WingNews logo WingNews GitHub [2]
top | item 33696486

Launch HN: Kalshi (YC W19) – A regulated exchange for trading on events

148 points| tmansour | 3 years ago

Hi HN! Tarek and Luana here, co-founders of Kalshi (https://kalshi.com/hn), a financial exchange that allows you to trade on the outcome of events.

Everyone faces different risks: inflation, extreme weather, mortgage rates, Supreme Court decisions, student debt, and more. Our mission is to allow people and businesses to mitigate risks that relate to them.

We got into finance early during our time at MIT. Tarek worked at Goldman and Citadel, Luana worked at Bridgewater and Citadel. We noticed something common across all these places: a lot of trading stemmed from an opinion on a future event. For example, a lot of activity at Goldman at the time was focused on providing institutions with exposure to, or a hedge against, Brexit. To do this, we’d sell them complicated financial bundles (a bunch of swaps, options, etc.) at a high price… but these bundles were proxies: basically, a bunch of risk curves fitted together to approximate the binary/event exposure the customers were looking for. What you couldn’t do was just trade directly on the event itself, even though that would have been simpler and cheaper and was what people actually wanted. The option just didn’t exist.

Once we identified the problem, we noticed it everywhere. The more we thought about it, the more the idea of an exchange for people to trade directly on events seemed obvious. That was the inspiration for Kalshi’s event contracts.

We give people the ability to trade based on their opinions about a specific yes-or-no question. For example, if you have student debt and are worried about relief not passing, you can purchase a contract and get a payout even if it doesn’t pass. If you’re worried about the economic fallout of another lockdown, you can place a trade to hedge against it. If you’ve developed a model on inflation, you can profit from that….and maybe even offset your rising costs.

Our markets are phrased as simple yes/no questions. For example, “Will the Fed raise interest rates next month?”. Users place orders on either the Yes or the No side and choose a price to purchase the contract between 1c and 99c. When there is a Yes order and a No order on both sides where the prices sum to $1, a trade is formed. When the event happens or doesn’t happen, based on criteria clearly defined in our contracts up front, we give back that $1 to whoever was right. The way our markets are structured means these trades are fully collateralized—there’s no margin or leverage on our platform.

The price that a given event contract trades at is actually the market’s assessment of the probability that the event will happen. If something happens that should increase the probability, people will start paying more for Yes contracts, raising the price. This market determination of the likelihood of an event has made Kalshi the most accurate place for predicting where inflation will be next month: https://kalshi.com/forecasts/inflation. People have been building forecasting dashboards on all sorts of things based on our data, including Bloomberg and news outlets.

Before Kalshi, markets that allowed you to trade on economically relevant events were illegal or unregulated. From day 1, we decided to take the harder path: build a fully regulated exchange with a deep commitment to compliance. We spent almost 3 years working with the CFTC to develop our exchange, contracts, market structure, surveillance, and compliance programs to provide a safe, secure and orderly market. This finally led to us getting federal approval to launch the first regulated exchange for this new asset class.

This path incurred the risk of launching later than anyone who opted to eschew regulatory approval. We chose the hard path because we want to develop this asset class in a way that is safe and responsible, which we see as the only way to build for the long term. We make money the way most exchanges do: we take a small fee on each transaction on our platform (none of the weird order flow or other stuff).

Our markets are liquid, have been around for over a year now, are fully regulated (as mentioned), and expanding. We’ve got over 70 markets live, many inspired by requests from our users. Here are some of the markets we’ve had so far: Will there be a Moon landing by 2025? [1] What will monthly inflation be? [2] Will there be a recession in 2023? [3] Will a new COVID variant of concern be identified? [4] We’d love to hear your suggestions for others!

You can access our platform through the web, iOS, Android, and our API - you can sign up at https://kalshi.com/hn and place your first trade in minutes. We recently launched our mobile app after months of hard work, which you can download at https://kalshi.app.link/hn.

We’d love to hear your feedback and ideas and look forward to a good discussion in the comments!

