Abstract
This document provides a technical overview of Kalshi, identifying it as the first federally regulated exchange in the United States dedicated to event contract trading. It details the operational mechanics of the platform under the Commodity Futures Trading Commission (CFTC), explaining how binary prices map to event probabilities and how the peer-to-peer model differs fundamentally from state-regulated sports betting. The guide outlines the legal status of the exchange, specific tradeable categories, and user procedures for account creation and position management.
Key Concepts
- Federally Regulated Exchange: Kalshi operates as a Designated Contract Market (DCM) under CFTC jurisdiction, contrasting with state-licensed gambling operators.
- Binary Event Contracts: Financial instruments where users trade ‘Yes’ or ‘No’ positions on specific, verifiable real-world outcomes.
- Probability Pricing: Contract pricing is standardized between one and 99 cents, where the price directly reflects the market’s assessed percentage probability of an event occurring.
- Payout Mechanics: Contracts settle at 0.00 if incorrect, resulting in profit equal to $1.00 minus the purchase price.
- Exchange vs. Bookmaker: Kalshi functions as a peer-to-peer exchange where users trade against each other rather than against a house that sets odds with a built-in margin.
- Market Categories: Available events span economics, politics, sports, and culture, covering outcomes such as interest rates, election results, and game scores.
Key Equations and Algorithms
None
Key Claims and Findings
- Kalshi was founded in 2018 to address the lack of straightforward methods for trading on event outcomes, achieving CFTC designation for event contracts in November 2020.
- A 2024 federal appeals court ruling upheld Kalshi’s ability to offer contract-based election trading, establishing significant precedent for political prediction markets.
- The platform is legally available across all 50 US states because its federal CFTC regulation preempts state gambling laws, unlike traditional sportsbooks.
- Market pricing dynamically adjusts to aggregate trader beliefs, allowing for the capture of specific market signals rather than just final outcomes.
- Traders can enter or exit positions at any time before settlement, allowing for profit realization or loss mitigation independent of event resolution.
Terminology
- Designated Contract Market (DCM): The regulatory classification for Kalshi as a futures exchange licensed by the CFTC.
- Event Contracts: Standardized derivatives where the value depends on the occurrence of a future event rather than asset movement.
- Vig: The implicit margin or commission built into traditional sportsbook odds, distinguishing them from Kalshi’s fee-based model.
- Resolution: The final determination of a contract’s status, determining the payout of 0.00.
- Federal Regulation: The oversight by the U.S. Commodity Futures Trading Commission which allows nationwide availability.