Prediction markets, particularly those offering "mention markets," have stirred controversy. These markets enable participants to bet on whether a prominent figure will say a specific phrase during public appearances.
In September, the Commodity Futures Trading Commission (CFTC) imposed a three-year trading ban on Gabriel Perez, a former teleprompter operator for President Donald Trump. This action followed allegations that Perez made illegal wagers on mention markets related to Trump, leveraging insider knowledge of forthcoming speeches to execute risk-free trades. The CFTC later issued a warning highlighting the increased susceptibility to market manipulation inherent in these contracts.
On September 22, the CFTC published a staff advisory pinpointing vulnerabilities within these markets. It specifically noted issues stemming from contracts dependent on the actions of a single individual, often lacking independent verification or external validation.
Classifying prediction markets as Designated Contract Markets (DCMs), the CFTC mandates compliance with 23 core principles under the Commodity Exchange Act, including a prohibition on contracts prone to manipulation. The CFTC expects any DCMs that wish to operate mention markets to establish robust rules targeting manipulation detection.
The advisory is not intended to establish legally enforceable rights or create new binding regulations, as clarified by the CFTC.
In another development, following a lawsuit against Kalshi in July by New York Attorney General Letitia James, Polymarket is now facing similar legal challenges. On Thursday, the New York Attorney General's office announced a lawsuit against Polymarket for allegedly conducting an illegal gambling operation. Governor Kathy Hochul criticized Polymarket's policy of permitting 18-to-20-year-olds to trade on event contracts, noting that betting is illegal for those under 21 in New York. “By running an unlicensed gambling operation, Polymarket has done more than just knowingly violate state law; they have put New Yorkers at risk,” Hochul asserted.
Polymarket has responded by attempting to transfer the lawsuit from state court to the US District Court for the Central District of New York and has initiated a countersuit against James and New York State Gaming Commission officials. Neal Kumar, Polymarket's chief legal officer, expressed disappointment over the lawsuit's claims but emphasized their commitment to their users.
The lawsuit seeks restitution and fines up to $100,000 for each instance of unlawful sports wagering in New York, potentially totaling $4.6 billion in damages—much less than the $36 billion sought against Kalshi.
An independent quantitative trader sparked controversy online by accusing Kalshi of manipulating its trading volume for crypto and perpetual futures. This coincided with a Wall Street Journal analysis indicating that over a third of Kalshi's perpetual trades were concentrated around identical order sizes of $5,500, amounting to a total of $5 billion in volume over the past month. Allegations of "wash trading"—a practice where traders buy and sell the same asset to inflate trading volume—surfaced, particularly regarding contracts related to Ethereum perpetuals.
Kalshi has vigorously denied these accusations, asserting in a lengthy statement that they discourage wash trading through stringent policies. They noted that market makers are incentivized to provide liquidity rather than artificially inflate volume. The company claims to block self-trades and actively monitor for suspicious activities.
While the CFTC has not confirmed any investigation into Kalshi regarding these allegations, the company submitted a petition on Tuesday to the CFTC seeking approval for risk-based margin trading on specific contracts, potentially altering its existing collateral requirements.
