Comment Text:
My name is Jonathan Zubkoff and I am a professional prediction market trader. Additionally, I am a consultant for Kalshi and act as their community manager. In my role, I help Kalshi come up with market ideas, help educate new members on how to use the platform, help moderate Kalshi’s discord server, and act as a liaison between Kalshi and its traders to help the exchange understand what the traders want. My remarks are my own and should not be taken as affiliated with Kalshi in anyway. The purpose of my comment is to strongly oppose this CFTC rule. I will be dividing my comment in to 3 sections: elections, awards and contests, and concluding remarks about the CFTC.
Elections
Election markets are in the public interest. I’m not some prediction market purist who believes prediction market odds are better than polls or should be taken as gospel. However, the biggest advantage is that prediction markets give real time odds that inform the public in a way that traditional reporting cannot. Here are several examples of my experiences with prediction markets providing a public service:
1) In 2018, there was a tight Senate race in Arizona. Kyrsten Sinema trailed Martha McSally by a significant amount of votes, with only mail left to count. The narrative coming out election night was that McSally was probably favored (WaPo election guy Henry Olsen called it for her mistakenly), but Sinema would likely pick up some votes in the mail-in ballots, but there would also be a late drop-off votes that would probably be favorable to McSally. It is this exact situation where you want prediction markets to exist. There was a major senate race up for grabs, the pundits were wrong, and the experts you should have wanted the public to listen to were those who were incentivized to get the answer right. Kyrsten Sinema ended up winning comfortably and there was no batch of mail-in or drop-off ballots that were favorable to Martha McSally.
2) In 2020, on election day, the markets favored Democrats in Wisconsin, Pennsylvania, and Michigan, while they favored Republicans in Florida, Arizona, North Carolina, and Georgia. In Florida, the markets started to drift to Democrats as some Election Day partisan early voting data started to come in. These were not actual election results, but the data showed that Democrats were showing up to vote. Then, we started to get actual election results. Early voting results were dumped first. Counties started to come in showing a somewhat close race, until prediction market traders got a significant piece of data: Miami Dade County was awful for Democrats. Florida was easily going to go for Trump. CNN didn’t call the race until 4 hours later. The markets took this piece of data from Florida and began to consider Trump to be a heavy favorite. The initial votes from Michigan and Pennsylvania were election day votes that showed Trump winning. It was clear Trump was going to win in North Carolina. Texas was worse than expected for Democrats including a massive shift in the Rio Grande Valley to Republicans. Georgia was interesting in that the New York Times election needle showed Trump to be favored, but in reality, we didn’t have much data from Atlanta. Still, taking the picture of data, the odds had shifted towards Trump. Brit Hume mentioned this several times on Fox News, and the Fox News round table began to taunt Donna Brazile after she said “there was still a path to Joe Biden winning.”Later in the evening, Arizona began to release election results. The results showed Biden and Mark Kelly winning in the all important Maricopa County. Soon after, Fox News called Arizona for Joe Biden to the shock of their own broadcast and honestly the country. The general election odds immediately took a hard turn towards Joe Biden, which again, Brit Hume reluctantly shared multiple times on their own broadcast. As it turns out, this call was borderline ridiculous and the prediction market traders were right to be hesitant at first, but the important reaction for the markets was to shift the general election odds with the information that Biden had probably won Arizona. Later in the evening, at around 3:30 AM, the election results site Decision Desk HQ had somehow acquired the election day results for Milwaukee, Wisconsin before any other news outlet had them. These results showed that Biden was clearly going to win Wisconsin, and the election odds immediately surged towards him. Finally, as Pennsylvania, Georgia, and Michigan continued to count their votes over the next 24 hours, it became immediately clear that Biden would win the election, despite the media not calling it for 4 more days.
