Kalshi offers a prediction market where you can bet on sports. No! Sorry! Wrong! It offers a prediction market where you can predict which team will win a sports game, and if you predict correctly you make money, and if you predict incorrectly you lose money. Not “bet on sports.” “Predict sports outcomes for money.” Completely different.

The difference matters for somewhat baffling legal and jurisdictional reasons. The US has a federal system in which:

1. Commodity futures markets are regulated by the US Commodity Futures Trading Commission, a federal agency.
2. Gambling is regulated by the states.
3. State gambling regulators are not allowed to meddle with CFTC-regulated commodity futures contracts. [1]

These things are related, because historically people sometimes thought that commodity futures contracts were gambling. If I buy a wheat futures contract, I make money if the price of wheat goes up and lose money if it goes down. I don’t have to be a farmer or a baker; I don’t have to have some non-speculative use for the wheat contract. I don’t have to take delivery of the wheat; I can just close out my bet for cash, and most traders do. So there was a risk that your commodity futures contract would be treated as gambling; gambling was often illegal, so your futures contract might not be enforceable, or you might even go to jail for trading it. The Commodity Exchange Act of 1936, which established the CFTC, created federal regulation of commodity futures contracts, which had the benefit of making it clear that CFTC-regulated contracts weren’t illegal gambling under state law, and so couldn’t be regulated by state gambling regulators.

The CFTC allowed and regulated futures contracts on various commodities (though not onions). Over time, though, the notion of a “commodity future” expanded. It turns out that financial markets have enormous use for interest-rate futures and stock index futures and other things that are not commodities in the normal sense of the word. CFTC regulation expanded to cover those contracts too. The way this happened is essentially that the CFTC licensed and regulated futures exchanges — the Chicago Board of Trade, the New York Mercantile Exchange, etc. — and the futures exchanges decided what contracts to list. They started off listing wheat and cotton and pork bellies, and then moved into interest rates and stock indexes, and the CFTC went along with them. But the impetus to expand came from the exchanges, which could make more money by listing new categories of futures.

The CFTC has rules about what sorts of contracts the exchanges were allowed to list; for a long time those rules involved an “economic purpose test,” requiring the exchanges to list only contracts that could help with hedging or price discovery. Wheat futures could help farmers hedge, and interest-rate futures could help banks hedge, but pure gambling was discouraged. In 2000, the Commodity Futures Modernization Act removed the economic purpose test, giving the CFTC more flexibility to allow futures contracts without any showing of a specific economic purpose.

Still there are limitations. Specifically, the statute says that the CFTC can refuse to approve “event contracts” — that is, contracts that “are based upon the occurrence, extent of an occurrence, or contingency (other than a change in the price, rate, value, or levels of a commodity)” — that “are contrary to the public interest” if they involve among other things, illegal activity, terrorism, assassination, war, “gaming” or other similar activity.

For a while, the CFTC interpreted this pretty broadly. For one thing, it declared categorically that any contracts involving those things (assassination, war, gaming, etc.) were “contrary to the public interest” and not allowed. [2]  But it was also skeptical of “event contracts” more broadly; in particular, it tried to stop most exchanges from listing election contracts, because it worried that those were also contrary to the public interest, had no economic purpose, and “would put the CFTC in the role of an election cop.”

But Kalshi, which runs prediction markets and became a CFTC-regulated futures exchange, pushed back on this, arguing that the CFTC was going beyond the statute by banning election contracts. In September, Kalshi won an important victory, when a federal court ruled that “Kalshi’s contracts do not involve unlawful activity or gaming. They involve elections, which are neither.”

In November, Kalshi won a much more important victory, when Donald Trump was elected president and brought in an administration that is far more friendly to prediction markets generally. Trump’s nominee to run the CFTC was previously a member of Kalshi’s board of directors, and the CFTC, which had planned to appeal the district court’s election-contract ruling, decided to drop that appeal last month.

So now Kalshi can list election contracts, and does. But there is only so much money in election contracts; there is not a high-profile election every day. There are high-profile sporting events most days. People like to, uh, predict the outcomes of those sporting events, and win money if their predictions are correct. Starting in January, Kalshi has listed sports contracts too. Is it allowed to? Well. ESPN described the situation earlier this month:

Kalshi went through a six-year process to be certified as an exchange regulated by the CFTC. ... This allows them to list any new offerings, sports or otherwise, through a self-certification process without prior approval from the federal agency, which can later review products and flag them for violations.

