SEC regulated markets, see e.g.: https://www.hflawreport.com/2550376/cftc-resolves-its-first-... https://www.lw.com/admin/upload/SiteAttachments/Alert%202827...

So, in a way, this is a good and tricky questions that applies much more broadly to non-securities markets (e.g. commodity futures). (IANAL)

I agree. The space is getting increasingly more savvy about how to handle this question in the derivatives markets though!

Great question. A few things here.

1. we spent years working with the regulators on defining and building our surveillance systems. They basically ingest data from the exchange and run stats/some ML to flag suspicious trading patterns to an investigation team in our compliance department (similar to when NYSE flags a Goldman trader for insider trading) -- our systems have gotten really sophisticated and you'd be surprised by the amount of commonality there is in cases of fraud/insider trading/manipulation/collusion and so on...

2. we tie people's trading activity to KYC we run at signup. We also pass people through Politically Exposed Persons (PEP) lists, that flag anyone that works in gov and their relatives etc.

3. when we investigate cases of inappropriate behaviors, the consequences can range from fines to criminal prosecution by the CFTC (similar to stock trading)

4. obv all the above are not a single hammer solution, they're heuristics, but people generally don't commit a federal crime to trade with $100, they tend to trade with much more meaningful sums, which fortunately and intuitively is much easier for our oversight programs to flag.

Overall, this question presents a number of fascinating challenges/questions, but it's not a more difficult problem than flagging insider trading/market manipulation in traditional markets like stocks and commodities.

Isn't insider trading the entire point of a prediction market as an information aggregator?

No. Some people have information that they are not fiduciarilly bound to keep secret but they may still know things that would allow them to make a profit. That’s not insider trading, that’s knowing private information that isn’t reflected in market prices. That’s the point of a prediction market as an information aggregator.

The fees on these contracts, and the selection of the contracts, is such that you're essentially playing the "picking up pennies in front of a steamroller" game. That's a bit of a silly game to play when the risk free rate of return is 4%-5%.

Eg, to meaningfully hedge against tail risk of hurricanes I'd need to put in so much money that I might as well just buy some bonds with the principal and self-insure.

This is awesome; prediction markets have made massive strides recently, with applications and implementations being useful from crypto to sports to politics.

I'm surprised if there wasn't already a pool of smart contracts out there basically already emulating the space.

The obvious first principled questions come to mind: definition ambiguity in the event and thus result, the Oracle problem confounds this by essentially either giving leeway to the market deciders or by using a concrete agreed upon source of truth, such as data published to .Gov domains and other government/market API's.

The need for human capital to moderate/adjudicate claims is apparent, but would vary per domain. No need for a human to decide on public CPI data (assuming no wrongdoing or mispublishing on the .gov part), and this could be further minimized by making clearer positions/events that eventually are glued to a dedicated Oracle API.

Definitely an area that could be implemented quickly but haphazardly in an unregulated/cryptobro fashion via tokens and smart contracts, but cool to see its been developed above the table.

Cool economic calendar too, I have been looking for exactly this. https://kalshi.com/economic-calendar

Glad you find the economic calendar useful. We're currently thinking of ways to improve/expand it...any events you'd like to see on there?

There are definitely areas where automating market resolutions/creating smart contracts can be useful....the most important thing is having a very well-defined contract upfront, so that outcomes are clear, the validators are authoritative, and unexpected edge cases don't come up. This is something we spend a lot of time thinking about when listing markets.

> prediction markets have made massive strides recently

Note that Kalshi lobbied to shut down its competition (PredictIt), so overall benefits are not clear.

Is this U.S. only?

Edit: Found the answer, yes "Only US residents are currently accepted."

For now we're focusing on the US. We're expanding to other jurisdiction soon... potentially in 2023.

In the UK, betting websites such as e.g. https://smarkets.com/ have often got reasonably liquid & transparent markets for political outcomes and similar.

This sounds a lot like intrade.com, which was popular among my coworkers and myself in the early aughts:

https://en.wikipedia.org/wiki/Intrade

Intrade was awesome. Great respect for that platform.

