Election betting looks more like gambling than hedging

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The so-called “Trump Trade” is some basket of securities that benefits from intense protectionism and profligate government spending. But what if such an investment was available not as a collection of proxies but a position on the real thing?

A start-up called Kalshi thinks it may have the product — on its regulated exchange for trading the outcome of future events. For now, its proposed election offering is limited to the US Congress. The “Congressional Control Product” would allow buyers to pick on which party controls either the US House of Representatives or the US Senate. It is a binary bet that pays off $1 per contract for a successful selection (with nothing for getting the winning party wrong).

It is also illegal, according to the Commodity Futures Trading Commission. Kalshi had boasted about being the first CFTC regulated exchange dedicated to the trading of future events including inflation, weather and Supreme Court decisions. But, the agency has said, election bets are a bridge too far.

A federal judge disagreed and in September legalised the congressional control product. However, it remains in limbo with appeals in process. Kalshi insists that its innovation is a market enhancing tool used for hedging. The Feds worry, meanwhile, about the merging of Wall Street and Washington’s worst instincts.

The CFTC argued that a pay-off from a “contest of others” rather than, say, a hurricane landing, resembled “gaming”, which is either outlawed or governed by other bodies. Indeed, as the CFTC argued, there isn’t much obvious investing purpose in the congressional control product — for example, the legitimate hedging of other market risks directly tied to whichever party leads Congress. In fact, the agency is concerned about the chance of manipulation by malign actors who could perhaps rig a political event that could swing prices for their trading positions.

Kalshi argues the market itself would reward good information and punish bad. It insists it is democratising finance by allowing wagers on democracy where direct and explicit hedging of political risk was previously not available. Moreover, the signals emitted by its marketplace will complement or supplant polling, it claims. 

Election markets already do exist in offshore venues with varying degrees of US legality. There is a steady drumbeat of clamouring from those who want to be able to put money on any uncertain event and who dubiously claim that there is a social benefit in doing so.

For now, those wanting to profit off the status of the US Congress may have to continue with synthetic portfolio construction.

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