3) In 2022, the prediction markets greatly favored Republicans. Republicans were favored in Senate seats for Pennsylvania, Arizona, Georgia, and Nevada (somewhat heavily in some of these). The exit polls came out and showed some increased interest in abortion. Then we began getting election results. Florida was a bloodbath for the Republicans. The worst loss for Democrats in a very long time. However, the initial results from Georgia and North Carolina were not indicative of a red wave. The overall odds began to move towards the Democrats. Soon after, the polls closed in Pennsylvania. It became clear that Governor Josh Shapiro was going to win in a landslide. In the first 2 completed counties, John Fetterman had run ahead of Joe Biden. He was now favored in the election odds to win over Dr. Oz, despite the fact that TV networks were only in the “hmmm, we’re intrigued phase.” Election odds began to shift across the board towards the Democrats. As more and more polls began to close, it became very clear that Republicans did not have the great night they expected. The House was up for grabs, Kevin McCarthy was in trouble, the Democrats expanded their lead in the Senate, and all but 1 battleground governorship remained in the Democrats hands. Prediction markets were ahead of the news in each of these occasions.
I’m attempting to paint a picture with all of these stories on how important prediction markets are to elections. It’s not that pundits are dumb and prediction market traders are always right. It’s that the public deserves a real-time accounting for what is going to happen. Most people don’t have time to know what each margin in each county means for the outcome of their election. To be honest, most people don’t know who their congressman is. There’s nothing wrong with that, but that’s the world we live in. The best counter to that is to allow people who know what every precinct in every state means for the final election result to process information quickly, bet their own money on what that information means, and provide real time odds for the public that will be an unbiased, strong estimate, of where each race currently stands.
If you deny this opportunity, you will be denying the public a great service that can’t be replaced by pundits. At a time when both sides of the aisle are terrified of trusting the polls, the public needs these experts in these markets more than ever. Additionally, if you deny this opportunity, you should be honest with yourself that the prediction markets will not go away. They will just continue to be unregulated in which traders will use VPNs and cryptocurrency to trade on their elections and legislation in real time. There will be consequences to this. One consequence will be that the pundits of the world may be less likely to quote the prediction market odds because either he doesn’t know these unregulated markets exist or they don't feel comfortable sharing that information. Another, more important consequence is that the government will likely take in fewer tax dollars due to the difficulty of tracking unregulated crypto market profits. That’s a very negative result for the CFTC.
Finally, the risks here are minimal. Unless the Supreme Court is planning on overturning Citizens United soon (which isn’t happening), you will not get rid of money in politics. Both parties are aggressively spending a record amount of money. You could put reasonable restrictions on the types of election contracts offered to limit any risks (ie, some monetary limits and/or not allowing named candidates to be listed to eliminate negative incentives). There is no world in which an election market with, to throw out a number, $5000 limits is a risk to election integrity. Respectfully, you are being extremely naive to pretend that’s the case. In fact, the opposite is true. People spending their own money to predict an outcome is a hedge in favor of election integrity. Market participants are strongly incentivized to price these contracts at fair value. If there was a market priced where one candidate was priced at 90% and the other was priced 10%, and the 90% candidate won but the 10% candidate claimed fraud, the market pricing would be a point in favor of a fair election. These markets are a good thing for election integrity.
If you ban election contracts, you’re just putting customers more at risk. People will still find ways to bet on this anyway and their funds will be less secure. You will restrict market innovation and public knowledge for absolutely no reason.
Awards and Contests
The CFTC is attempting to classify awards and contests as gaming. As basis for this, they are using a colloquy between Senator Feinstein and Senator Lincoln that talked about gaming during the discussion of Dodd-Frank as evidence that it was Congressional intent to ban these contracts. First of all, You can’t find video of this colloquy anywhere on C-Span; it was very likely inserted in the Congressional record afterwards. It didn’t actually happen. Despite that, in the colloquy, the Senators do not mention awards and contests at all. The mention horse racing and sports. If Congress wanted awards and contests classified as gaming, they would have clarified that in the law. They did not. This is an overreach from the CFTC that goes well beyond their jurisdiction.
