Lecture 20: Building the First Federally (CFTC) Regulated Exchange Dedicated to Trading on Events

Quick Overview

Tarek Mansour, founder of Kalshi, successfully built and launched the first federally (CFTC) regulated exchange dedicated to trading on events, overcoming significant regulatory hurdles and eventually winning a lawsuit against the CFTC to legally trade on US elections, leading to over a billion dollars in volume in the last month.

Key Points: Kalshi took two and a half to three years to get regulated by the CFTC, marking the launch of the first legal prediction market exchange in the US. The company sued the federal government over the denial to list the election market and won, marking the first time in 100 years one could legally trade on US elections. Kalshi achieved over a billion dollars in volume in the last month alone, with current volume being higher than the days leading up to the election. The volume breakdown is currently 30-40% institutional clients and the rest retail, with Mansour expecting it to move towards 50/50 over time. The fundamental difference between Kalshi and betting markets, from a regulatory perspective, is trading on 'natural risks' (like Brexit) versus 'artificial risks' created for entertainment (like a casino dice roll). Mansour credits perseverance and a degree of 'naivete' for pushing through the difficulty of starting the company, stating, 'We didn't give up. We just pushed harder than anyone else.' Kalshi's revenue model relies on trading fees, market making activities (competing with firms like SIG), and potentially selling its valuable data in the future, though the company is currently prioritizing growth over profitability.

Context: The transcript captures a guest lecture by Tarek Mansour, co-founder of Kalshi, delivered to Peter Kempthorne's class at MIT. Mansour, an alumnus who previously worked at major financial institutions like Goldman Sachs, Citadel, and Bridgewater, details the founding story of Kalshi, an ambitious venture aimed at creating a regulated financial exchange for trading on outcomes of future events. The discussion centers on the immense regulatory challenges faced, the eventual success in becoming CFTC-regulated, and the strategic decisions made in growing the platform.