Earlier this week, the financial services company Robinhood, which caters to retail investors, rolled out its derivative market for trading on the outcome of the upcoming United States presidential election. These trades are an example of “event derivative trading,” which allows persons to buy and sell contracts speculating on the outcomes of specific events like elections.
Understanding Event Derivative Trading
Event derivative trading is unlike sports gambling in that while sports bettors are wagering on the outcome of an event, sports gambling is an all-or-nothing endeavor with fixed wins and losses supported by a “house” or bookmaker. Further, unlike sports gambling, derivatives can be bought or sold and the underlying value of the asset may change over time, which may allow a trader to minimize downside or take on additional risk before the event concludes. Essentially, Robinhood is offering traders an opportunity to place money on the outcome of the presidential election, with the ability to close the traders’ positions before the outcome of the presidential election is finalized.
CFTC’s Challenge to Derivative Trading
Robinhood’s announcement comes weeks after the United States Court of Appeals for the District of Columbia denied the Commodity Futures Trading Commission’s (CFTC) request to stay the trial court’s order allowing KalshiEX LLC, a New York-based derivatives trading platform, to list derivative contracts that would permit Americans to bet on United States election outcomes.
Court Ruling on CFTC Authority
Previously, the federal trial court determined that the CTFC, which regulates derivative markets, did not have authority “to conduct the public interest review.” The CTFC filed a motion for a stay pending appeal, which was denied, and the D.C. Circuit upheld the lower court’s determination on the basis that the CFTC did not show how the public interest or the agency would be harmed by KalshiEX’s derivative events contracts.
“Ensuring the integrity of elections and avoiding improper interference and misinformation are undoubtedly paramount public interests, and a substantiated risk of distorting the electoral process would amount to irreparable harm. The problem is that the [CFTC] has given this court no concrete basis to conclude that event contracts would likely be a vehicle for such harms,” said Circuit Judge Patricia A. Millet writing for the D.C. Circuit.
Past Manipulation Concerns
The CFTC had cited one prior instance where a trader placed large bids on Mitt Romney winning the 2012 presidential election to potentially “influence fundraising, campaign morale, voter preference, and turnout,” “[b]ut the trader fell short because the attempted manipulation was easily detected by market investors.” At bottom, the D.C. Circuit upheld the lower court’s ruling because the CFTC’s “generalized worries…without more, do not amount to irreparable harm.”
Implications for the Future of Derivative Trading
Although the CFTC immediately appealed and requested an emergency stay on derivative trading, this ruling paved the way for Robinhood to unveil its market for presidential election trading. Since the October 2, 2024 ruling by the D.C. Circuit, KalshiEX has seen an influx of more than $100 Million placed on the elections. Other notable people have claimed that KalshiEX is where they look instead of traditional polls, including comedian and podcast host Theo Vonn, reasoning that “it’s actually people putting their money down.”
Over the months ahead, however, the CFTC and KalshiEX will continue to brief issues before the D.C. Circuit, with oral arguments requested for December 2, 2024. While this may lead to uncertainty surrounding the legality of the election markets, the derivative trading platforms have sought to clarify how and when the event is decided, with some looking to certification and others to inauguration. Perhaps the only certain thing here is the uncertainty.