[1] https://kalshi.com/events/MOON-25/markets/MOON-25

[2] https://kalshi.com/events/CPI-22NOV/markets/CPI-22NOV-T0.2

[3] https://kalshi.com/events/RECSSNBER-23/markets/RECSSNBER-23

[4] https://kalshi.com/events/COVVC-23MAR1/markets/COVVC-23MAR1

165 comments

order
[+] barnbuilder|3 years ago|reply
> Before Kalshi, markets that allowed you to trade on economically relevant events were illegal or unregulated.

Totally untrue. PredictIt was legal and regulated and well-loved for many years, operating with the permission of the CFTC under a no-action letter. Then Kalshi hired former CFTC commissioner Brian Quintenz and soon, PredictIt was suddenly deemed by the CFTC to have committed still-unenumerated violations of the no-action letter.

This is a rotten way to do business and shame on YC for being involved in it.

https://karlstack.substack.com/p/a-textbook-case-of-regulato...

[+] NoboruWataya|3 years ago|reply
Without more detail this just sounds like a conspiracy theory. Hiring a former regulator is way too weak a link to conclude that Kalshi are pulling the strings at the current regulator.

If PI were operating on the basis of a no action letter they were unregulated pretty much by definition. A no action letter is basically a regulator saying that it won't take action against a market participant for doing things that would otherwise merit regulatory action.

(I'm not affiliated with any of these parties, just going by what I read in the comments and the various publications from CFTC.)

[+] lacker|3 years ago|reply
I think it's unfair to jump to the conclusion that Kalshi is to blame for regulators banning PredictIt. From the link you posted, PredictIt promised the regulators they would:

* be small-scale and not-for-profit

* be operated for academic and research purposes only

It doesn't really say what "small-scale" means, but obviously, if PredictIt keeps being successful and growing, eventually they will no longer be small scale. PredictIt was always in a situation where they had to make a different deal with regulators, eventually, as long as they continued to grow.

If you want to blame the CFTC for shutting down PredictIt, Intrade, all of those other prediction markets, then yeah, I agree! I wish they had just been much more permissive long ago. We should blame the CFTC for being too strict. But it doesn't seem fair to blame Kalshi just because they might be the ones to finally convince the regulators to allow one of these.

I hope Kalshi is the group to figure this out, make prediction markets popular, and that prediction markets can finally get the attention from wider society that they deserve.

[+] weixiyen|3 years ago|reply
I think they did the same to Polymarket in the US.
[+] ricardobayes|3 years ago|reply
Not only that, but at least in the UK, bookmakers take bets for newsworthy events. (Like elections)
[+] orangepurple|3 years ago|reply
Buying out the regulators and making competition illegal is the moat YC needed to invest
[+] froogle|3 years ago|reply
Prediction markets are a fantastic concept with a ton of value I think for everyone. So I wish companies in the field success and I hope they thrive despite regulators doing their best to destroy them, like PredictIt.

I think it's a shame Kalshi has managed to get their hooks into the CFTC and, rather than lobby to open the field to all prediction markets, instead lobbied for narrow permissions to operate only their stuff (in a limited, less useful way) while killing their competitors.

It's a terrible way to operate a business and it's a black stain on YC for funding a company using these kinds of underhanded methods.

I can only hope the regulatory environment improves and we get some improvements at the CFTC, but I think anyone familiar with US government institutions would bet against it. Perhaps someone could open a question about it on a prediction market.

[+] brap|3 years ago|reply
So it's like placing bets?

This is branded as if it's some new type of stock exchange when in practice it's just another betting platform, no? Other than fancy UI, how is this any different in practice than oddschecker.com or betway.com (I'm not familiar with those sites, just a quick search)?

>inb4 all stock exchanges are betting platforms

[+] tmansour|3 years ago|reply
There's a fundamental difference between gambling and financial trading.

In gaming, you are trading on risks that are artificial, eg. betting on a dice roll or on a roulette spin. Those risks do not need to exist, and they risk solely for the purpose of betting.

In the derivatives markets, the risks you're trading on are not artificial, they're already existant. The purpose of markets is to transfer those risks from people that bear them and need to offload them (hedgers) to people that have appetite for them (speculators).

