$5 Billion Flurry of Nearly Identical Kalshi Trades Draws Scrutiny — WSJ

By Neil Mehta, Caitlin Ostroff and Katherine LongTraders on the prediction market Kalshi have made almost one million trades in a single market since August that were in nearly identical amounts, unusual activity that has caught the eyes of federal regulators and traders.A Wall Street Journal analysis of public trading data found that in recent weeks, more than one-third of trades on a market speculating on the price of the cryptocurrency ether consisted of rapid trades clustered around the same order size-$5,500. Kalshi's public data doesn't disclose the identity of traders.Artificial trading activity that has no economic value, or so-called "wash trading," can violate commodities and securities trading laws. In a blog post published Tuesday, Kalshi said that wash trading is "explicitly banned in our rulebook," that it has seen "no evidence" of wash trading, that the trades were real and that the order sizes were a function of its incentives to ensure seamless transactions.The Commodity Futures Trading Commission, the federal regulator that oversees Kalshi, is examining the trades, according to a person familiar with the matter. The agency typically reviews data on trading activity before determining whether to open an enforcement investigation. A spokeswoman for the CFTC said the commission "can't comment on whether an investigation is happening or not."The trades took place in one of Kalshi's markets for perpetual futures, also called perps, which allow users to speculate on the price of an asset without purchasing it.To encourage some large traders to offer liquidity as market-makers, Kalshi has waived trading fees and provided monthly cash stipends. Some traders are offered an opportunity to purchase Kalshi equity if they hit trading volume targets, according to people familiar with the arrangements.Kalshi co-founder Luana Lopes Lara said in an interview with the Journal that it's not uncommon for exchanges to try to draw large traders into new markets to incentivize broader adoption. "What's happening now is what happens with any market that's trying to kick-start a new product and activity," she said. "This is very normal."Kalshi provided data drawn from trading activity on Crypto.com's prediction market showing some orders for contracts betting on the prices of ether and bitcoin also fell into regularly-sized tranches. Those orders accounted for less than 15% of total volume across hundreds of markets."While we appreciate Kalshi's instinct to deflect attention, there is no evidence of wash trading on our platform," said Crypto.com spokesman Al D'Agostino.Kalshi, which raised $1 billion at a $22 billion valuation in March, introduced perps in May and currently has perps markets for cryptocurrencies and precious metals. It is seeking approval to create similar markets for stock prices, and has emphasized the importance of growing its perpetual futures markets to investors, according to people familiar with the discussions. The company views perps as a potential hedge against an adverse ruling in a suit challenging its ability to offer sportsbetting, which could appear before the Supreme Court next year.A week after Kalshi launched its cryptocurrency perps, Chief Executive Tarek Mansour appeared on CNBC to share that the markets had exceeded $1 billion in trading volume, including leverage. "The results have been incredible," he said. "The demand is there."In all, the trades at $5,500 accounted for over $5 billion in ether perp volume over the past month, the Journal's analysis showed.The trading pattern on Kalshi was surfaced on X by Benoit Dubosson, a former quantitative trader who focuses on crypto.In its blog post, the company said that "hundreds of distinct traders" participated in the transactions. Kalshi shareholder Jump Trading was one of the parties to the rapid transactions, according to a person familiar with the matter; another participant was crypto trading firm Wintermute. Wintermute didn't respond to a request for comment."Jump uses available self-match prevention tools, trades to make a profit and does not coordinate its trading with anyone," a Jump spokeswoman said.Financial experts and former federal regulators said the Journal's analysis merits further review."Normal market-making isn't really what's described in this type of conduct," said Braden Perry, a former CFTC enforcement attorney, who said he hasn't previously seen a trading pattern of this type."What's going on is definitely unusual," said Rajiv Sethi, a Barnard College economics professor who has studied prediction markets and wash trading. "There's no doubt that the data is extremely striking." Sethi said there could be benign explanations for the activity.In 2021, the cryptocurrency exchange Coinbase paid a $6.5 million fine to settle allegations brought by the CFTC including that one of its employees had engaged in wash trading in crypto markets to create a "misleading appearance of liquidity and trading interest."Write to Neil Mehta at [email protected], Caitlin Ostroff at [email protected] and Katherine Long at [email protected]