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The growing interest of US financial institutions in contracts that allow people to bet on future events is fueling new growth in a market best known for the battle over regulation of the legality of betting on politics.
Interactive Brokers, founded by electronic trading pioneer Thomas Peterffy, is launching its own platform, ForecastEx, on Monday, which offers contracts based on key economic data.
In April, trading house Susquehanna International Group, co-founded by billionaire Jeff Yass, set up a special team to create markets on Kalshi, a platform that offers users the chance to speculate on events ranging from the Federal Reserve’s interest rate cuts this year to critics’ ratings of new movies.
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 fluctuate in between, reflecting the changing odds.
ForecastEx is launching contracts tied to commonly used economic data, such as the weekly jobless claims report and monthly consumer confidence figures.
Steve Sanders, head of marketing and product development at Interactive Brokers, said he expected several customers to be interested.
“I think hedge funds will find ForecastEx useful as an insurance for their portfolios and I certainly think individuals will find it useful not only as insurance but also perhaps to form a view on where they think these indicators are going,” he added.
SIG’s involvement with Kalshi has so far focused on its financial offering. Monthly trading volumes have increased by 227 percent in the past year and in the three months since SIG joined, volume has increased by 88 percent, founder Tarek Mansour told the Financial Times. Kalshi is in talks with several brokers about offering their clients a connection to its platform.
“Someone with the status of an institutional market maker like SIG can add 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, founder of PredictIt, the only site in the US offering contracts based on US election results due to a 2014 deal that regulators are trying to invalidate, said many of the company’s users come from the financial sector.
“They have to be connected to, for example, who’s going to get control of Congress, or who’s going to be the next Supreme Court nominee, in their day-to-day work. These people are going to be watching events,” he said. “Political risk is very important to investors, and that’s reflected in those who are consuming the opportunities.”
The growing involvement of financial firms comes as regulators consider new restrictions on what events can be offered for trading. Because they are essentially futures contracts, the market is regulated by the Commodity Futures Trading Commission.
PredictIt is challenging the CFTC in court after the regulator in 2022 revoked a 2014 no-action letter that allowed the company to operate as a nonprofit in partnership 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 still pending.
However, the CFTC changed course in May of this year when it proposed a rule that would specifically ban contracts based on political contests, awards ceremonies or sporting events, as they are “contrary to the public interest.”
CFTC Chairman Rostin Behnam argued that regulating futures on those specific topics would take the commission far beyond its authority. He pointed to political contracts, arguing that they would tarnish Americans’ “unique experience of democracy” and risk turning the watchdog into “an election agent.”
The CFTC noted in its proposal that prediction markets are growing rapidly, with the number of new contracts created each year since 2021 exceeding the previous 15 years combined.
“I hope (the CFTC) treads as lightly as possible so we have a chance to see how people try to innovate and what happens,” said Eric Zitzewitz, an economics professor at Dartmouth College who studies the market.
“Prediction markets are potentially a really useful way of providing a collection of people’s opinions on a particular topic that might be more meaningful than just taking the average of what everyone says. It’s like an average, but weighted by how much they’re willing to back up what they’re saying with money.”