There are multibillion dollar industries that would have hedging interests in these markets. They should be given the opportunity to hedge their risk. In addition, the great thing about these awards and contests is that the results are almost certainly certified by one of the major accounting firms, which protects these contracts from manipulation. Furthermore, the CFTC has already allowed Kalshi to list contracts surrounding the Oscars, Emmys, Grammys, Country Music Awards, SAGs, BAFTAs, CrunchyRoll Anime Awards, and the Nobel Prize. Several of these contracts have been listed for multiple years. At any time, the CFTC DMO could have referred the contracts to the commission for review and/or a comment period like they did with the Control of Congress contracts. They did not do that. They allowed Kalshi to list these contracts and allowed participants to trade on them and gave both parties the assumption that the CFTC allowed trading on this category of markets. There are open markets on Kalshi right now, which were approved by the CFTC, in which participants have their funds invested in the outcomes of these contracts. Declaring these markets against the rules would cause chaos. While it would be great to believe that the CFTC has some great plan on how to deal with customer funds in this scenario, as we saw when they tried to shut down PredictIt, they almost certainly do not. It is in the public’s interest to expect consistency out of their government. By changing the rules to exclude contracts that the CFTC previously allowed AND IS CURRENTLY allowing, the commission would be violating the public’s trust.
Concluding Remarks
In the open meeting, DMO chair Vince McGonagle voiced various concerns about how when you trade a commodity, you’re trading a thing. With event contracts, there is no thing and thus you have to rely on various underlying sources that the CFTC does not have the resources to regulate. I just would like to say to Mr. McGonagle that I’m sorry he does not like that his job has turned into dealing with markets that ask interesting questions that affect millions of people in the country. Some people are just meant to love following the price of cocoa and nickel and I understand that. I’m sorry to the staff at the CFTC that feels so overworked by Kalshi wanting to offer interesting contracts that they have decided that they need to ban things in order to reduce their workload. I’ll choose to ignore that the CFTC tried to desperately increase their authority regulating crypto and met with Sam Bankman-Fried approximately 50 times. I guess that increase in workload would have been ok, but the workload forced upon them by the events contracts was just too much.
However, with all due respect, that is not my problem. That is not Kalshi’s problem. That is certainly not a PUBLIC INTEREST problem. That is ABSOLUTELY NOT a reason to make new restrictive regulations that help absolutely no one and hurt many people, including me. That is YOUR problem. Figure it out, hire different people, find a different job, or retire.
The CFTC granted PredictIt a No-Action Letter. They hilariously botched attempting to ban PredictIt and have produced minimal evidence of PredictIt violating their no-action letter. Any evidence they did produce was laughed out of court and rebutted by Victoria University in copious detail.
The CFTC approved Kalshi as a DCM. They allowed Kalshi to list markets across various categories including climate, politics, epidemiology, music, and movies. They clearly have worked with the Kalshi markets team on various occasions and have negotiated with them not to list certain contracts. Kalshi has worked in good faith with the CFTC and the way the CFTC pays them back is by trying to ban several products that their customers enjoy very much, which the CFTC had previously approved.
Instead of working to setup a responsible regulatory system to enforce the integrity of elections contracts, the CFTC is instead trying to hand wave them away, despite interest from the public NEVER BEING HIGHER. At this very moment, I believe I’ve read 2 negative comments in this entire comment packet. One of them is from Elizabeth Warren, which was almost certainly solicited by the CFTC. For the CFTC commissioner or staff member reading this, put a mental pin right here. As of August 5th, the comments are approximately multiple hundreds to 2 in favor. You’re violating the public trust of people who actually care about this if you move forward, even if you get Ralph Nader’s useless organization to provide thousands of hysterical comments about Democracy at the last second again.
The CFTC has no authority to do this. Congress did not give them anything close to the authority to do this. This rule should not pass and the proposed and already approved contracts should be allowed immediately.
