A Sportsbook In Sheep's Clothing
Kalshi claims to be a peer-to-peer exchange, not a sportsbook, but critics argue its market makers, like Susquehanna, act as bookmakers taking on risk.
The Bulletin Board
THE LEDE: Is Kalshi a sportsbook, or something else entirely?
THE KALSHI SECTION: More prediction market updates.
NEWS: Oklahoma sports betting bills are alive, but face an uncertain future.
IGA NEWS: A potential California sports betting framework.
AROUND the WATERCOOLER: Prediction market takes from across X.
STRAY THOUGHTS: Oscar Wilde speaks truth to truth.
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The Lede: Is Kalshi a (Sometimes) Sportsbook?
One of the arguments Kalshi is leaning on as it fights back against allegations it is offering sports betting, is that it is not an against-the-house sportsbook; it’s a peer-to-peer exchange. However, some people are questioning the definition of peer-to-peer that the company is using.
Kalshi argues it’s merely a facilitator of trades, but as many have pointed out, someone has to take the other side of low liquidity or one-sided markets. That somebody (at least one of them) is Susquehanna (SIG).
As Kalshi CEO Tarek Mansour said on X in April 2024, when he announced SIG as “the 1st institutional market maker to commit to Kalshi”:
“Prediction markets have (finally) surmounted their most elusive challenge: liquidity… They now have a dedicated trading division to trade prediction markets on Kalshi… You can now trade significant volumes, 100,000 shares at a time (up from 1,000) in Kalshi’s major markets.”
As Steve Brubaker discovered in an interview (at the 27:37 mark) with Kalshi cofounder Luana Lopez Lara, “What markets SIG takes and doesn't take. Lara says they have their own arm of the company that takes markets that SIG does not take. That's the smoking gun. Can't be peer to peer when the House offers the market. (SIG contractually offering markets, also the House.)”
Alfonso Straffon, who has been involved in both industries, explained what is going on in an X post (STTP has edited Straffon’s post for length and clarity):
“The following points I would like to make are in regards to sports-related event contracts, and specifically to point out that market makers on Kalshi are in effect assuming the role of a bookmaker in many, if not most instances.”
“In the business of sports betting, the bookmaker (or operator) is no different than a market maker as defined in the world of financial markets… A bookmaker will put up markets on sports-related events and allow bettors to place wagers, they just so happen to provide it on their own platform.
“Sometimes action can be fairly balanced, but more times than not , bookmakers and market makers find themselves overly exposed to one side.”
Straffon goes on to give some examples of how these two market principles work at sportsbooks and Kalshi (once again edited for length and clarity):
Example 1 [the bookmaker]: Player A bets $140 to win $120 on Team X, while Player B bets $100 to win $120 on Team Y, allowing the bookmaker to lock in a $20 riskless profit as a market maker in a Riskless Principal Transaction.
Example 2 [the bookmaker]: Player A bets $140 to win $100 on Team X with no opposing bet on Team Y, leaving the bookmaker to assume a Principal Transaction with balance sheet risk, potentially losing $100 or winning $140.
Example 3 [Kalshi]: Player A risks $140 on Team X winning (233 Yes contracts at $0.60) to win $93, while Player B risks $100 against it (238 No contracts at $0.42) to win ~$138; a single market maker profits risk-free (Riskless Principal Transaction), or two market makers each take on risk (Principal Transaction).
Example 4 [Kalshi]: The same scenario as Example 3, but this time the market is illiquid, with only a single trader purchasing one side of the market, Player A purchasing 233 Yes contracts at $0.60, risking $140 to win $93. This is not a problem, because the market maker, in his duty of always standing ready to provide liquidity, engages in a Principal Transaction and assumes balance sheet risk, either losing $93 or winning $140 depending on the outcome.
Straffon concludes that “sports betting markets quoted by bookmakers are no different than sports-related event contracts quoted by market makers,” as the roles of the bookmaker or market maker are the same: “They both get paid by assuming principal risk, though sometimes they also get to enjoy riskless profits.”
