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The Rise of Prediction Markets: Kalshi, Robinhood, and the Questionable Volume on Polymarket

Patricia Arquette
Patricia ArquetteOriginal
2024-11-03 06:28:22842browse

The recent surge in prediction markets has coincided with the upcoming presidential election, as those seeking a supplement to traditional polling look to new methodologies.

The Rise of Prediction Markets: Kalshi, Robinhood, and the Questionable Volume on Polymarket

The recent surge in prediction markets has coincided with the upcoming presidential election, as those seeking a supplement to traditional polling look to new methodologies. As election day draws closer, established prediction markets have seen their volumes skyrocket, while fresh players are jumping in to launch their own platforms.

This sudden influx of companies offering event contracts—or prediction markets—in the United States is no coincidence.

The following opinion editorial was written by: Alex Forehand and Michael Handelsman for Kelman.Law

Last month, in KalshiEX LLC v. CFTC, No. 24-5205 (D.C. Cir. 2024) the U.S. Court of Appeals for the D.C. Circuit ruled against the CFTC by allowing Kalshi to continue offering event contracts that cover U.S. elections while the CFTC’s appeal is pending. A lower court had previously granted Kalshi’s motion for summary judgment, ruling that the Commission could not block Kalshi’s “Congressional Control Contracts,” as they were not considered “gaming” and did not “involve” “illegal or unlawful activity.” The Commission appealed, and filed a motion seeking to block Kalshi from offering the contracts until the appeal was decided, arguing that not doing so would result in irreparable injury to the public.

Although recognizing that “[e]nsuring the integrity of elections and avoiding improper interference and misinformation are undoubtedly paramount public interests, and a substantiated risk of distorting the electoral process would amount to irreparable harm,” the Circuit Court ultimately concluded that “the CFTC has given this court no concrete basis to conclude that event contracts would likely be a vehicle for such harms.” Although the CFTC’s appeal is still ongoing, the Circuit Court’s denial of its motion to stay has seemingly given others a temporary greenlight to offer similar products.

Just this week, the retail investing app, Robinhood, seemingly piggybacked off the Kalshi rulings and launched its own prediction market, although it is limited to the 2024 U.S. Presidential Election. Despite releasing a new desktop trading platform, index options, and futures trading only two weeks prior, the Robinhood team evidently recognized the value of acting promptly in the wake of Kalshi.

As with any novel financial instrument, the rise of these “traditional” prediction markets has corresponded with an upswing in offshore markets using blockchain technology. Champions of blockchain-based prediction markets advocate that a primary benefit of employing the technology is the increase in transparency. All transactions and outcomes on a blockchain are recorded immutably, providing a fully transparent and auditable history of all purchases, payouts, and outcomes.

This transparency enables users to make informed decisions by providing a complete record of the size and timing of various purchases, supplying insight into why a market may have moved unexpectedly. More importantly, this clarity helps protect the integrity of the market by stifling bad actors who might otherwise look to manipulate the market, or exchanges seeking to artificially boost volume.

The advantage of monitoring platforms through blockchain analytics was spotlighted in recent reports that called into question the authenticity of the trading volume on Polymarket, the world’s largest prediction market. In a revelatory article, Fortune reported that Polymarket “exhibited signs of wash trading” and misrepresented the total volume in its markets by inflating the true trading volume.

By examining on-chain data, blockchain analytics company, Chaos Labs, found that roughly “one-third of trading volume—and overall users—on the presidential market alone was likely wash trading.” They reached similar conclusions for other markets. In a separate investigation, Inca Digital also attributed a “significant portion of the volume … to potential wash trading.”

Wash trading is a form of market manipulation that occurs when shares are repeatedly bought and sold in rapid succession, or even simultaneously, in order to create an illusion of high volume and trading activity in a given market. While wash trading generally does not have a direct effect on the price of the market—since traders involved usually buy and sell an asset at similar prices, effectively canceling out any price effects—it does artificially inflate volume, leading to the hollow sense of a “deep market.”

Even more damning, Polymarket appears to have grossly inflated the volume listed on its website when compared to the on-chain data. According to Inca’s reports on the presidential prediction market, the actual transaction volume was around $1.75 billion, despite Polymarket’s representation of $2.7 billion.

Chaos Labs posited that this discrepancy was the result of Polymarket conflating shares with U.S. dollars. In other words, users looking to buy an event contract on Polymarket purchase shares at different odds falling between $0 and $1. If the purchaser is correct in their prediction, the share pays out $1; if they are wrong, the share expires worthless. At the time of writing, a “yes” share of Donald Trump currently costs $0.63 for the presidential

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