A new stock exchange should make it easier to protect against major economic and political events.
Kalshi, a company founded by Tarek Mansour and Luana Lopes Lara, was classified as a contract market by the Commodity Futures Trading Commission in late 2020 and was officially launched in June.
The exchange offers binary yes-or-no contracts that pay out $ 1 if the investor makes the right choice. Some of the current offerings include “a recession will start by the second quarter of 2022” and “income taxes on the highest income bracket will increase by the end of 2021”. Traders are not allowed to use margin to take their positions.
In some ways, Kalshi is similar to overseas betting markets that sometimes gain popularity with investors around major political events – or even online sports betting, which is booming in the US
However, Mansour said the economic benefits of hedging outcomes and Kalshi’s lack of a market maker role combine to make it a far cry from a casino.
“In casinos and gaming houses, they earn income from their customers’ losses. The industry has these weird incentives … for us, we take transaction fees. We don’t take money from the losses of others. ”Mansour said.
A major first test of the program came in November when the company’s yes-or-no deal focused on whether President Joe Biden would appoint a replacement for Jerome Powell to head the Federal Reserve.
Mansour said the market had shown stability in the week leading up to Biden’s decision to hold on.
“Some of the things we saw at this Jerome Powell market is that there was news every time, like for example [Sen.] Elizabeth Warren was strongly against Powell or his trading activity was being made public, the headlines on that forecast were very binary, “said Mansour. But the market showed no knee-jerk volatility.
After the contract started in September, the highest closing price for “yes” on the Powell substitute question was 32 cents. “You could see some sort of constant adjustment to the news, but not an overshoot,” he said.
Kalshi’s team believes the market contained both retailers and calculated hedging moves. “I think we had a very good mix of people who were interested based on their portfolios and those who were more speculative,” said Lopes Lara.
The company does not have formal status with the Securities and Exchange Commission, but its current offerings are tight enough to fall solely under the rules of the Commodity Futures Trading Commission, according to Matthew Kluchenek, partner at law firm Mayer Brown. Kluchenek said the SEC could get involved if the contract market appears to be affecting security prices in other markets.
Of course, Kalshi isn’t big enough for professional investors to hedge really massive portfolios. Before it expired, the Powell contract had a total volume of around 227,000 total contracts and was thus at the level of the daily volume of many small or mid-cap stocks. In addition, there is a $ 25,000 downside limit on individual contracts, although Mansour said it would be raised in the near future.
In total, the exchange recorded a weekly volume of around 1 million contracts in November. The co-founders said the company expects great growth early next year as the stock market becomes more accessible.
“The plan for the first quarter of 2022 is really to get out of beta,” said Lopes Lara.
The next steps for Kalshi include the launch of a mobile app that will expand trading opportunities beyond the company’s website.
The company has also had talks with brokerage firms to include Kalshi in their listings and with other investment firms to act as a market maker on the stock exchange, Mansour said. Currently, orders on Kalshi remain in the books until a second trader agrees to take over the opposite side of the contract, which could result in lower volumes and liquidity than if a market maker were involved.