Prediction markets have recently come under scrutiny, particularly the controversial “mention markets,” which allow trading based on whether public figures will deliver specific remarks during appearances.
In a significant development last month, the Commodity Futures Trading Commission (CFTC) imposed a three-year ban on Gabriel Perez, a former teleprompter operator for President Donald Trump. This action was taken amid allegations that Perez made illegal bets on mention markets related to Trump’s speeches, using insider knowledge to stake risk-free trades. Following this, the CFTC released a notice indicating that these markets are particularly vulnerable to manipulation.
On September 22, the CFTC issued a staff advisory that described several ways in which mention markets might be susceptible to undue influence. The advisory particularly emphasized contracts where the “settlement turns on the discrete conduct” of a single individual. The memo further pointed out that such contracts might not be “independently generated” or “externally verifiable.”
Prediction markets are classified as Designated Contract Markets (DCMs) by the CFTC. Consequently, they must adhere to 23 core principles under the Commodity Exchange Act, specifically Principle 3, which prohibits the listing of contracts that are easily manipulated. The advisory indicated that DCMs wishing to introduce mention markets must enforce stringent trading rules to detect and prohibit manipulative behavior.
The advisory does not create enforceable rights or establish binding regulations, as clarified by the CFTC.
In legal news, New York Attorney General Letitia James expanded her litigation efforts against prediction markets, recently including Polymarket in her lawsuit. The state is accusing the platform of operating an illegal gambling venture. This action follows a prior lawsuit against Kalshi in July. Notably, Polymarket has a policy permitting individuals aged 18 to 20 to trade on event contracts, which conflicts with New York’s law that forbids those under 21 from wagering on sports.
Governor Kathy Hochul expressed strong disapproval, stating, “By running an unlicensed gambling operation, Polymarket has done more than just knowingly violate state law, they have put New Yorkers at risk.”
On the same day, Polymarket sought to transfer the case to the U.S. District Court for the Central District of New York and also filed a countersuit against James and other officials. Polymarket’s Chief Legal Officer, Neal Kumar, criticized James for what he described as a “recycled lawsuit,” affirming the platform’s commitment to defend its users.
Alongside Kalshi, New York is seeking restitution, treble damages, and penalties linked to Polymarket operations. James is demanding a fine of $100,000 for each instance of offering sports wagering in New York and at least $4.6 billion in damages, significantly less than the amount sought from Kalshi.
In a separate controversy, Kalshi found itself defending against allegations of manipulation, particularly concerning volume on its crypto and perpetual futures trades. A former quantitative trader claimed on social media that Kalshi inflated its trading volume, coinciding with a Wall Street Journal report indicating that over one-third of the platform’s perpetual trades were concentrated at a uniform order size of $5,500 each. This raised concerns of potential wash trading, where a trader simultaneously buys and sells a security to artificially enhance volume.
Kalshi responded vigorously, asserting that it does not condone wash trading and deploys measures to prevent it, including mechanisms to block self-trading and surveillance for suspicious activities. In light of this situation, Kalshi also submitted a request to the CFTC for approval to replace full-collateral requirements with risk-based margin trading on particular contracts.
Thus, the prediction market landscape continues to evolve, facing both legal challenges and operational scrutiny.
