Business

Prediction Market Biz Asks Regulator To Let Traders Bet With Borrowed Money. What Could Possibly Go Wrong?

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Prediction market giant Kalshi asked federal regulators to let institutional traders use borrowed funds on event contracts, potentially pushing the booming industry further into the world of traditional finance.

Kalshi Klear, the company’s clearinghouse, filed Tuesday with the Commodity Futures Trading Commission (CFTC) for approval to introduce margin trading on certain event contracts, according to a regulatory filing. The proposal would allow qualifying institutions to put up only a portion of the capital backing certain positions rather than fully collateralizing them, potentially making prediction markets more attractive to large financial firms.

Margin trading allows investors to gain exposure to positions without putting up the entire amount of money they could potentially lose. Kalshi’s existing rules required event-contract positions to remain fully collateralized. 

Marginable contracts would be available only through qualifying market participants, including eligible self-clearing members, according to the filing. Kalshi also told CNBC that sports, culture and “mention” markets would not be eligible for margin.

The company argued margin could make longer-dated prediction markets more attractive to institutional traders, which otherwise must commit capital for the duration of a contract, according to CNBC. Kalshi’s framework would also increase capital requirements as contracts approach resolution, when the outcome of an event can rapidly move a contract toward its maximum or minimum value.

The proposal could broaden the role prediction markets play in finance beyond the retail-driven sports contracts that fueled much of the industry’s recent growth. The filing covered eligible contracts tied to economic, financial, political and commercial events, potentially giving institutional traders another vehicle for taking or hedging positions around real-world outcomes.

Rival Polymarket began seeking regulatory licenses that could eventually allow it to offer margin trading on U.S. event contracts, Bloomberg reported in July.

The CFTC raised the possibility of bringing margin to prediction markets in a March request for public comment, asking what factors regulators should consider before allowing margined event contracts and whether the rules should differ for retail and institutional traders.

Trading with borrowed money can magnify losses when positions move against an investor and trigger demands for additional collateral. Archegos Capital Management demonstrated the risks in 2021 after the family office amassed massive positions while putting up limited funds, according to the Securities and Exchange Commission. Falling prices triggered margin calls Archegos could not meet, causing its collapse and billions of dollars in losses for its counterparties.

Credit Suisse lost approximately $5.5 billion following Archegos’ default, according to a review commissioned by the bank’s board. Archegos told its brokers shortly before its collapse that it held roughly $120 billion in gross exposure against only $9 billion to $10 billion in remaining equity.

A former college student who previously lost more than $100,000 sports betting began wagering hundreds of dollars per day on Kalshi after moving home to Utah, where traditional sports betting was prohibited. He lost more than $12,000 on Kalshi after previously entering treatment for gambling addiction.

Kalshi told Bloomberg that the case was “cherry-picked” and said the company offered risk-management tools. UCLA Gambling Studies Program co-director Timothy Fong previously told the DCNF that expanding access to gambling inevitably reaches some people vulnerable to gambling disorder.