A CFTC rule prohibits offering event contracts related to "gaming," which Kalshi argued in court filings last year applied to sports. At the time, the company was facing scrutiny from the Biden administration about its offerings on political elections. "The only relevant legislative history, moreover, confirms that contracts on 'sporting events such as the Super Bowl, the Kentucky Derby, and Masters Golf Tournament' were precisely what Congress had in mind as 'gaming' contracts," Kalshi's attorneys wrote in a filing in January 2024.

A year later, Kalshi began offering sports contracts, including on the Super Bowl and the Masters, and advertised itself as the "First Nationwide Legal Sports Betting Platform." Over the next five months, more than $1 billion was traded on 3.4 million sports propositions, according to a company spokesperson. It has roughly two million users, the spokesperson said, and is still available nationwide.

On the federal level, the CFTC has yet to weigh in. The commission canceled a public roundtable on prediction markets in April and has not rescheduled it. …

Currently, Kalshi offers contracts only on the results of games or tournaments, but the NBA wrote to the CFTC that it is concerned that the market will soon expand to individual player propositions or other types of contracts that pose a greater threat to sporting integrity. It also said that the self-certification process "allows most contract markets to simply proceed unchecked."

That is: The CFTC currently has a rule that prohibits futures exchanges from listing “gaming” contracts, and Kalshi has previously said in court that contracts on sporting events are “gaming,” but it is not absolutely clear that that’s the case. More recently, Kalshi Chief Executive Officer Tarek Mansour has said that “I just don't really know what this has to do with gambling,” because Kalshi offers a marketplace for traders to bet with each other on sports rather than serving as a central sportsbook. That argument strikes me as quite weak — betting against other people is still betting? — but the point is that “gaming” is somewhat unclearly defined, there is some continuum between “betting on wheat prices” and “betting in-game parlays in the NBA Finals,” and, most crucially, the CFTC hasn’t stopped them. Kalshi has self-certified sports contracts, and the much more Kalshi-friendly 2025 version of the CFTC has said, implicitly, “eh fine go ahead.”

Perhaps that will change: In February, Robinhood Markets Inc. briefly offered its clients the opportunity to bet on the Super Bowl on Kalshi, and then quickly walked that back after getting some sort of pushback from the CFTC. Robinhood had thought the CFTC was cool with it (“We were in regular contact with the CFTC prior to launching this product, and we believe we are in full compliance with all applicable regulations,” it said), but that turned out to be wrong. Perhaps the CFTC will also get around to telling Kalshi to knock it off, though I wouldn’t bet on that.

But various state gaming regulators have told Kalshi to knock it off: The state gaming regulators want sports betting to go through state-regulated sportsbooks rather than through CFTC-regulated(-by-omission) futures markets, for consumer-protection and integrity-of-the-game and state-revenue-related reasons. But Kalshi has gone to court to argue: No, actually, states aren’t allowed to regulate our sports bets, because they are CFTC-regulated futures contracts and state regulation is preempted.

And Kalshi has a pretty good record of winning those cases! Federal judges have blocked Nevada and New Jersey gaming regulators from banning Kalshi’s sports contracts, because (1) Kalshi is a CFTC-regulated futures exchange, (2) the CFTC has exclusive jurisdiction over commodity futures, (3) the CFTC has not blocked Kalshi from listing these sports contracts and therefore (4) they must be commodity futures that are not subject to state regulation.

This strikes me as an extremely, extremely weird state of affairs. Andrew Kim and John Servidio explained some of the weirdness in April:

If Kalshi is right and the CEA preempts state wagering laws as they relate to sports-wagering contracts, such an outcome could have dramatic consequences for the sports wagering industry. It would have the potential to cause not just a realignment and reconfiguration of sports wagering (or event contracting) as we know it, it would also lead to a regulatory void. The CFTC cannot meaningfully regulate sports-related event contracts using the up-or-down power of prohibition. It lacks both statutory authority and experience to address the range of compliance issues uniquely presented by staking money on the outcome of sporting events, regardless of whether that happens as a “contract” or as a “wager.” These issues include integrity monitoring, responsible gaming and anti-money laundering, to name just a few. Any court addressing the preemptive power of the CEA will need to grapple with these practical concerns.

I actually think that the US Securities and Exchange Commission does have a pretty good track record of dealing with “integrity monitoring” (banning insider trading, etc.), “responsible gaming” (telling brokers not to drain their customers’ accounts too much) and anti-money laundering, so I am somewhat more optimistic that federal regulation of sports gambling by the CFTC could work. Still, “federal regulation of sports gambling by the CFTC” is a weird outcome! 

