Kalshi has asked the CFTC to approve a margin framework that would allow eligible institutional participants to post less than the full collateral value of certain event-contract positions. Initially, margin trading will be available only to select approved institutions and not available on sports markets. With the platform already enticing users with “free” money offers, critics argue that allowing users to trade with borrowed money is a recipe for disaster.
Currently, when users or institutions trade on Kalshi, they must post the full potential value of the trade. Margin trading allows accounts to deposit part of the value, with Kalshi essentially taking the rest on credit.
The proposed rules filed with the CFTC on Tuesday state that Kalshi may determine which contracts are eligible for margin trading. It further clarifies that “event contracts whose underlying event involves a sporting contest will not be eligible for margined treatment.”
It also says that the ability to use borrowed funds to put up liquidity in markets will be side-specific. This means that an institution could use margin trading on one side, while a casual user takes the other side of the trade, putting up the full value as normal.
Primarily, the markets where it would be available would be long-term, saving institutions from tying up capital. As the settlement date approaches, traders must increase the amount of money they put up in the market, eventually reaching 100%
Important Step For Better Trading, Says Kalshi CEO
“Capital efficiency has been the biggest bottleneck for institutions, and margin is the single most requested feature,” said Kalshi CEO Tarek Mansour in a post on X.
“Fully collateralizing long-dated contracts ties up substantial capital for months or years, making participation impractical for many institutions. It is very difficult for a large institutional market to develop without margin.”
He further added that, “Greater capital efficiency enables more institutional participation, bringing deeper liquidity and better pricing. That makes our markets more attractive to more traders, whose participation further strengthens liquidity and improves the experience for everyone.”
Margin Trading Already Available On Perps
Kalshi already allows margin trading on perpetual futures (perps). Eligible traders can already use leverage to trade cryptocurrencies, requiring only a fraction of the cash to open long or short positions.
The company also recently filed with regulators to expand these perps into ETFs and single stocks. This has attracted some criticism.
“You’re going to have the ability to place these bets around the clock. And perpetual futures usually have much more leverage than you have with respect to single stock ETFs,” Benjamin Schiffrin, director of securities policy at Better Markets, told the Wall Street Journal.
Expanding Margin Trading Is A Recipe For Disaster, Says Law Professor
Law professor Melinda Roth just taught her corporate finance students about margin trading and told Gaming America that she is wary of its expansion.
Largely, Roth’s concern is that it will eventually become available to individual users on a wide range of markets, including sports.
“My earlier work on the consequential detrimental impact on sports betting showed that the most financially constrained are the most negatively impacted financially from legalized sports betting, and allowing that population to chase losses and buy contracts on credit seems a recipe for disaster,” Roth said.
Accepting bets on credit is often the difference between a regulated sportsbook and an illegal bookie. It can lead to extreme losses, such as in the example of Ippei Mizuhara, Shohei Ohtani’s interpreter. Mizuhara gambled millions of dollars on credit from bookie Matthew Bowyer and then stole funds from Ohtani to pay his debts. He received a 5-year prison sentence after pleading guilty.
“One guardrail in place for sports betting and prediction markets is that a retail investor has to have the cash in their account,” Roth added. “With margin trading possibilities, losses could be significantly magnified, and ‘casual users’ have neither the discipline of a sophisticated institutional investor, nor the capital to fall back on should their losses be magnified through margin trading.”
While Kalshi says it would exclude sports from margin trading, it also said it would not offer sports markets at all when arguing for its election markets to be made available in 2024. Less than three months later, Kalshi began listing sports-related event contracts.
To prevent the slide into allowing users to trade on credit, Roth recommends a complete ban on margin trading – even for institutions in a limited number of markets.
“I would suggest a categorical prohibition on margin trading would be preferable from both an enforcement and policy perspective,” Roth told the CFTC when it opened up for comments on new rules for prediction markets.
The CFTC has not yet approved Kalshi’s filing. Roth says the agency should at least draw a very bright line between allowing margin trading for financial institutions and normal users.
Prediction Market ‘Free’ Money Ads Also Face Criticism
In addition to the controversy over allowing trading on borrowed funds, prediction markets are under scrutiny for advertising that claims users can get “free” money when opening a new account.
Sportsbooks are largely prohibited from using terms such as “free bet” or “risk-free” if a user actually has to place a qualifying wager to obtain a bonus. Companies like FanDuel and DraftKings have pivoted to terms such as “no sweat first bet,” “first bet insurance,” or “bonus bet.”
Kalshi and Polymarket, however, have been using the term “free” in their sign-up offers, as highlighted by Dustin Gouker this week.
Both companies require users to deposit money and place a qualifying wager to obtain the “free” money.
“Some states would clearly take issue with how Kalshi and Polymarket are using ‘free’ in their advertising,” noted Gouker. “I would argue the same standard from sports betting should apply to prediction markets.”
