In the final week of November, prediction market companies, a lawyer, and a professor filed amicus briefs in Kalshi’s case against the Commodity Futures Trading Commission (CFTC). Amicus briefs are arguments favoring one of the case’s sides from parties who aren’t part of the court case but who have an interest in its outcome.
Kalshi, a commercial prediction market company, sued its regulator, the CFTC, to offer event contracts on American elections. In September 2024, Kalshi won its lawsuit in the D.C. District Court. Hours later, the CFTC was granted an emergency stay, which prevented Kalshi from offering its election contracts until a new hearing on Oct. 2.
The D.C. District Court lifted the stay, and Kalshi was able to offer its election contracts throughout most of October. Meanwhile, the CFTC filed an appeal. Oral arguments at the D.C. Circuit Court of Appeals are scheduled for Jan. 17, 2025, three days before Donald Trump takes office.
That lawsuit affects more than Kalshi. Other financial companies, like ForecastEx and RobinHood, also began offering election contracts leading up to the 2024 presidential election, as news outlets began reporting prediction market prices alongside election polls.
The parties that filed amicus briefs supporting Kalshi included ForecastEx, Aristotle Inc. (PredictIt), Paradigm Operations (Crypto investment firm), Dr. Joseph Grundfest, and Jeremy Weinstein.
One organization, Better Markets, filed an amicus brief supporting the CFTC. Better Markets is a nonprofit organization founded after the 2008 financial crisis. Its stated mission is to promote “pro-market, pro-business and pro-growth policies that help build a stronger, safer financial system that protects and promotes Americans’ jobs, savings, retirements and more.”
The amicus briefs between Better Markets and everyone else show the points the Circuit Court judges will interrogate during oral arguments.
Big picture: Election markets are not gaming and are useful
Two broad arguments emerge across the amicus briefs supporting Kalshi:
- Election markets do not “involve” gaming
- Election markets serve legitimate hedging and predictive functions
Better Markets’ amicus brief makes several of the same arguments the CFTC has made throughout the case. However, the nonprofit also makes its own arguments:
- The CFTC read the special rule prohibiting election contracts correctly
- The District Court ignored election markets’ threats to democracy
- Election markets are vulnerable to market manipulation
- Regulating election markets will make the CFTC police elections
- The District Court ignored CFTC expertise
The amicus briefs supporting Kalshi push back against all five of these points.
The CFTC’s reading of the special rule
The CFTC prohibits event contracts on “activity that is illegal under state or federal law” and “gaming.” Better Markets’ amicus brief argues that “the CFTC also rightly concluded that the word ‘involve’…is a broad term that refers not only to the events or activities underlying a contract but also to instances where trading in the contract constitutes…’gaming’ as well activity outlawed by many states.”
Under the CFTC’s reading, the contract trading itself is gambling. Jeremy Weinstein, a private energy commodities attorney, noted that “the CFTC’s expansive vision of ‘gaming’ essentially allows it to regulate betting on contests, competitions that have winners and losers, of any kind.”
Some companies took issue with prohibiting election contracts based on state law. For example, Washington prohibits betting on elections. Since Washington prohibits election betting, registered derivatives exchanges could violate state law. However, Aristotle Inc. pointed out that:
...the CFTC, for over a decade, has permitted designated contract markets to list contracts based upon the number of hurricanes in a given calendar year. These contracts would potentially constitute unlawful gambling in the many states that define gambling as wagering on a future contingent event. The same would be true about markets relating to atmospheric carbon levels, the date of a rocket launch, or the number of Ozempic prescriptions in a given quarter.
Many state laws also have exceptions for business transactions that could otherwise be considered wagers under gambling law. Derivatives are speculative by nature and remain legal under state law under carveouts like these. Aristotle argues that election markets should be allowed under the same carveout.
Threats to democracy
Better Markets’ amicus brief raises concerns about election markets’ effects on election integrity.
For example, they [election contracts] will incentivize the dissemination of misinformation for profit, as some bad actors can be expected to assume large positions in the contracts and then disseminate false or misleading information to skew election outcomes in favor of their market position.
The 2024 presidential election was a trial run to see how this objection held up. Dr. Grundfest, W.A. Franke Professor of Law and Business, Emeritus at Stanford University, noted that while “the CFTC expressed concern about fake polls being used to manipulate prediction markets…there is no evidence this happened—indeed, the prediction markets were better than the polls.”
Prediction market proponents take pride in how much sooner odds called the presidential race for Trump than traditional media sources. Kalshi’s odds showed Trump’s chances of winning over 90% by midnight on Election Night. The AP didn’t call the race for Trump until after 5:30 the next morning.