This debate has been at the core of these markets since the dawn of derivatives markets. See this fascinating Court Case on grain futures: https://en.wikipedia.org/wiki/Chicago_Board_of_Trade_v._Chri....

At the time, there was a lot of debate on whether grain futures were gambling. The final decision by justing Wendell was not because (paraphrasing) "sure a lot of people will speculate, but saying that these markets exist purely for speculation is off - there's a subset of participants that need to hedge risk, and that makes these markets crucial" (note: intent to deliver was the early form of hedging).

The original response:

"[T]he plaintiffs chamber of commerce is, in the first place, a great market, where … is transacted a large part of the grain and provision business of the world. Of course, in a modern market, contracts are not confined to sales for immediate delivery. People will endeavor to forecast the future, and to make agreements according to their prophecy. Speculation of this kind by competent men is the self-adjustment of society to the probable .... It is true that the success of the strong induces imitation by the weak, and that incompetent persons bring themselves to ruin by undertaking to speculate in their turn. But legislatures and courts generally have recognized that the natural evolutions of a complex society are to be touched only with a very cautious hand. .... It seems to us an extraordinary and unlikely proposition that the dealings which give its character to the great market for future sales in this country are to be regarded as mere wagers or as ‘pretended’ buying or selling, without any intention of receiving and paying for the property bought, or of delivering the property sold, within the meaning of the Illinois act"

[+] MrMan|3 years ago|reply
its binary options, which have long and spotty history. The payout does not cover owernship of an asset and typically the payouts are adjusted to be overall quite disadvantageous for retail bettors. I would stay away, it doesn't matter how they try to rebrand it. do your own research on binary options as they say.
[+] kolbe|3 years ago|reply
An important distinction is that if you are an asset manager (i.e. gambler with other people's money), you aren't allowed on traditional betting platforms--only SEC and CFTC approved ones. Now you can bet on political outcomes with other people's money.
[+] gus_massa|3 years ago|reply
Who decides the outcome of each event? The Kalshi team?

For example en the Moon landing example, I guess NASA will make press release, but it looks impossible to automate reading it and deciding. (What if the starship colides with the Moon? What if they can't return? What if it explodes 5 seconds after landing? What if it's a joint NASA+ESA project?)

[+] adamsmith143|3 years ago|reply
Why are we acting like this isn't just a prediction market? Also as others have said PredictIt did it first and was fine until you hired a former regulator and got them shut down. Questionable business practices. How long will you survive until the next upstart throws enough money at someone higher up the regulatory chain and you yourselves get shut down??
[+] tmansour|3 years ago|reply
It's a prediction market in some ways... though prediction markets have been historically associated with unregulated venues etc.

We're fully regulated by the federal government as a derivatives exchange, and that's a big difference in an of itself (it took us years to figure out the right model to offer derivatives dynamically, with events as underlying). Regulation allows us to plug into the financial ecosystem, and offer the asset class to hedge funds, market makers, brokers, etc.

For all intent and purposes, we're a financial exchange that offers derivatives on a broad range of things that have been offered before.

[+] likecarter|3 years ago|reply
I'm a big user of https://predictit.org/. But they are getting shutdown soon, so this is great.

One thing I'd suggest: add pictures to the events. Makes it much easier for me to navigate and identify markets. I.e. a Biden picture next to a Biden event.

[+] melony|3 years ago|reply
They are getting shutdown specifically because of Kalshi, see the links in my other comment for some context
[+] tmansour|3 years ago|reply
We're evaluating the idea of adding pictures (they were there in an earlier version). Totally agreed it makes the site looks livelier.
[+] shmatt|3 years ago|reply
This is oversimplifying complex investments to a point where no one is investing in anything anymore, just a lot of hand waiving a money exchanging hands

Bureau of Labor Statistics could announce a new equation for the CPI next month. Which means the inflation will be calculated to be much lower than everyone expected.

If you're betting on Bureau of Labor Statistics press releases, you just lost your bet just because a human decided to word things differently.

