Prediction markets, particularly mention markets, have attracted significant controversy due to their nature. These platforms allow participants to bet on whether a public figure will say specific phrases during scheduled appearances.
In a notable case last month, the Commodity Futures Trading Commission (CFTC) imposed a three-year trading ban on Gabriel Perez, a former teleprompter operator for President Donald Trump. The ban followed allegations that Perez engaged in illegal betting on mention markets related to Trump’s speeches, potentially exploiting insider knowledge to make risk-free trades. Shortly after this case, the CFTC reiterated concerns about the potential for manipulation in these markets.
On September 22, the CFTC issued a staff advisory addressing the susceptibility of mention markets to undue influence, particularly those contracts reliant on a single individual’s actions. The advisory indicated that such contracts often lack independent generation and external verification, raising alarm over their integrity.
As designated contract markets (DCMs) under the Commodity Exchange Act, prediction markets are required to adhere to several core principles, one of which forbids the listing of contracts prone to manipulation. The advisory emphasized that any DCMs wishing to offer mention markets must establish trading rules meant to prevent and identify manipulative practices. However, the CFTC clarified that this advisory does not create enforceable rights or new regulations.
In legal developments, New York Attorney General Letitia James escalated her scrutiny of prediction markets by filing a lawsuit against Polymarket, charging that the platform operates an illegal gambling business. The lawsuit follows an earlier action against Kalshi and highlights concerns over Polymarket’s allowance of minors aged 18 to 20 to trade on event contracts, contravening state laws that require participants to be 21 or older. Governor Kathy Hochul reinforced the state’s position, stating that Polymarket's actions endanger the public.
Polymarket has since attempted to move the case to federal court and countersued James and New York gaming officials. Neal Kumar, Polymarket’s chief legal officer, criticized the attorney general's approach and expressed determination to protect their users’ interests.
Alongside this, both Kalshi and Polymarket are facing demands for restitution and penalties from the state. New York is seeking at least $4.6 billion from Polymarket, with fines of $100,000 for each attempt at illegal sports wagering, and triple the profits the platform has made in the state.
Simultaneously, Kalshi is facing scrutiny regarding claims of manipulation in its trading volumes. A former quantitative trader made allegations of wash trading—where traders simultaneously buy and sell the same security to distort market activity—on social media last weekend. This claim coincided with a Wall Street Journal analysis noting that over a third of Kalshi’s recent volume centered around trades of $5,500 each.
In response, Kalshi firmly rejected these claims in a detailed statement, asserting that its business model incentivizes market-makers to provide liquidity rather than partake in manipulative trading practices. The company emphasized its mechanisms to prevent self-trades and monitor for collusion.
The CFTC has refrained from confirming any ongoing investigation into Kalshi’s trading practices. Additionally, Kalshi has filed with the CFTC to seek approval for adjusting its margin trading policies.