We're doing a fully regulated, full scale version of Intrade. Regulation allows us to take this to the next level: getting market makers onboard, integrating with brokers, etc.

That's a great model and I wish you and your team success!

thank you my friend - hope you give it a spin and send feedback my way

Interactive Brokers startem Playing in this space too.

https://eventtrader.interactivebrokers.com/en/home.php

Yepp! and other big players like CME.

I'm super excited about that: we finally opened the space in a way that is meaningful enough for the big players to start taking note and join.

I think the events trading ecosystem is still very much in its infancy and there will be a lot of movement in the space in the next few years.

Wouldn't such an exchange be a good use case for a smart contract?

It would make it very transparent, if the exchange is honest. As a history of all bids, payouts and judgments would be recorded on a blockchain.

It probably also would do away with the KYC, so everybody could participate.

And nobody would have to give away their private data.

Thinking about it ... if the smart contract would let users post new bets as tokens and appoint judges, the whole thing would be eternal. Individual users and judges might come and go. But the platform would live on forever and the history of bets would be recorded forever.

> Wouldn't such an exchange be a good use case for a smart contract?

There were several such "decentralized" projects (Augur, etc.), but I don't know of anyone who uses them. I kind of stopped following the "permissionless" space after several projects turned out to be too scammy for my liking.

> It probably also would do away with the KYC, so everybody could participate. Nobody would have to give away their private data.

That's exactly why they're not allowed. If you can't easily get fiat in and out of such contracts, they can hardly matter.

Kalshi: not a novel idea, but it's good to see another implementation.

Several solid blockchain projects (also permissioned/KYC, but based on blockchain, with distributed oracles) are launching similar markets in 2023. I think they will have an advantage because all participating financial institutions will be able to create own markets without reinventing the wheel or building their own in terms of underlying infrastructure (APIs, smart contracts, etc.). Some already have simple apps (decentralized price feeds, etc.) in beta now - they just need to add the ability to bet on outcomes. I don't want to "advertise" their names here but you can look them up on the Internet.

It actually is ideal, given trusted API/Oracles, a timeout period to ensure mis-published data is corrected promptly, and a few other non-obvious gotchas.

You could even have trusted middle-men that collect a Fee iff ambiguity is discovered and an appeal is wagered against the escrow.

I'm sure it exists and got rugpulled already.

If it is set up so that the users can put in bets and appoint judges, then it can't ever be rugpulled. Individual judges could turn hostile. But if the judges get paid for their work, a great track record might be worth more than any rugpull.

So a person could build trust and society could benefit from their good behavior and they would make money by being trusted?

Augur tried this and doesn't seem to have gained a lot traction doing so. Any staking schemes that were developed were relatively easily gamed and that led to distrust in the system.

We, like traditional financial exchanges, define the contracts upfront with clear rules on how they will be settled, then follow the letter of the law very strictly when settling a market.

In general, we've found market certainty to be more important that accuracy: ie. having pre-defined rules that everyone can agree on and that are pre-set is more important than those rules being the "correct rules" (not that having correct rules isn't important).

Such a thing exists (Polymarket) and the whole setup has probably precluded many, many, many people from using it including myself. I got halfway through setup before giving up.

By contrast, I signed up for Kalshi and bought 3 contracts in the last 30 minutes.

Additionally, smart contracts don't actually solve the primary source of (unaccepted) risk: the oracle.

Did you already have Polygon and a wallet (e.g. metamask)? If you didn't have that, I could see it being a pain too much of a pain to deal with.

It only took me a minute to use Polymarket, but I already had the prerequisites above.

I love Polymarket. It's what dapps should aspire to be

This is a nice idea in theory, but in practice you have to really trust the judges. Suppose that 99.9% of people thought that X is going to happen, but it didn't. If the judges are a representative sample, then 99.9% of them were wrong and are about to lose money. Unless they cheat.

Huge development for the legitimacy of prediction markets. As a regular user of manifold, I'm really looking forward to the day this becomes available in Europe.

Prediction markets have incredible potential and I really hope that we one day will look back on this launch as we look back on the launch of the New York stock exchange.