But what am I going to do about it. Last week a company called “Ohio Gambling Recovery LLC” filed an amazing lawsuit in Ohio state court against Kalshi, Robinhood, and Susquehanna International Group, the options market maker that has also gotten big into sports gambling. Ohio’s state gaming regulator, like New Jersey’s and Nevada’s and several other states’, has sent Kalshi a cease-and-desist letter telling it to stop offering sports bets in Ohio, but Kalshi takes the position that those letters are invalid because they are preempted by CFTC regulation. So far that has been a winning strategy for Kalshi, but it is not absolutely certain that will continue. Maybe the CFTC will say “actually you can’t list these contracts because they are gaming,” or maybe a court will eventually rule against Kalshi’s preemption arguments. If that happens, presumably Kalshi will have to stop listing sports contracts.

Ohio Gambling Recovery, though, has bigger plans. If Kalshi’s contracts are gambling, it will have to stop offering them, sure, but the bet in this lawsuit is that it will also have to pay all of its winnings to Ohio Gambling Recovery. From the lawsuit:

Like many states, Ohio offers an additional safeguard against illegal, unregulated gambling: its Statute of Anne. Based on a 1710 British law passed during the reign of Queen Anne, that law allows a losing party to sue the winning party for the value of gambling losses plus fees. And should the losing party fail to sue within six months, the statute authorizes any third party to bring a claim against the winning party to recover those losses and fees also.

Defendants have operated in Ohio without regard to the state’s legal limits for years. Each year, they take tens of millions of dollars from Ohio gamblers. But under the State’s Statute of Anne, each time Defendants caused a gambler in Ohio to suffer gambling losses, that person had the right to sue for recovery of those losses. And after six months, any person may sue for those losses on the victims’ behalf. In filing this action, Plaintiff takes just that step.

The theory here is that, if Kalshi’s sports contracts are gambling, then they are illegal gambling in Ohio, and if they are illegal gambling in Ohio, then anyone — and why not Ohio Gambling Recovery? [3] — can sue Kalshi to get back everyone’s losing bets, under a 1710 bounty-hunting statute. (But they don’t have to give back anyone’s winning bets. [4] ) 

That is: Some people think that Kalshi’s sports contracts are gambling, and some people don’t. Eventually there will be a definitive resolution of the question: The US Supreme Court will rule on the matter, or some other appellate ruling will become final and there will be consensus that the contracts are or are not gambling. If you have a strong informed opinion on the matter — if you know a lot about the court system and gambling regulation and the attitude of the CFTC in 2025 — you might want to bet money on your prediction of the outcome. Kalshi has at least implicitly bet a lot of money on the view that its sports contracts are fine and will be a lucrative business for it. And now somebody is taking the other side of that bet.

For a while there was a concept called a “greenium.” The idea was that investors wanted to fund climate-friendly projects, so a company raising money to do green projects would have a lower cost of capital on that project than it would on the rest of its projects. If you could borrow at an 8% interest rate to fund a normal project, you could borrow at, like, 7.97% to fund a solar energy project. As far as I can tell that was the right order of magnitude for the greenium; I have seen estimates of 1, 2, 8 or as many as 15 basis points of bond greenium. Investors wanted to fund climate-friendly projects, but not that much.

That was a few years ago, though, and since then the demand for climate-friendly projects in the US has reversed: There has been a political backlash to environmental, social and governance investing, and big asset managers now have to prove to politicians that they love funding fossil-fuel projects in order to keep investment mandates. If you own too many green bonds now, you will get in trouble. In theory this should be bad for the greenium: If US investors prefer non-green bonds, then the relative value of green bonds should come down. If European investors still prefer green bonds, the greenium might still be positive, but it might not be. It’s not like the greenium was ever that big! If it has come down, it could well be negative now. Maybe the cost of capital of doing green projects is higher than the cost of doing non-green projects.

There is a limit to that, though, because if the greenium is negative you can just stop talking about the green projects. “This bond is for general corporate purposes, including all sorts of power projects, we’ll decide later which ones,” you say, instead of “this bond is for wind power projects.” If the cost of financing wind power is higher than the cost of financing “miscellaneous,” you raise money for miscellaneous and use it for wind power. The Financial Times reports:

US green bond sales have fallen since Donald Trump won a second term as president, as companies seek to avoid unwanted attention by backing away from or playing down their environmental activities. ...

While potential unwanted scrutiny from the administration was not the sole factor depressing green bond issuance, it was a significant one, [Sean Kidney, founder of the Climate Bonds Initiative] added.

However, shrinking cost savings from selling green debt and falling demand among US investors have also weighed on issuance in recent years.

“All of this makes for an environment prone to ‘greenhushing.’” said Hortense Bioy, head of sustainable investing research at Morningstar. 

