Prediction markets are witnessing scrutiny, particularly around "mention markets" which enable traders to bet on whether public figures, like politicians, will use specific phrases during events. The Commodity Futures Trading Commission (CFTC) recently took action by banning Gabriel Perez, a former teleprompter operator for President Donald Trump, from engaging in trading on these markets for three years. This decision came after allegations surfaced that Perez exploited his insider knowledge of Trump’s speeches to place lucrative bets. Following this, the CFTC highlighted the increased risk of manipulation within such markets, particularly where the outcome relies on the behavior of a single individual.
On September 22, the CFTC released a staff advisory outlining vulnerabilities in prediction markets, notably pointing out that contracts tied to the actions of individuals could be susceptible to undue influence and may not be independently verifiable. As designated contract markets (DCMs), prediction markets must adhere to 23 core principles mandated by the Commodity Exchange Act, including a prohibition against listing contracts prone to manipulation. The CFTC expects DCMs considering mention markets to enact stringent trading rules to prevent manipulation.
The advisory does not establish any enforceable rights and does not provide a “no-action position,” meaning it does not enact new laws or regulations.
In related news, New York Attorney General Letitia James has escalated her investigation into the prediction market landscape by filing a lawsuit against Polymarket, following her earlier lawsuit against Kalshi in July. The New York state government accused Polymarket of operating an illegal gambling business, particularly criticizing its policy allowing users aged 18 to 20 to trade on event contracts—an action that violates state law prohibiting anyone under 21 from engaging in gambling.
Governor Kathy Hochul expressed concerns, stating, "By running an unlicensed gambling operation, Polymarket has done more than just knowingly violate state law; they have put New Yorkers at risk."
In response to the lawsuit, Polymarket attempted to shift the case from state to federal court and filed a countersuit against the attorney general and New York State Gaming Commission officials. Chief Legal Officer Neal Kumar expressed disappointment at the lawsuit’s claims, saying, "While the AG’s decision to copy/paste a recycled lawsuit is disappointing, we’ll fight for our users."
The state is pursuing restitution and treble damages, seeking a fine of $100,000 for each incident of illegal sports wagering and alleging damages totaling at least $4.6 billion, significantly lower than the $36 billion it is pursuing from Kalshi.
In another development, Kalshi faced allegations of manipulating trading volume on its platform. A report suggested that a significant portion of its perpetual futures trades—a derivative allowing traders to speculate on asset prices—was artificially inflated, with trades clustered around the same order size of $5,500. Critics suggested that this pattern indicated potential "wash trading," a practice where traders buy and sell the same asset to artificially inflate market activity.
Kalshi strongly refuted these claims in a detailed statement, asserting it prohibits self-trading and maintains surveillance to prevent collusion. The firm stated, "We’ve seen no evidence of collusion or wash trades". Meanwhile, the CFTC has not confirmed whether it is investigating these accusations. On a separate note, Kalshi submitted a request to the CFTC to transition from full-collateral trading to risk-based margin requirements for specific contracts.
