By Lydia Beyoud
One week after the December 4 murder of UnitedHealth Group executive Brian Thompson in New York, Americans were able to bet on the fate of his alleged killer. Some people, including financial regulators, may have a problem with that.
Contracts offered by Kalshi, a New York exchange, allow retail traders to put money on the outcome of nearly anything. Kalshi listed wagers on December 11 related to Thompson’s death that included whether the suspect, Luigi Mangione, would be extradited to New York from Pennsylvania, whether he acted alone and whether he would be convicted or plead guilty.
Wagers linked to murder suspect Luigi Mangione (right) illustrate the challenge faced by regulators in the burgeoning business of events contracts.Credit: Bloomberg
Two days later, when trading suddenly halted, Kalshi told customers it made the decision “after receiving notice from our regulators”, according to messages reviewed by Bloomberg News.
The regulator, the Commodity Futures Trading Commission, and Kalshi declined to comment. The agency bans futures trading linked to crimes including assassination, terrorism and war if it decides the so-called events contracts are against the public interest.
Wagers linked to episodes such as murder illustrate the challenge faced by regulators in the burgeoning business of events contracts, that is, what happens when free markets and poor taste collide. Hot-button topics can be very profitable for the purveyors, and they can go live quickly without approval from the regulator. Critics say exchanges are pushing futures trading far beyond true risk hedging or other legitimate economic purposes.
“It’s straight gambling,” said Cantrell Dumas, director of derivatives policy at Better Markets, a financial policy think tank in Washington. “People are betting on whether this person is allegedly responsible for the assassination of another human being, and here we are desensitised to this and betting on whether he’ll enter a guilty plea.”
Contracts related to Mangione were still being traded on unregulated exchanges, among them crypto-only Polymarket, which says it has excluded US users since 2022 as part of a settlement with US authorities.
In a December 23 hearing, Mangione pleaded not guilty. His lawyer expressed concern about getting a fair trial due to statements being made by state officials.
The Commodity Futures Trading Commission sought earlier this year to block Kalshi from taking bets on elections, but a US appeals court lifted a stay on trading and allowed such contracts to be handled on regulated exchanges. The court is set to weigh in on the CFTC’s authority to permanently stop the contracts.
“It’s not surprising that activities that are enumerated and potentially prohibited as the subject of derivative contracts are ones that are going to be on the forefront of issuers’ agenda,” said Gary DeWaal, a retired former senior counsel and derivatives markets specialist at law firm Katten Muchin Rosenman.
The situation tees up “round two of the debate on the political event contracts,” DeWaal said. That legal dispute centres on how the regulator and the company view what “involves” gaming and activities that are illegal under federal or state law, he said.
Contracts can go live if an exchange merely files a self-certification with the CFTC, with one full business day to review. Given the short turnaround, the agency lacks the time to stop self-certified offerings before they go live, but it can put them in a trading review limbo.
A billboard for Kalshi showing 2024 US presidential election odds.Credit: Bloomberg
“There’s no 10-day review period,” Dumas said about new products, referring to the US Securities and Exchange Commission. “In this instance, Kalshi can certify a contract and next day, it’s live.”
The tsunami of self-certified contracts is likely to grow in coming years. CFTC-regulated companies like Robinhood Markets and Interactive Brokers Group’s ForecastEx launched election-themed trading this year, and more event contracts exchanges are seeking approval to operate.
It’s not the first time someone took wagers on the outcome of a criminal case. Almost 30 years ago, a UK bookmaker saw significant interest when it offered bets about O.J. Simpson’s murder trial. Some competitors refused, regardless of whether they were allowed.
The CFTC under the Trump administration is likely to be more friendly to these types of exchanges than during the Biden administration. One of the leading contenders to lead the regulator is former CFTC commissioner Brian Quintenz, who has served on Kalshi’s board and is now a top policy official at a16z crypto, part of the influential Andreessen Horowitz venture capital firm.
The agency has spent the past two years in litigation with Kalshi and PredictIt, an unlicensed exchange, seeking to block their ability to list elections contracts. An effort to prohibit such contracts has not been finalised, opening the door for the next CFTC chair to make changes in how the regulator deals with prediction markets.
Bloomberg