At least six prediction market exchanges have conflicts of interest baked into their corporate structures via “affiliate relationships,” according to the Commodity Futures Trading Commission (CFTC), the nation’s federal betting regulator.
The CFTC proposed rules last week meant to address a trend of companies owning both a prediction market exchange and a principal trading desk that bets against customers on that exchange. The CFTC views these arrangements as inherently troublesome.
Kalshi was the first prediction market firm known to develop such a strategy, as Sportico has reported, doing so through KalshiEX (the exchange) and Kalshi Trading (the affiliate). Kalshi has said it keeps strict information firewalls between its entities, but the CFTC believes internal safeguards alone do not alleviate conflicts of interest.
“[An] exchange’s self-regulatory functions run directly against its commercial interest in the affiliate’s trading,” the CFTC writes. “Where the firm under surveillance is the exchange’s own affiliate and a potential profit center, the exchange is asked to investigate and, if warranted, discipline the source of its own revenue.”
Instead of trying to shut down affiliated trading arms, the CFTC is looking to limit their profit potential. It believes an outright prohibition would be “the most disruptive” option to companies currently using affiliates and might in some circumstances leave markets too thin for users to easily enter or exit bets anywhere near a reasonable price.
