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U.S. financial institutions’ growing interest in contracts that allow people to bet on future events is fueling new growth in a market best known for its regulatory battles over the legality of betting on politics.
Interactive Brokers, founded by e-trading pioneer Thomas Peterffy, is launching its own ForecastEx platform on Monday, which offers contracts based on published key economic data.
In April, Susquehanna International Group, a trading company co-founded by billionaire Jeff Yass, created a dedicated team to make markets on Kalshi, a platform that offers users the chance to speculate on whether the Federal Reserve will cut interest rates this year. for the evaluation of new films by reviewers.
Event contracts are typically structured as yes or no bets that pay $1 per contract if correct and zero if incorrect. Before they expire, prices move between them and reflect changing rates.
ForecastEx launches with contracts tied to widely watched economic data such as the weekly jobless claims report and monthly consumer sentiment data.
Steve Sanders, head of marketing and product development at Interactive Brokers, said he expects a variety of clients to be interested.
“I think hedge funds will find ForecastEx useful in providing insurance to their portfolios, and I certainly think individuals would find it useful not only as insurance, but also perhaps to see where they think these indicators are going,” he added.
SIG’s involvement with Kalshi to date has focused on its financial offers. Monthly trade volumes have increased by 227 percent over the past year, and in the three months since SIG joined, volume is up 88 percent, founder Tarek Mansour told the Financial Times. Kalshi is in talks with several brokers to offer their clients to join their platform.
“Someone from an institutional market maker like SIG can bring a lot to a growing market like ours,” said Mansour, who also welcomed Interactive Brokers’ move. “It brings more credibility, education and interest to the market, and we’re excited to see that.”
John Aristotle Phillips, the founder of PredictIt, the only site in the US that offers contracts on the outcome of the US election because of a 2014 deal its regulator is trying to overturn, said many of the company’s users come from the financial industry. .
“They have to be involved in their day-to-day tasks, say, who’s going to have control of Congress or who’s going to be the next Supreme Court nominee.” Those people will be watching events,” he said. “Political risk is very much on the minds of investors, and it’s evidenced by those consuming the odds.”
The growing involvement of financial firms comes as regulators consider new restrictions on what events can be offered for trading. Because these are essentially futures contracts, the market is overseen by the Commodity Futures Trading Commission.
PredictIt is fighting the CFTC in court after the regulator in 2022 revoked a 2014 “no-action” letter that allowed it to operate as a nonprofit in association with a New Zealand university, essentially to provide data for academic research.
In 2023, Kalshi sued the CFTC after the watchdog banned it from offering election-related contracts. Both cases are ongoing.
However, the CFTC took a new tack this May when it proposed a rule specifically banning contracts based on political contests, awards shows or sports competitions as “contrary to the public interest.”
CFTC Chairman Rostin Behnam argued that regulating futures on these specific topics would push the commission far beyond its mandate. He singled out political contracts, arguing that they would degrade the “unique American experience of democracy” and risk turning a watchdog into an “election cop.”
In its proposal, the CFTC noted the rapid growth of prediction markets, with the number of new contracts each year starting in 2021 surpassing the previous 15 years combined.
“I’m hoping (the CFTC) will use as light a hand as possible so we have a chance to see people try to innovate and then see what happens,” said Eric Zitzewitz, a Dartmouth College economics professor who studies the market.
“Prediction markets are potentially a really useful way to provide an aggregation of people’s opinions on a particular topic, which is perhaps more meaningful than just taking an average of what everyone is saying. It’s like an average, but weighted by how much they’re willing to back up what they say with money.”