Trading Platform Argues CFTC Lacks Authority to Ban Election Betting
Commentary by Steven Lofchie
In its Appellee Brief, filed in the DC Circuit, the trading platform KalshiEx LLC ("Kalshi") argued that the CFTC exceeded its authority by attempting to ban Congressional Control Contracts.
The filing stems from a CFTC appeal of a District Court ruling in favor of the trading platform, which found that the CFTC's Order banning election prediction markets "exceeded its statutory authority." (See previous coverage.) As stated in the Brief, the District Court "vacated the agency order, permitting prediction markets to go live for the 2024 election cycle—a result this [Appellate] Court declined to stay pending appeal." The trading platform requested that the DC Circuit affirm the merits of the District Court's conclusions.
In its Brief, Kalshi argued that the contracts do not "involve" unlawful activity under the CEA because they are based on elections—lawful events. Kalshi also argued that the term "gaming" in the CEA refers specifically to games or gambling on games, and since elections are not games, these contracts do not constitute gaming. Kalshi contended that its prediction markets serve a public purpose by offering tools for hedging economic risks related to political outcomes and providing reliable data for gauging electoral probabilities.
Post election, the issue is being closely watched, as the prediction marketplace was proven more accurate and less subject to manipulation than general polling. Recently, President-elect Trump called for an investigation into an Iowa-based pollster who reported that a majority of Iowa residents favored Vice President Harris in the then-upcoming election. These results conflicted with prior polls that had predicted Mr. Trump's strong support in Iowa. Ultimately, Iowa voters backed Mr. Trump by a substantial majority, highlighting the inaccuracy of the pollster's findings.
Commentary
As to whether event contracts on elections should be prohibited, as it stands, the Commodity Exchange Act does not seem to prohibit the contracts, and the CFTC should not stretch the word or its authority to reach a desired result. If Congress wants to amend the CEA to prohibit election contracts, there is plenty of time before the next election.
Among several justifications for its disputed Order banning election contracts, the CFTC argued that these contracts were potentially subject to manipulation by persons that had an interest in the elections, and so would "bet" on their candidate to sway public opinion by showing that the betting was going in favor of that candidate. Post-election, that argument raises many questions about polling. The President's allegations of misconduct in polling could wind-up proving that the prediction markets are less susceptible to manipulation than polls. That may be for a variety of reasons, first, people have to put up money, which generally discourages the idea that bets placed are done so simply to make a point. Second, polls are inherently biased based on how they are conducted (and who conducts them). That is why Nate Silver reports on the pollster as well as the poll results.
It is also notable that the prediction market ended up with a more accurate forecast of the election results than did the pollsters. The Wall Street Journal wondered if old-fashioned polling could survive given the arguably better quality of prediction markets. (See How the Trump Whale and Prediction Markets Beat the Pollsters in 2024.)
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