Rather than spreading misinformation, prediction markets spent Election Night as a neutral source of information. Concern about election markets’ impact on voters wasn’t just about the election, though. Worries stemmed from a larger concern about market manipulation and fraud.
Market manipulation and fraud
On Oct. 7, 2024, a French trader placed $30 million on Trump’s victory on Polymarket, a crypto-based prediction market that operates outside the United States. The price on Trump’s victory moved four cents, in about three hours, raising concerns about market manipulation from wealthy parties.
However, Grundfest contrasted the regulations Kalshi is subject to and that Polymarket is free from:
If a market participant like the French investor had placed a $30 million bet on Trump’s victory, KalshiEX would have immediately detected the investment and conducted an investigation as to whether the market participant was attempting to manipulate the market, was trading based on inside information, or was otherwise violating KalshiEX’s rules.
Kalshi must report large positions on its market, so the CFTC and the exchange is aware of large wagers’ impacts on contract prices. Kalshi took pride in the large trades it could process without prices being affected. The company’s X account tweeted images of large trades on Kalshi at the precise prices that traders placed them.
$1.2 million trade. Zero slippage.
— Kalshi (@Kalshi) October 29, 2024pic.twitter.com/GruWUmiFyD
It’s a sign of high liquidity and a strong capacity to handle large trades without distorting a contract’s price. Large trades that didn’t affect contract prices also refuted arguments about the CFTC’s role in regulating election contracts.
CFTC election policing
Better Markets repeated the CFTC’s claim that regulating election markets would require overseeing elections themselves. ForecastEx’s amicus brief notes that election law is “mostly state law” since state governments administer elections.
The brief also notes that “Congress has never hinted that the CFTC should or must assist the FEC [Federeal Election Commission]” in enforcing federal election law. ForecastEx’s filing argues that the CFTC would require authorization from Congress to assist in those duties if the CFTC wanted to.
Crucially, ForecastEx’s brief lists some of the industries that the CFTC has not policed despite allowing exchanges to offer contracts on them:
...the CFTC is not the cop for regional insured property losses (because state insurance regulators are), bankruptcy proceedings (because state courts are), changes in corporate officers (because the SEC is), GDP data accuracy (because the Department of Commerce is), or warehousing and transporting energy products (because the Federal Energy Regulatory Commission is).
The briefs supporting Kalshi suggest that the CFTC’s role is to protect market integrity rather than election integrity.
District Court and CFTC expertise
The final major disagreement involves the expertise the District Court should have deferred to. A Supreme Court case, Loper Bright Enterprises v. Raimondo, allowed courts to evaluate whether an agency was within its regulatory limits rather than defer to agency expertise regarding ambiguous statutes. Courts can weigh an agency’s expertise but have no obligations to defer to them.
Better Markets’ amicus brief took issue with a footnote in the District Case. The footnote stated:
“Because the CFTC did not argue that the Court should [draw on the CFTC’s expertise] here, the Court neither considers nor addresses the scope of deference owed to the CFTC in the wake of Loper Bright.” From this footnote, Better Markets concluded that the District Court gave insufficient weight to the CFTC’s knowledge and experience in regulating derivatives.
Grundfest disagrees with Better Markets, arguing that Loper Bright requires the CFTC to stick to interpretations of the word “gaming” rather than setting policy and expecting the courts to defer to it.
“Perhaps in the Chevron era, [when courts had to defer to agency expertise] the CFTC’s policy arguments—misguided as they are—might have been a basis for this Court to hold its nose and defer to the CFTC’s efforts to torture the statute,” Grundfest wrote. “But today, the Court’s task is to conduct an ordinary statutory-interpretation—and such an analysis dooms the CFTC’s case.”
The root of this argument is how much courts should defer to agency expertise in cases about regulations. If courts do not have to defer to agency expertise, then regulatory agencies must rely more on statutory language than policy goals alone.
Oral arguments and prediction markets’ outlook
The major arguments in the amicus briefs will be settled during oral arguments on Jan. 17, 2025. Lawyers for the CFTC and Kalshi will each face a panel of three circuit judges. After oral arguments, one of the judges will write the court’s opinion.
Amicus briefs are only attempts to persuade the court to rule one way or the other. The bulk of the amicus briefs favor Kalshi, but that doesn’t guarantee that the Circuit Court will rule in Kalshi’s favor. The panel of judges will have to be convinced by the merits of the case.
Regardless of this case’s outcome, the future of prediction markets is bright. The new administration includes officials who are friendly toward alternative institutions like cryptocurrencies and prediction markets. With a new CFTC chair on the way, Kalshi and prediction markets seem poised to remain relevant to election reporting, whatever the circuit judges decide.
