Kalshi has revealed steps to bolster its surveillance and enforcement mechanisms as skepticism rises around the rapidly growing prediction market industry. This announcement comes just days before Super Bowl 60, which has already attracted over $160 million in trading volume through prediction markets, according to Kalshi. These platforms enable users to purchase event contracts on various outcomes, spanning politics, pop culture, financial markets, and sports.
The practice of trading on predetermined outcomes, such as which companies will air Super Bowl advertisements, has sparked concerns over possible insider trading. In response, New York Attorney General Letitia James issued a caution regarding what she termed 'unregulated prediction markets.'
'Being federally regulated means that Kalshi prohibits market manipulation, insider trading, and imposes limits on the types of markets it lists. The platform conducts Know-Your-Customer (KYC) and Anti-Money Laundering (AML) checks on every user before they trade, and it publicly reports all trades to the CFTC daily,' Kalshi stated in a release. 'Kalshi also invested years in developing custom prediction market trade surveillance and enforcement systems akin to those used by the stock market.'
On Thursday, Kalshi announced additional steps, including the formation of an independent surveillance advisory committee. This committee will provide quarterly analysis to the company's external counsel and will release statistics on investigations into suspicious activities. Additionally, Kalshi has entered into surveillance partnerships with Solidus Labs and the director of the Wharton Forensic Analytics Lab.
Moreover, the prediction market will collaborate with a former Treasury undersecretary specializing in terrorism and financial intelligence to counsel Kalshi on 'market integrity, trading surveillance, and financial compliance matters.'
Kalshi's legal representative, Robert DeNault, has been appointed as the head of enforcement. He will work alongside the advisory committee to detect insider trading and market manipulation, according to the company.
Kalshi has also established online hubs providing resources for consumers on responsible trading and market integrity.
In a post on X, CEO Tarek Mansour emphasized the company's commitment to penalize wrongdoing with fines and referrals to the Commodity Futures Trading Commission — the U.S. regulator for event contracts — and the Department of Justice for legal proceedings.
'In the past year, we conducted over 200 investigations and froze relevant accounts,' Mansour wrote. 'Of these inquiries, more than a dozen have progressed to active cases, with several referred to law enforcement.'
Mansour added that Kalshi has modeled its market surveillance system after those of the New York Stock Exchange and Nasdaq, identifying suspicious conduct through pattern recognition models.
'All industries have bad actors and no system is perfect, including Kalshi's,' Mansour noted. 'But we are committed to improving daily. Lots of work ahead!'
Disclosure: CNBC and Kalshi have a commercial relationship that includes customer acquisition and a minority investment.