C.F.T.C. Weighs Proposal to Allow U.S. Betting on Control of Congress

Handicapping control of Congress is always a risky proposition, with multiple forces at work and much at stake in terms of policy and power. Now tens of millions of dollars could be riding on the outcome of House and Senate races as well.

The Commodity Futures Trading Commission is weighing a proposal from a New York-based exchange that would allow derivatives trading on the question of which party will control Congress, potentially turning Election Day into a political version of the Super Bowl.

Backers of the plan, which was proposed by the trading platform Kalshi, say it is simply another way for big firms to limit risk by hedging against possible adverse policy outcomes on issues such as taxes, energy and the environment that turn on which party holds sway in the House and Senate. They say it could also provide reliable data on the public view of elections that rivals or outperforms conventional polling.

But the prospect of big firms laying up to $100 million on the line worries lawmakers and Wall Street watchdogs, who say it could lead to widespread gambling on politics in the United States and pose a threat to election confidence at a time when many Americans already harbor suspicions about electoral outcomes.

“I just think this is hugely damaging to democracy, to have a monetary incentive,” said Senator Jeff Merkley, Democrat of Oregon and one of a bloc of senators in his party who oppose the plan.

The effort by Kalshi, which already hosts trading on the outcome of real-world events such as when the Hollywood writers strike might end and whether there will be a government shutdown, is the latest in a push to allow more speculation on political contests, on which traditional betting is generally prohibited.

The nonprofit firm PredictIt, which has allowed limited trading on political futures since 2014, won a reprieve last month from the U.S. Court of Appeals for the 5th Circuit that enabled it to temporarily continue to operate after an attempt by the C.F.T.C. to shut it down. The case will now make its way through federal court.

The operators of Kalshi, a relatively recent start-up with some big-name Wall Street backing, want to go beyond the limited approach of PredictIt to allow large-scale trading on which party controls each chamber of Congress. Individuals would be allowed to take a position of up to $250,000 and big firms up to $100 million.

The buyers of such “event contracts” who forecast correctly would be paid out depending on a market-established price, with Kalshi taking a fee for operating the exchange. The regulatory agency opened a review of the trading proposal in June and is expected to decide by Sept. 21.

Kalshi executives reject the claim that their plan represents a threat to elections and say that their platform would be heavily regulated and transparent. They point to existing heavy wagering on American elections in Britain and other countries without domestic scrutiny, and say the exchange would open up possibilities for smaller companies and individuals that don’t have easy access to those opportunities.

“People and businesses already take positions on elections on unregulated, overseas, or illegal markets in the billions,” said Eliezer Mishory, chief regulatory officer and counsel at Kalshi. “The C.F.T.C.’s choice isn’t whether this economic activity will happen or not happen, it’s whether this activity will happen in a regulated market with full government oversight or continue to happen without any government oversight.”

The proposal has drawn the support of high-volume traders, economists and researchers who see advantages to companies whose financial prospects can hinge on the decisions made by Congress, as well as the opportunity to gather predictive election data. Among them is Jason Furman, a former top economic official in the Obama administration and a Harvard economics professor who calls himself an “enthusiastic” backer of the proposal. He dismissed concerns of financial manipulation of U.S. elections, noting that big financial players already make huge campaign and market-based moves based on their assessments of where elections are heading.

“There are hundreds of billions of dollars already at stake in elections,” Mr. Furman said. “I think this is a rounding error compared to the set of financial incentives in elections today.”

But given the heavy influence of megadonors in political campaigns, opponents in the Senate argue that allowing such substantial investment in potential election outcomes could provide powerful motivation for those with resources and inside knowledge to try to script the result.

“Establishing a large-scale, for-profit political event betting market in the United States by approving Kalshi’ s requested contracts would profoundly undermine the sanctity and democratic value of elections,” Mr. Merkley wrote in a letter to the commission. He was joined by fellow Democratic Senators Chris Van Hollen of Maryland, Sheldon Whitehouse of Rhode Island, Dianne Feinstein of California and Elizabeth Warren and Edward J. Markey of Massachusetts. They added that “introducing financial incentives into the elections process fundamentally changes the motivations behind each vote, potentially replacing political convictions with financial calculations.”

The proposal has also encountered stiff opposition from Better Markets, an independent Wall Street and consumer watchdog that characterizes Kalshi’s proposal as a “back door” effort to instigate across-the-board wagering on U.S. elections when state and federal regulators have historically banned such gambling.

“If it were to be approved by the C.F.T.C. or the courts, you can bet there will be widespread gambling on everything from the presidency to the local dogcatcher,” said Dennis Kelleher, a former top Senate aide who heads Better Markets. “We are at a perilous point in politics where confidence and trust in elections is low and going lower. The last thing democracy can withstand now is additional activities that erode the confidence of Americans.”

Kalshi initially tried to win approval for its plan before the 2022 midterm elections but withdrew its proposal when it appeared in danger of being blocked. It resubmitted a revised plan in early June. The C.F.T.C. then began a 90-day review period over the objection of one commissioner, who argued Kalshi should be allowed to proceed. Should the agency rule against the trading plan, a lawsuit challenging that outcome is anticipated.

Under the proposal, members of Congress, candidates for federal and statewide office, top advisers and others with a direct role in campaigns would be prohibited from taking part.