The difference is, unlike other CFTC-regulated products, the product they are offering is a sports bet:
“Though Susquehanna (and others) may like to disguise themselves as a market maker under the purview of the CFTC, it is very clear they are engaging in the same kind of risk taking that traditional bookmakers and present day operators do.
“More importantly, these operators are subject to state laws and regulations that allow (or not) sports betting within their borders.
“While many of us can appreciate the innovation and spirit at Kalshi, undermining state laws that clearly have been set to regulate sports betting, is probably not the best way to go about establishing a Federal regulatory framework that seeks to institutionalize betting on sports across the country.”
Straffon also noted that Chat GPT agreed that Kalshi is a bookmaker.
Alex Kane, the founder and CEO of the betting exchange Sporttrade, said on X, “I think Alfonso Straffon’s analysis for the purpose of evaluating 'is this betting?' is spot on.”
Kane went on to make a distinction between an against-the-house sportsbook and an exchange (where the house sometimes has a vested interest in the outcome):
“The reason I make distinction between the two is because I believe there should be one made by state legislators as it pertains to the fees, req’s, and tax rates of a sportsbook vs a true mkt. Consumers deserve a prediction market experience in every state where sports betting is made legal.”
And In Other Kashi News
It appears I need a semi-permanent Kalshi section of the newsletter.
Here are some more updates since yesterday’s newsletter:
From Covers.com: “The gaming division of the Connecticut Department of Consumer Protection has opened an investigation into Kalshi, adding to the list of states that are taking a closer look at the federally regulated prediction market’s products.” That makes three states with C&D letters (NV, NJ, and OH) and two others with investigations (MA and CT).
From Dustin Gouker at the Closing Line: “TCL has seen the full letters Ohio's gaming regulator has sent to Kalshi, Robinhood, and Crypto.com. Here are the laws the state says they are breaking, and what could happen if they don’t comply.”
From Rep. Dina Titus: “I petitioned CFTC to stay, evaluate, and amend all sports and political event contracts while legal proceedings occur. Allowing the trading of these contracts violates states' rights to tax and regulate gaming.”
From Daniel Wallach: “TRO hearing in Kalshi v. New Jersey ‘sports prediction’ case adjourned after parties agree TRO is not necessary and will proceed directly to the preliminary injunction motion. The new briefing schedule is as follows: NJ opposition brief is due April 18; Kalshi reply brief is due April 23. Cease-and-desist deadline pushed to April 30. Here is the letter that the parties jointly filed with the federal court today.”
More from Daniel Wallach: “Kalshi’s federal lawsuit vs. Nevada gaming regulators finally gets a permanent judge (Chief Judge Gordon), who sets a hearing date on Kalshi’s TRO motion for April 8th at 10:30 am in Las Vegas Courtroom 6C and orders defendants to file a response by 12 noon on April 4.” Judge Jennifer Dorsey and Judge Gloria Navarro recused themselves from the case.
News: OK Sports Betting Bills Advance; Hurdles Remain
Several sports betting bills are weaving their way through the Oklahoma legislature, but the state’s gaming tribes and Gov. Kevin Stitt are not on the same page.
In a press release from the Oklahoma Indian Gaming Association, the group said that after 18 months of behind-the-scenes discussions, the OIGA has “released policy positions and recommendations around current and future proposed sports betting legislation in Oklahoma.”
The OIGA language has been added to SB 125 and HB 1047.
HB 1047, authored by Rep. Ken Luttrell, has passed the House. HB 1047 “outlines provisions for tribes interested in entering into gaming compact supplements to accept the state's offer for sports betting.” Another bill passed by the House, HB 1101, also authored by Luttrell, “establishes a voter referendum for the approval of sports wagering in the state.”
