U.S. Election Betting: Regulated Presidential Markets Are Live, and Tiny Compared to Polymarket’s

On Friday, Kalshi, a company that waged a protracted legal battle with the Commodity Futures Trading Commission to provide election-related contracts in the U.S., debuted its presidential markets. This move came a day after Interactive Brokers’ (IAB) ForecastEx, a significant player on Wall Street, introduced similar markets.

To date, trading volumes have been relatively low at exchanges overseen by the Commodity Futures Trading Commission (CFTC), with approximately $344,101 in contracts traded on Kalshi and $346,000 on ForecastEx. Conversely, Polymarket, a prediction market platform utilizing cryptocurrency, has seen significantly higher volumes of over $1.2 billion wagered on the contest between Kamala Harris and Donald Trump. Notably, despite being prohibited from U.S. users due to a CFTC settlement, Polymarket has experienced record volumes this year, while Kalshi and other platforms like IAB have been waiting for legal clarity before engaging in active trading.

Koleman Strumpm, an economics professor at Wake Forest University in North Carolina, stated that it might be challenging for two platforms to compete, but he added that such a scenario isn’t completely out of reach. In his opinion, some traders could potentially shift their activities from Polymarket to the other sites due to this situation. (It is said that despite geofencing restrictions, American traders have been reportedly using VPNs to gain access to Polymarket.)

As an analyst, I’ve observed that based on historical trends, a significant proportion – likely over half – of all trades are anticipated to take place between now and Election Day. This trend is particularly notable in close races such as the one we seem to be looking at currently, given that there tends to be increased volume in these situations. My findings are based on my study of the history of election markets.

In my exploration, I’ve noticed that Polymarket, being the pioneer in its field, holds two distinct advantages that set it apart. As a researcher, these points caught my attention.

“Polymarket can potentially be used by individuals globally, unlike Kalshi whose products are not open to foreign nationals and some other specified groups,” he noted. “Additionally, while Polymarket doesn’t impose specific position limits, Kalshi does, and this could potentially cap the overall market size due to these restrictions, even though the limit is quite high in Kalshi.

Price differences

Around midday on a Friday in New York City, the market value of each share for Harris stood at approximately 51 cents, indicating that traders believed she had a 51% probability of success. Meanwhile, Trump’s chances on the Kalshi platform were calculated to be at 50%.

On ForecastEx, Harris held a more significant advantage over Trump, with a score of 53 to 47. Conversely, on Polymarket, the contest between the two candidates was extremely close, each garnering approximately 49% support.

Harry Crane, a statistics professor at Rutgers University in New Jersey, stated that these differences weren’t particularly significant. “In our election forecasting, we often rely on polls, and with polls comes an established margin of error, typically around three percentage points, which can vary based on the sample size,” he explained.

As a researcher studying market dynamics, I often come across instances where there is a “margin of inefficiency” – situations where potential profits from arbitrage, or capitalizing on price discrepancies, are too small to warrant the effort involved. Essentially, it’s as if there’s a penny left on the ground that’s not worth bending over to pick up due to the insignificant reward compared to the required effort.

Crane explained that while prediction markets don’t necessarily have to be identical to each other, they can still provide accurate predictions over time. By analyzing their performance, it’s possible to identify the ones with stronger predictive abilities. Ultimately, a combined forecast could be developed, giving greater weight to one market over another based on its track record.

Unfinished business

Kalshi sued the CFTC last year after the agency denied its application to list contracts on which party would control each house of Congress. The company won the case (which the CFTC is appealing) and listed the congressional contracts on Sept. 13.

After trading for just a few hours, the court granted the CFTC an administrative stay that froze the contracts. This freeze was lifted on Wednesday. Confidently, the company not only reinstated the congressional contracts but also self-certified the presidential one. Self-certification refers to the process whereby entities regulated by the CFTC can list products without needing the agency’s prior approval. Following this lead, IAB, which launched ForecastEx during the summer, swiftly did the same.

The Commodity Futures Trading Commission (CFTC), an organization that is currently evaluating a plan to prohibit political event contracts on exchanges under its jurisdiction, has requested the appeals court to prioritize the case. The CFTC mentioned one of the reasons for this urgency as their proposed regulation might significantly change based on the court’s final decision regarding the case’s substance.

Instead, it seems they’ve decided not to intervene in these contracts being traded before the election. Their suggested schedule indicates briefs should be submitted by November 22 (over two weeks following the voting day), with oral arguments scheduled for December 2.