That said the whole predictit thing strikes me as really shady. I hope it was a necessary evil to gain the authorization of this market and not just a move to secure a monopoly position.

Will you ever allow for the results of sports to be traded? Why stop at large political events?

This is a pretty well served market at this point.

We're not doing sports for now. We're focused on events that have broad economic/social utility (not that sports doesn't, but it doesn't as clearly).

Is this legal? If so, why are similar-sounding things illegal?

Kalshi is the first federally (CFTC) regulated exchange allowed to do this. We spent 3 years working with regulators to get this regulated and opened up the market for events trading.

Here's more about our regulatory status: https://kalshi.com/learn/how-is-kalshi-regulated?

This is one of the most common startup ideas. It doesn’t work. Been tried dozens of times. But seems to have an unlimited supply of greater fools who will invest.

You're right! Lots of people have tried this before. The main source of failure historically has been regulation.

We took the approach of addressing the elephant in the room first. We spent 3 years to crack the regulation case and we got federal approval to make sure we have the potential to get this market to its full potential.

Did Kalshi do anything to stop others from operating in this space as well?

Definitely not the main source of failure but it’s a reasonable pitch. Good luck.

love to get your thoughts on what was the main source of failure

What's HN's stance on tracking links? This post is filled with them. I thought I remember Dang saying something about it.

That's a good point - I didn't really think about this when posting (growth team really wanted those in).

Dang let me know if I should take them down/if they're super annoying.

Who are (or who do you expect) to be your primary core of users/customers? I imagine professional trading firms would be your most profitable customers, but it seems targeted or at least designed for the meme stonk day trader? Just trying to understand who actually has this problem that Kalshi is trying to solve.

Our users and their use cases vary drastically....they can be asset managers with acute financial risks, freight carriers protecting against dry van rates dropping, traders looking for alpha, SMBs in Florida worried about a hurricane disrupting their operations, everyday people looking to hedge against inflation, and so on.

What about inside trade? Isn’t there a big risk that people at institutions you use as source take bets last minute before they announce the critical information? Or maybe even change what they publish (maybe pretending it to be an honest mistake, which is corrected the next day) to win?

Good question.

Among a number of other safeguards that I mentioned in a reply above, we often use well established and reputable data sources that either 1) already have restrictions on their employees trading on the event or 2) we enter into data licensing agreements with and require those restrictions to be put.

We also run KYC and pass all the participants through Politically Exposed Persons (PEPs) list, which allows us to flag people that are potentially close with a lot of our data sources (BLS, Nasa, MTA, etc.).

Our surveillance systems also do a great job of flagging weird activity (more in the post above) and anyone who we find to have done something wrong can be fined all the way to criminally prosecuted by the CFTC.

In short, a lot of similar safeguards to what you have against insider trading in stocks.

How many markets do you anticipate adding next year?

It's really hard to say. We tend to be dynamic in how list markets: we monitor whatever is trending every week/month, and create a market out of those things.

I guess the number of markets we post next year will be a function of how crazy 2023 will be. In some ways, we capitalize on volatility.

Antifragile...

Is it possible to chain multiple linked events and trade? For example, if I want to place a bet on inflation going to 15% in next 6 months or that the BLS will change the CPI composition/metric. Although I might expect the real inflation to go high as 15%, I might also expect politicians to change the goalpost as a response.

We'll be exploring AND/OR and conditional markets at some point... liquidity permitting.

From what I understand, Kalshi clears on (or used to clear on) LedgerX/FTX Futures. What made you choose them over, say the CME's ErisX? Have you run into any issues given the recent FTX implosion? Where there any other options you considered and ultimately choose to not move forward with?

LedgerX team is more tech savvy and higher execution team. We considered all options and LedgerX was the superior one for our needs.

LedgerX is fully separated from rest of FTX from financial perspective by virtue of CFTC regulation, so no impact on us!

I used Kalashi to bet on the timing of the recession. I think my ROI was around 4 to 1.

Btw we have a discord channel if you want to join - traders tend to chat/debate/share trading strategies/troll us there: https://discord.gg/rJpKGZk6Wt

Very cool. Asides from geography, how does this differ in implementation to something like Betfair (or Betfair Exchange) and the UK-based bookies who allow you to bet on things like political outcomes, who wins a reality TV show, etc?