If you're investing in a complicated financial bundle, like actual contracts to buy sell oil, wheat, stocks. Then you could still be winning. Because a single politician can change your win to a loss when you're betting on words (like Inflation as calculated by a person in the US government), but a single human can't lose you money when you're investing in actual equities

This is more like a roulette table than an actual investment

[+] tmansour|3 years ago|reply
There's a few points here - I'll try to address one by one:

1) Hand-wavy exchange of money. Most of the derivatives market, including some of the most traditional instruments like energy Futures, have massive amount of cash-settled activity, rather than physically-settled -- ie. nothing physical is actually exchange hands, and traders are purely exchange financial risk.

That doesn't make the transaction any less important and valuable: at the end of the day, participants are hedge financial exposure and cash-settlement is a great and more efficient way to get that hedge in.

2) Single-point of failure OR arbitrary change to the underlying. There's an extreme amount of scrutiny and safeguards around how CPI is calculated and how it is changed. CPI impacts trillions that are traded in traditional assets like interest rate swaps, inflation swaps, mortgages, etc. Also, CPI is a large factor in the Fed's decision to raise interest rates at every meeting. It cannot be changed by a single person, on a whim. And this tends to be true for all the data sources underlying our markets.

Arguably, a stock has much more key man risk (or "arbitrary whims risk") than something like CPI: eg. Elon ripping a bong and tweeting something's impact on Tesla stock.

3) More like roulette than actual investment. The lack of physical underlying doesn't make this any less of a financial instruments. Most liquid markets today do not actually exchange the underlying, eg. interest rate swaps, index futures, etc.

What differentiates a financial product from gambling is the presence of an economic purpose. A roulette spin does not need to happen - it happens solely to create an artificial risk for people to bet on. In the case of event contracts, things like an election or a CPI print already expose the market to risk... that risk already exists and our markets allow the transfer of said risk from people that have and can't bear it to people that have the appetite to bear it (that's actually the whole point of the commodity futures and derivatives market).

[+] quickthrower2|3 years ago|reply
> Everyone faces different risks: inflation, extreme weather, mortgage rates

Even as a relatively sophisticated investor (compared to the median) I wouldn't really know how to hedge correctly on these markets.

For example if inflation is high, how many units do I buy. Am I fully hedged, or can I lose the bet AND lose in real life?

I think users need to understand these things to use it. Some of that is education, and some will be tools.

For example, enter your salary, expenses, budget etc, and it recommends a bet, and then shows you the outcomes if you win or lose.

It should be clear that for example YOUR cost of living might go up more than inflation because you buy different things from the inflation basket.

This is a bit like insurance, in the sense you may pay for health insurance, or travel insurance then find your thing isn't covered.

I would also be interested in the tax implications. For example you do a bet to hedge your foreign holdings of say GBP. GBP goes down so you win from the bet and lose in real life. But you still pay tax on the bet (or do you ... ?).

I think this is a cool idea.

I think the more useful idea for the everyday person is something akin to a "1kg of tomatos a week prepaid subscription for 5 years" aggregated over their typical shopping.

That all said trying to tame the future is a hard beast. And expensive to insure yourself against all the things. Especially likely things, like shit getting more expensive!

[+] einpoklum|3 years ago|reply
There used to be betting on horse races, now these guys (well, not just them, but still) let you bet on the results of _human_ races. Will SCOTUS uphold civil right R ? Come make money off of it! Or - hedge your bets, and if the pseudo-democracy gets further downgraded - at least you'll be a little richer, at the expense of the poor saps who believed in "Golden Miller" or "Hoofs of Thunder". Oh, sorry, I meant to say "Elena Kagan" or "Brett Kavanaugh".

Just wonderful!

[+] makestuff|3 years ago|reply
So lets say I think inflation is going to continue to go down and return to 2% by 2023. At the same time my shares of SPY and QQQ are continuing to go down due to increasing rates.

Is the point of this platform to serve as a hedge against other asset classes or is this supposed to be thought of as a completely separate asset class and not as a hedge against other investments?

I see the gambling aspect of it of just betting on outcomes, and that is interesting to me; however, I am curious how your team thinks about it.

