Traders, gamblers and politicos now have new tools to express their views this election cycle in the form of event contracts, but the 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 this month on their nascent platforms after Kalshi won a key round in its legal fight with the Commodity Futures Trading Commission. The CFTC is seeking to shut down the markets on appeal, but the presidential election promises to be a big opportunity for the platforms to prove themselves to investors while the process works its way through the courts. The platforms previously consisted mainly of lightly traded contracts around other events, like economic data releases. Those served as a “test run” for the election contracts, which the platforms are building out with less than a month before the Nov. 5 general election, said Steven Sanders, executive vice president for marketing and product development at Interactive Brokers. “Things were going okay before the election contracts, but since we put them on the platform there’s been a lot more interest,” Sanders said. How they work The contracts offered by Kalshi and Interactive Brokers are designed to function similarly to futures and other types of derivatives, with contracts that expire on a set date. The election contracts on each site are binary, and they pay out $1 if the correct outcome is chosen and $0 for the incorrect outcome. Unlike the two new entrants, PredictIt and the Iowa Electronic Markets have been around longer, operating under different CFTC rules, but both have position limits under $1,000. A fifth arena, Polymarket, is a blockchain-based prediction platform that is not open to U.S. customers. The position limits on the older prediction markets keep them from being swayed by any one trader and reduce the risks for users, but there are drawbacks as well, said John Phillips, co-creator of PredictIt. “The position limits serve a useful function, but they also come at a cost. And the cost is you’re not able to use this market effectively for hedging purposes, unless [the need] is very small,” Phillips said. His team is working to create a platform that would act more in-line with Kalshi and Interactive Brokers. The presidential election is not the only political outcome for traders to take a position on. For example, Kalshi’s other contracts cover several key Senate races and ways to bet on control of Congress. “The presidential election is not the only thing that matters,” said Kalshi CEO Tarek Mansour. “The Senate matters, the House matters, the individual states matter.” Real world use One potential use of the election contracts for the financial world is to hedge against outcomes in a more direct way than, say, taking a short position against the S & P 500 . “Political outcomes, in particular elections, are one of the more challenging things for managers to navigate and create balanced risk controls,” said Bob Elliott, CEO and CIO at 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 have been useful during the 2016 Brexit refererendum in the UK. However, the markets as they currently stand are small and have an uncertain regulatory future, keeping many investors away for now. As of Monday evening, the most popular presidential election market on Kalshi had less than $8 million in cumulative trading volume since its launch earlier this month. The Interactive Brokers platform appears to be seeing similar volumes. Polymarket has seen far higher trading volume, with roughly $1.9 billion total in its most popular contract. But that has been open since the start of 2024 and includes sizable bets on politicians like former South Carolina Gov. Nikki Haley, who dropped out of the Republican primary in March, and former First Lady Michelle Obama. Volume, liquidity and regulatory scrutiny “are the hurdles to getting them actually in a portfolio at the moment,” said Matt Thompson, co-portfolio manager at Little Harbor Advisors, which specializes in strategies to reduce volatility for clients. Thompson also said that, because it is not clear how a market will react to any given piece of data or election outcome, the contracts may be imperfect hedging tools. If they prove to be accurate over time, the prediction markets may also serve non-traders such as consultants and fundraisers who want to glean more insight into the election. “My very strong sense is that these markets typically do as well or better than polls, with one important exception being 2016, but nobody got that right,” said Koleman Strumpf, the Burchfield presidential chair of political economy at Wake Forest University in Winston-Salem, N.C. Concerns More ominously, critics of the election markets have raised alarm that they could be moved by one or two big traders for possibly nefarious purposes. Cantrell Dumas, director of derivatives policy for the advocacy group Better Markets, told CNBC that his organization was concerned that someone might try to move the prediction markets on election day to discourage voters. “You have more people with more incentives to try to put more money into the election to give the impression that a certain candidate is winning or losing,” Dumas said. On the other hand, PredictIt’s Phillips said he believed the markets could serve as an “antidote to fake news” by spurring traders to become more informed. Strumpf at Wake Forest said that he has not seen compelling evidence that any of the major prediction markets are being manipulated, adding that the different rules around each platform make arbitrage difficult but, in turn, could make the markets less efficient. What’s next An appellate court has fast-tracked the CFTC’s appeal in the legal case, but the latest schedule shows that the dispute won’t be decided by election day on Nov. 5. The CFTC has objected to being put in an “election-policing role,” and to the wide variety of contracts offered by Kalshi, according to one of its legal filings . Beyond the legal road ahead, how the markets grow by election day — and how they handle that growth — could also be key to their staying power. Mansour, the CEO, said that Kalshi’s market makers, including Susquehanna, could handle trades of up to $100 million and only move the markets a few cents, although he admitted no such trade has yet occurred. He said Kalshi is talking to institutional clients, including hedge funds and family offices, about using the platform. However, the markets today are probably still too illiquid to convince major hedge funds to be serious players in this area, and these types of contract markets could be difficult to scale, said Elliott at Unlimited Funds. “We’ve got a long way to go before these sorts of instruments would be chosen by big institutional investors, if that’s the sort of liquidity that they’re talking about,” Elliott said.
