# Lecture 20: Building the First Federally (CFTC) Regulated Exchange Dedicated to Trading on Events Source: https://www.youtube.com/watch?v=8XrYjnDHmE4 Recap page: https://rapidrecap.app/video/8XrYjnDHmE4 Generated: 2025-12-03T16:12:40.805+00:00 --- ## 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. ## Detailed Analysis Tarek Mansour detailed the founding of Kalshi, inspired by the lack of suitable financial instruments to hedge against events like Brexit, leading to the vision of creating a market for any meaningful economic or social question. He and his co-founder, Luana Lopes Lara, faced immediate skepticism from lawyers, as regulators historically disallowed such markets; however, they persisted for nearly three years to achieve CFTC regulation for the exchange and clearinghouse. A major turning point involved suing the CFTC after they disallowed the listing of the election market, a painful but ultimately correct decision that resulted in a victory, opening up legal trading on US elections for the first time in a century, which expanded the universe of what constitutes a financial instrument. Following the election, volume retention has been strong, driven by interest in crypto, economics, and other political events, resulting in over $1 billion in volume recently. Mansour explained that Kalshi currently operates on a fully cash-collateralized model (100% upfront), but plans to introduce leverage by the end of next year, subject to strict regulatory requirements to prevent systemic risk like in 2008. He emphasized that Kalshi is structured as a retail-first market, contrasting with traditional institutional exchanges, noting that currently 30-40% of volume is institutional but they charge retail customers higher fees. The company is aggressively pursuing growth, reinvesting revenue, and plans to integrate trading access through major brokerages like Schwab and Fidelity. Mansour strongly advised students that perseverance and the capacity to fail and stand back up are the most crucial traits for entrepreneurs, noting that he chose this path based on regret minimization. ### Kalshi Founding and Regulation - Started by MIT graduates Tarek Mansour and Luana Lopes Lara after observing inadequate hedging tools for events like Brexit - Decided to build the first large-scale prediction market as a regulated financial exchange - Faced initial legal resistance but persevered for 2.5 to 3 years to secure CFTC regulation. ### Regulatory Battles and Outcomes - The CFTC under the prior administration blocked the listing of the election market, prompting Kalshi to sue the regulator, becoming one of the first regulated companies to sue its own regulator - Won the lawsuit, enabling legal trading on US elections for the first time in 100 years, expanding the definition of financial instruments. ### Market Performance and Growth - Volume is currently higher than pre-election levels, with over $1 billion traded in the last month alone - Volume split is 30-40% institutional and the rest retail, with a goal to reach 50/50. ### Distinction from Betting Markets - The structural difference lies in trading 'natural risks' (like Brexit) that exist versus 'artificial risks' created for entertainment - Kalshi operates as an exchange with an order book, unlike bookie-driven betting markets. ### Operational Model and Future Expansion - Currently fully cash collateralized (100% upfront) with plans to introduce leverage by the end of next year - Revenue comes from trading fees, market making, and future data monetization; currently prioritizing growth over immediate profitability. ### Career Advice and Culture - Mansour advocates for perseverance over perfect strategy, stressing the 'capacity to fall and stand back up' as key to entrepreneurial success - He advises students to take more risks, worry less about optimal career paths, and focus on practical application, referencing how concepts learned in Peter's class proved highly valuable in trading at Citadel.