[+] tmansour|3 years ago|reply
It is a separate asset class yes. But it ties to other markets in a number of ways.

In your example, there's two things you could do depending on your usecase: 1) You think inflation will go up and capitalize on it. Today, you might think that a good way to do that is to short SPY. That's good, not great - because it's a proxy: inflation could still go up, and you SPY could go up as well (correlation is not 1:1 for a number of reasons).

The best way to express that view is by buying inflation event contracts: more direct, no basis risk, cleaner.

This use-case was super common when I was at Goldman and Citadel, which is where we got the idea.

2) You hold SPY but worry about the exposure of your holdings to inflation: you can use event contracts to hedge that exposure very precisely... think of it as a precise, meticulous surgery on your portfolio to eliminate (or even take) risks that are very difficult to eliminate with traditional instruments.

[+] Zufriedenheit|3 years ago|reply
How do you prevent insider trading? Does your regulation account for that? For example how would you prevent an high ranking NASA employee who knows and/or influences the decision of a moon landing from misusing the platform?
[+] tmansour|3 years ago|reply
Great question. A few things here.

1. we spent years working with the regulators on defining and building our surveillance systems. They basically ingest data from the exchange and run stats/some ML to flag suspicious trading patterns to an investigation team in our compliance department (similar to when NYSE flags a Goldman trader for insider trading) -- our systems have gotten really sophisticated and you'd be surprised by the amount of commonality there is in cases of fraud/insider trading/manipulation/collusion and so on...

2. we tie people's trading activity to KYC we run at signup. We also pass people through Politically Exposed Persons (PEP) lists, that flag anyone that works in gov and their relatives etc.

3. when we investigate cases of inappropriate behaviors, the consequences can range from fines to criminal prosecution by the CFTC (similar to stock trading)

4. obv all the above are not a single hammer solution, they're heuristics, but people generally don't commit a federal crime to trade with $100, they tend to trade with much more meaningful sums, which fortunately and intuitively is much easier for our oversight programs to flag.

Overall, this question presents a number of fascinating challenges/questions, but it's not a more difficult problem than flagging insider trading/market manipulation in traditional markets like stocks and commodities.

[+] thwayunion|3 years ago|reply
The fees on these contracts, and the selection of the contracts, is such that you're essentially playing the "picking up pennies in front of a steamroller" game. That's a bit of a silly game to play when the risk free rate of return is 4%-5%.

Eg, to meaningfully hedge against tail risk of hurricanes I'd need to put in so much money that I might as well just buy some bonds with the principal and self-insure.

[+] Jerrrry|3 years ago|reply
This is awesome; prediction markets have made massive strides recently, with applications and implementations being useful from crypto to sports to politics.

I'm surprised if there wasn't already a pool of smart contracts out there basically already emulating the space.

The obvious first principled questions come to mind: definition ambiguity in the event and thus result, the Oracle problem confounds this by essentially either giving leeway to the market deciders or by using a concrete agreed upon source of truth, such as data published to .Gov domains and other government/market API's.

The need for human capital to moderate/adjudicate claims is apparent, but would vary per domain. No need for a human to decide on public CPI data (assuming no wrongdoing or mispublishing on the .gov part), and this could be further minimized by making clearer positions/events that eventually are glued to a dedicated Oracle API.

Definitely an area that could be implemented quickly but haphazardly in an unregulated/cryptobro fashion via tokens and smart contracts, but cool to see its been developed above the table.

Cool economic calendar too, I have been looking for exactly this. https://kalshi.com/economic-calendar

[+] matkoniecz|3 years ago|reply
> prediction markets have made massive strides recently

Note that Kalshi lobbied to shut down its competition (PredictIt), so overall benefits are not clear.

[+] tmansour|3 years ago|reply
Glad you find the economic calendar useful. We're currently thinking of ways to improve/expand it...any events you'd like to see on there?

There are definitely areas where automating market resolutions/creating smart contracts can be useful....the most important thing is having a very well-defined contract upfront, so that outcomes are clear, the validators are authoritative, and unexpected edge cases don't come up. This is something we spend a lot of time thinking about when listing markets.

