With its bid to let Americans wager on elections put on ice by federal watchdogs, Kalshi Inc. is now shopping a plan to let hedge funds easily wager millions of dollars on more real-life events.
The upstart New York-based derivatives exchange has been quietly laying the groundwork with trading firms and desks for months. The pitch: hedge risk and bet directly on market-moving news like monetary policy, weather shifts and geopolitical outcomes without needing a cocktail of complex, and often costly financial instruments.
Kalshi has thus far marketed itself mostly to the masses, despite the Citadel Securities quant trader pedigrees of co-founders Luana Lopes Lara and Tarek Mansour. To attract proprietary trading firms and other professional traders, Kalshi is considering boosting wager limits from a current maximum of $25,000. It already increased the limit on its monthly inflation-rate contract to $7 million, and is considering raises on other economic-themed contracts, according to people familiar with the matter.
The stakes are particularly high for Kalshi, which is seeking a crucial first-mover advantage in an emerging asset class rife with regulatory land mines. The Commodity Futures Trading Commission has the power to stymie Kalshi’s plan because the exchange is registered with the regulator and its contracts are considered derivatives.
Kalshi’s recent pitches to big-money investors and traders have coincided with a painful time for some of its employees. The firm, whose early backers include Sequoia, Charles Schwab and Henry Kravis, lost about a quarter of its staff on Jan. 31 through a mixture of staff cuts and voluntary departures, according to two people familiar with the matter.
“It’s critical for a startup venue to find an actively traded product,” said Larry Tabb, Bloomberg Intelligence’s head of market structure research. That’s more crucial if it involves a new concept like event contracts, he said.
Kalshi does about $10 million a month in trading, and is hoping to attract Wall Street firms to increase that. It planned to onboard at least one large market maker earlier this year, Kalshi said in a recent pitch to a finance industry executive. The person, like others, agreed only to speak anonymously to discuss plans that aren’t public.
Kalshi declined to comment.
Competition ahead
There’s also competition to bring event trading to Wall Street by bigger players like CME Group Inc.
Kalshi’s contract prices settle at $1 if the event happens, or zero if not, and the price fluctuates before then, depending on how likely the market considers the occurrence.
The CFTC can stop exchanges from listing instruments relating to “terrorism, assassination, war” and “gaming,” if it deems them “contrary to the public interest.” Yet the watchdog hasn’t defined what constitutes gaming, making its authority somewhat ambiguous.
The regulator last year delayed a decision on a Kalshi plan to list a contract that would have let people bet as much as $25,000 on which political party would control Congress after the November elections. In October, Kalshi ran a New York City subway ad telling commuters: “Wall Street wins every election. Now you can too.”
Election bets
The CFTC is still weighing whether to allow a similar proposal from the firm for next year’s polls and has asked for public comment. The regulator has historically refused to greenlight derivatives tied to election outcomes, except in limited situations for research or academic purposes. The regulator declined to comment.
Other firms long interested in listing other types of contracts that could prove controversial are closely monitoring how the CFTC proceeds with Kalshi’s application.
To help bolster its chances, Kalshi spent $180,000 in 2022 on Washington lobbyists, compared with $20,000 in 2021, according to federal disclosures. It hired a former CFTC general counsel to help it make its case.
The CFTC is set to weigh in on the plan next month.
