We're trying to fix that at kalshi.com :)
120 karma · joined September 24, 2018
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.
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.
LedgerX is fully separated from rest of FTX from financial perspective by virtue of CFTC regulation, so no impact on us!
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.
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.
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.
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).
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.
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).
As I posted above, here's more (insider) information about what happened with PredictIt: https://www.capitolaccountdc.com/p/gambling-on-politics-an-i...
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.
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.
We're a derivative exchange regulated by the CFTC. We're no more gambling than grain futures are!
Dang let me know if I should take them down/if they're super annoying.
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.
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.