[+] Kkoala|3 years ago|reply
Is this U.S. only?

Edit: Found the answer, yes "Only US residents are currently accepted."

[+] conformist|3 years ago|reply
In the UK, betting websites such as e.g. https://smarkets.com/ have often got reasonably liquid & transparent markets for political outcomes and similar.
[+] tmansour|3 years ago|reply
For now we're focusing on the US. We're expanding to other jurisdiction soon... potentially in 2023.
[+] mrcode007|3 years ago|reply
Interactive Brokers startem Playing in this space too.

https://eventtrader.interactivebrokers.com/en/home.php

[+] tmansour|3 years ago|reply
Yepp! and other big players like CME.

I'm super excited about that: we finally opened the space in a way that is meaningful enough for the big players to start taking note and join.

I think the events trading ecosystem is still very much in its infancy and there will be a lot of movement in the space in the next few years.

[+] JonathanBeuys|3 years ago|reply
Wouldn't such an exchange be a good use case for a smart contract?

It would make it very transparent, if the exchange is honest. As a history of all bids, payouts and judgments would be recorded on a blockchain.

It probably also would do away with the KYC, so everybody could participate.

And nobody would have to give away their private data.

Thinking about it ... if the smart contract would let users post new bets as tokens and appoint judges, the whole thing would be eternal. Individual users and judges might come and go. But the platform would live on forever and the history of bets would be recorded forever.

[+] llamaimperative|3 years ago|reply
Such a thing exists (Polymarket) and the whole setup has probably precluded many, many, many people from using it including myself. I got halfway through setup before giving up.

By contrast, I signed up for Kalshi and bought 3 contracts in the last 30 minutes.

Additionally, smart contracts don't actually solve the primary source of (unaccepted) risk: the oracle.

[+] Jerrrry|3 years ago|reply
It actually is ideal, given trusted API/Oracles, a timeout period to ensure mis-published data is corrected promptly, and a few other non-obvious gotchas.

You could even have trusted middle-men that collect a Fee iff ambiguity is discovered and an appeal is wagered against the escrow.

I'm sure it exists and got rugpulled already.

[+] brap|3 years ago|reply
This is a nice idea in theory, but in practice you have to really trust the judges. Suppose that 99.9% of people thought that X is going to happen, but it didn't. If the judges are a representative sample, then 99.9% of them were wrong and are about to lose money. Unless they cheat.
[+] Proven|3 years ago|reply
> Wouldn't such an exchange be a good use case for a smart contract?

There were several such "decentralized" projects (Augur, etc.), but I don't know of anyone who uses them. I kind of stopped following the "permissionless" space after several projects turned out to be too scammy for my liking.

> It probably also would do away with the KYC, so everybody could participate. Nobody would have to give away their private data.

That's exactly why they're not allowed. If you can't easily get fiat in and out of such contracts, they can hardly matter.

Kalshi: not a novel idea, but it's good to see another implementation.

Several solid blockchain projects (also permissioned/KYC, but based on blockchain, with distributed oracles) are launching similar markets in 2023. I think they will have an advantage because all participating financial institutions will be able to create own markets without reinventing the wheel or building their own in terms of underlying infrastructure (APIs, smart contracts, etc.). Some already have simple apps (decentralized price feeds, etc.) in beta now - they just need to add the ability to bet on outcomes. I don't want to "advertise" their names here but you can look them up on the Internet.

[+] nickphx|3 years ago|reply

[deleted]

[+] HumanReadable|3 years ago|reply
Huge development for the legitimacy of prediction markets. As a regular user of manifold, I'm really looking forward to the day this becomes available in Europe.

Prediction markets have incredible potential and I really hope that we one day will look back on this launch as we look back on the launch of the New York stock exchange.

That said the whole predictit thing strikes me as really shady. I hope it was a necessary evil to gain the authorization of this market and not just a move to secure a monopoly position.

[+] alexb_|3 years ago|reply
Will you ever allow for the results of sports to be traded? Why stop at large political events?