Prediction markets, especially controversial "mention markets," allow traders to bet on whether a notable figure will say specific phrases during public appearances. Recently, the Commodity Futures Trading Commission (CFTC) imposed a three-year ban on Gabriel Perez, a former teleprompter operator for President Donald Trump, due to allegations of illegal trading based on insider knowledge of Trump’s speeches. Following this, the CFTC highlighted concerns about manipulation in mention markets, emphasizing that contracts tied to the actions of individual figures are particularly vulnerable.
On September 22, the CFTC issued a staff advisory noting the risks of undue influence in these markets, particularly where outcomes depend on individual conduct, which may not be externally verifiable. Under the Commodity Exchange Act, designated contract markets (DCMs) must adhere to 23 core principles, including prohibitions on contracts susceptible to manipulation. The CFTC is urging DCMs proposing to list mention markets to develop trading rules to prevent such manipulation.
The advisory clarifies that it does not create enforceable rights and offers no binding regulatory changes.
In New York, Attorney General Letitia James expanded her legal actions against prediction markets, adding Polymarket to a lawsuit initially filed against Kalshi in July. The state alleges that Polymarket operates an illegal gambling site, specifically criticizing its policy allowing traders aged 18 to 20, which contradicts New York law prohibiting sports betting for those under 21. James remarked that Polymarket's operation has compromised public safety.
Polymarket has sought to shift the case to the US District Court for the Central District of New York and filed a countersuit against James and state gaming officials. Neal Kumar, Polymarket's chief legal officer, expressed disappointment at the attorney general's lawsuit. New York seeks restitution, treble damages, and penalties, proposing fines of $100,000 for each instance of illegal sports wagering. The state claims at least $4.6 billion in damages, lower than its $36 billion demand from Kalshi.
In other developments, allegations surfaced against Kalshi regarding potential manipulation of trading volumes in its crypto and perpetual futures markets. A former quantitative trader claimed on social media that a significant portion of Kalshi's trades were artificially increased through wash trading, a practice where identical buy-sell transactions inflate volume figures. The Wall Street Journal found that over a third of perpetual trades were made at consistent order sizes of $5,500, amounting to significant trading volume.
Kalshi strongly denied enabling wash trading, asserting that it implements strict measures to prevent self-trades and has surveillance systems in place to detect collusive activities. Furthermore, the company clarified that its trading incentives are designed to reward liquidity rather than volume.
While the CFTC did not comment on any investigation into Kalshi, the company submitted a request to the commission to allow risk-based margin trading as an alternative to full collateral requirements for specific contracts.