A separate effort that would bring the state’s only professional sports franchise, the Oklahoma City Thunder, into the fold has passed the Senate. The Senate passed Sen. Bill Coleman’s, SB 585, which makes licenses available to Oklahoma’s 38 recognized Oklahoma tribes (retail sports betting and online sports betting on tribal lands), as well as the Oklahoma City Thunder, with the franchise able to “sublicense the event wagering license to one tribal-approved operator for mobile and in-person event wagering on nontribal land.”
Stitt has promised to veto any bill that gives tribes exclusivity, saying, “Some of the bills that you're seeing come through, which I'm not supportive of, and I would absolutely veto any of the bills that hit my desk that are exclusively giving a monopoly to the tribes.”
Even the inclusion of the Oklahoma City Thunder hasn’t moved the governor, who recently said, "None of those bills that have moved off the Floors of the House or Senate have got my input on them. Matter of fact, they have excluded the governor of the state of Oklahoma from these discussions. This isn't complicated. You simply create the program that other states do, and you can roll that out. That was the plan that I put forward, and unfortunately, those aren't the two bills that are moving across the Senate. These are tribal-pushed bills that are only going to benefit the tribes, and not the citizens of Oklahoma."
The tribes will oppose any bill that doesn’t provide tribal exclusivity. As the OIGA said in a news release, for tribal support, a bill must do the following:
Do no harm to our current gaming compacts;
Utilize the statutory process for the State to offer additional forms of gaming to our gaming compacts (i.e., Gaming Supplement Process);
Recognize that any offer must make economic sense for tribes and the state for the potential Oklahoma sports betting market.
And In Other Tribal News: A California Compromise?
Interesting news is coming out of the Indian Gaming Association Tradeshow and Convention this week, which points to a potential breakthrough for California sports betting, or at least a solid step toward legalization.
Per Jill Dorson at Casino Reports:
“At the Indian Gaming Tradeshow & Convention in San Diego, representatives from DraftKings and FanDuel shared the idea of creating a single tribal entity in California, which has 109 tribes. That entity would then contract with national operators to offer online sports betting in the most populous state in the US.”
The presentation included a slide showing the four SBA members as the contracted operators, but the group later clarified that “The logos on the slide were simply a function of who the SBA represents. The slide was not meant to be an indication of the full market.”
Important point: This is not a deal or an agreement; these are discussions. Basically, don’t get too far out over your skies on what this means. As Victor Rocha said on X, “I spoke with several California tribal leaders tonight. It’s DOA.”
STTP has heard rumors about this type of framework for several months, with the 2028 ballot the target. With more than 100 tribes (some likely to be left out) and multiple commercial operators (some likely to be left out), this can go sideways fast.
Furthermore, a lot can happen between now and 2028; there are still-yet-to-be-fully determined DOI rules covering tribal online gambling (the Florida hub-and-spoke model), not to mention the current battle over prediction markets overhanging the entire process.
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Around the Watercooler
Social media conversations, rumors, and gossip.
More Kalshi/prediction market discourse.
Daniel Wallach dug through acting CFTC Chair Caroline Pham’s May 10, 2024 comments on predcition markets and found some interesting statements about sports contracts (Pham is considered very pro-prediction market, although incoming CFTC Chair Brian Quintez is even more of a supporter):
Pham’s statements include:
“The Federal government cannot preempt traditional State powers that are the exclusive domain of States to regulate, recognizing the right to self-determination by the people.”
“State regulation of gaming, ranging from betting to lotteries, is long-established in the U.S., and is clearly a power reserved to the States. No one understands their local cultures, economies, and values better than the States.”
“When it comes to event contracts related to gaming, I have been clear that the CFTC should exercise caution, primarily because I believe the Commission fundamentally misunderstands the law in this area and Congressional intent.”
“The CFTC has a role in regulating event contracts as a market regulator, but it is essential that the CFTC does not encroach upon the prerogatives of States.”
Stray Thoughts
"The truth is rarely pure and never simple." ~ Oscar Wilde