Neat platform. I think geopolitics, currently is, and will likely be a heavy driver of market moving events over the next couple of decades.

Any plans to support that space more deeply?

Thanks for the input! We have plans to expand many of our existing markets, and introduce many new markets. Geopolitics is definitely an area we're excited to grow over time. If you have any specific suggestions, please send them our way!

Not sure if this is exactly how it works, but I would love to see things like

Who will win the 2024 presidency

GOP

Dem

Or the hundreds of scenarios that could have been bet on during the midterms.

noted - thanks for the suggestions!

Love the idea! Would love to try it out, but it seems it is not available in Europe.

Is there any plans in the near future to open in other regions?

There's a non-trivial chance we might be available in Euro area next year, but early to tell right now as we're focused on US.

This isn't exciting or moral.

YC's standards have plummeted.

I very honestly do not at all agree with your platform or hope for it's success.

If you're for everyobody, then you're for nobody!

I am naive here. But is it a platform for gambling like features for markets?

Here's a good primer on why prediction markets are actually a massive opportunity to improve society and democracy:
https://www.youtube.com/watch?v=BLS2TX1KxzI

I know that sounds hyperbolic, but once you go down the rabbit hole it will start to make sense

Thanks

How does NASA landing or not on the moon cause an insurance loss to someone?

That was more of a fun one suggested by our users...though there may be some extraterrestrials who would want to hedge against that, once we can operate outside of the US :)

Am I able to write contracts for events? And if not now, in the future?

No, I don't believe so. Such a feature would need to come from a fully decentralized platform, or one that doesn't operate (legally) in the US (or most of the world, for that matter).

Take a look at Azuro for an example of a decentralized betting protocol: https://azuro.org/

It's something we may consider in the future... there's a lot we'd need to figure out from a regulatory standpoint before we get there.

Can I also trade “Will Chelsea win against Barcelona next weekend?”

We don't do sports

What tech was used to build the mobile app?

Flutter!

Who makes the markets on your exchange?

Why does this need to involve cryptocurrency, if it’s centralized and regulated anyway?

Edit: the crypto part isn’t true

Kalshi doesn't currently involve any crypto. We're fully centralized, regulated by the federal government, and customer funds go to a traditional bank, where they sit in segregated member accounts.

Though we've built our exchange from the ground up, we're focusing on innovating on the markets side, rather than the financial plumbing side.

Oh, that makes sense. I was confusing you with someone else who is indeed web3. Mea culpa!

YC are funding gambling companies now? On brand these days I suppose. How the mighty have fallen.

YC has funded a ton of great financial companies eg. Coinbase, One Chronos, etc.

We're a derivative exchange regulated by the CFTC. We're no more gambling than grain futures are!

You're not a financial company. Grain futures have an actual use. Come on now. You're insulting the reader base here.

There are a vast number of use cases here. A simple one is the peak mortgage rate market[1]. That allows you to create hedges against movement on variable rate homeloans directly.

There's a number of unemployment-related markets that allow you to create insurance for yourself against unemployment.

And these are just things I've thought up of in a couple of minutes, not even considering what actual financial markets might want to use them for.

[1] https://kalshi.com/events/FRMMAX-22DEC29/markets/FRMMAX-22DE...

That's neat but how does one hedge a $800k loan with a max position of $25k? Idea seems spurious. The difference is substantially higher. Compare a pre-hike 2.8% with a present 6.8%. Your $25k hedge is going to be pointless.

It's 25k downside exposure limit (doesn't mean your upside is capped at 25k).

Also even if you can't hedge the exposure in its totality, it is still worth hedging a fraction of it. "Under-hedging" is a common term in commodities markets - people often want to cover a portion of their exposure and leave the rest in the hands of mother nature.

Useful to know.

+1 on this answer - there's a ton more examples here: student loans, climate policy, hurricanes, inflation, etc.

Launch HN: Kalshi (YC W19) – A regulated exchange for trading on events