In contrast with several years ago, when more corporates were keen to trumpet their environmental, social and governance (ESG) credentials, some US companies have been quietly funding green projects through traditional debt sales without slapping a green label on the bonds used to finance them.

Bankers focusing on the clean energy finance sector predict companies will continue to sell debt to fund projects such as wind and solar power generation during Trump’s second term, but say these efforts increasingly could be financed without advertising them as green initiatives. 

Meanwhile I suppose there must be a “brownium” now, where if you are raising money specifically to drill oil in a nature reserve that will command a lower cost of capital, because BlackRock Inc. can buy those bonds and go to Republican pension-fund managers and say “see we love oil.” Perhaps there is always some sort of favored project that will command a lower cost of capital than general corporate projects; the trick is to finance the favored stuff specifically and the disfavored stuff generically.

We talked yesterday about the wait time for delivery from pizzerias near the Pentagon, which arguably predicted Israel’s attack on Iran, and which more generally is arguably correlated with oil prices. The busier those pizzerias are, the busier the Pentagon probably is, which probably means some geopolitical stuff is going down, which probably means oil prices are going up. None of those things is absolutely true. Maybe some unrelated business near the Pentagon needed a lot of pizzas; maybe the Pentagon’s softball championship is that day; maybe the geopolitical stuff will reduce the price of oil. But it would not be shocking if there is some positive correlation.

I, like, one-quarter-jokingly suggested that hedge funds should pay for a direct data feed of Pentagon pizzeria wait times, since that would be a valuable signal to their commodity trading models. Fine. 

Three readers independently emailed me with variants on what in retrospect is sort of an obvious question, which is: “Is it market manipulation to order like 200 pizzas to an office near the Pentagon, and then buy calls on oil?” A few points:

1. Not legal or investing advice!
2. This assumes that it would work, which in turn assumes that hedge funds are trading on this data. My thesis yesterday was something like “the oil futures market does not move immediately in reaction to Pentagon pizza delivery wait time data, so if you traded on that data, you would be ahead of the market and make a profit.” My readers’ implicit thesis is something like “since it was published in Money Stuff, now canonically the market will move immediately in reaction to Pentagon pizza delivery wait time data, so if you manipulated that data, you would be ahead of the market and make a profit.” But obviously if nobody trades on that data then you’ve just wasted money on pizza.
3. More generally, “manipulate alternative data that is correlated with some security prices, expecting sophisticated hedge funds to trade on that data, and trade the correlated securities ahead of them” seems like a rich field for study in modern finance. As people seek more obscure sources of information, data sources that are moderately correlated with asset returns rather than leaks of merger news, there are more opportunities for both manipulation and plausible deniability. We have talked a few times about “shadow trading,” which is the related practice of (1) getting inside information about some company and (2) trading some correlated security (rather than the company’s stock, which will obviously get you in trouble). The field of alt-data manipulation is broader, though — if hedge funds are reading tweets, you can write a lot of tweets, etc. — and less obviously illegal. Trading one security with inside information about another security seems bad in some fuzzy but obvious way; ordering too many pizzas to trick people into buying oil is murkier. “Park 100 cars in the parking lot of some retailer announcing earnings next week, and buy calls on the company,” that sort of thing: You were misleading someone, probably (the hedge funds examining satellite images of that parking lot), but why did they think they were entitled to rely on that parking lot for their trading?

The US Securities and Exchange Commission requires public companies to file various disclosures using its Edgar online system. Edgar stands for “Electronic Data Gathering, Analysis, and Retrieval,” and I suppose it is objectively old and clunky, but I have a soft spot for it. Compared to a lot of other online stuff, it is surprisingly usable, at least for consumers of information. (Filers might find it harder.) If it looks old-fashioned, it comes by that honestly: It has been around for a long time in reasonably consistent form. In recent years the SEC has done its worst to lard up Edgar with new features, but as online data sources go it’s still pretty straightforward. Still, modernization continues, and this week the SEC adopted amendments to the EDGAR Filer Manual. I enjoyed this description of some of the amendments:

Volume II of the Filer Manual contains several outdated generic references, explaining for example the nature of the internet and other basic issues that were novel in the time period that the Filer Manual was initially adopted. The Commission has completely revised Volume I to streamline it and remove such references. The Commission now seeks to remove such antiquated language from Volume II. For example, we are removing sentences such as: “The SEC accepts electronic submissions through the Internet,” “The EDGAR system is comprised of a number of large computers that receive filings submitted by entities,” “Many people have become familiar with HTML since they have used the Internet,” and “Browsers have very similar navigation functions….”

I don’t know, if your description of your online filing service explains that it “is comprised of a number of large computers,” that’s pretty cool! I would keep that in just for retro-chic purposes.

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