Want to bet baseball owners and players celebrate the new year with a signed and sealed collective bargaining agreement? Kalshi, a trading market approved by regulators to offer futures on events, is selling “yes or no” contracts on whether MLB and the players will have a deal by Jan. 4. Based on nearly 22,000 contracts created, the market is predicting there won’t be.
People speculating on the outcome of events isn’t a new idea: Wagering on sporting contests is probably as old as competition itself. Kalshi contends its offering is different, part of its intention to develop useful financial hedging against unfavorable outcomes. The company won approval a year ago from the Commodity Futures Regulatory Commission (CFTC) to offer futures contracts on specific events. That’s a shift from traditional futures, which focus on supply and demand of commodities from oil to orange juice, allowing producers and consumers to fix price and supply well ahead of time.
“Whether or not the MLB season is going to be locked out is of meaningful, financial importance for the tens of thousands of people who work at the stadiums, all the bars and restaurants in the surrounding area,” William Arnesen, a member of the markets team at Kalshi, said on a phone call.
Kalshi is specifically selling futures on whether MLB and the MLBPA have ratified a collective bargaining agreement that runs through the 2022 season and disclose it on their respective websites by Jan. 4. Each contract pays out $1 to the correct answer and nothing for the wrong answer. Right now buying ‘No’—meaning baseball won’t have a deal in early January—costs 58 cents, implying the market assigns a 58% probably of no deal. The website also offers a contract on whether MLB will approve the Oakland Athletics’ move to a new city outside the Bay Area by March 2022 (72 cents buys you a no.) “We are focusing on contracts that actually do provide hedging. These are not gambling,” said Arnesen.
How much actual hedging is being done with the contracts is a matter of debate: To start with, the contract size seems more appealing to individual speculators, with the $0.01 to $0.99 contract pricing similar to the unregulated PredictIt website. By contrast, a stadium concessionaire wanting to hedge the price of bacon could buy one pork belly future with a contract value of $70,000, equal to roughly 720,000 slices of bacon. In both Kalshi’s MLB futures, a trader can’t hold a position of more than $25,000, roughly the revenue of the average sports bar for one week. What’s more, the contracts are marketed among more eye-catching wagers on events no one needs to hedge, like if Olivia Rodrigo’s “Sour” will be nominated for Grammy’s Album of the Year.
“There are definitely speculators and speculating behavior, but it’s about making the market dynamics work in order to serve the grander purpose of the hedging utility for the little guy,” said Samantha Braun, the vice president of business development for Kalshi, on a phone call.
In fairness to Kalshi, the exchange has to walk the line between drawing in investors with ‘fun’ bets, like in sports and music, which have been shown on other platforms to generate investor interest for other less exciting but useful hedges, Dartmouth College economics professor Eric Zitzewitz said during a phone call. “Kalshi’s platform has a decent potential to evolve in that direction, [but] you see a trade-off between the way to design a contract that will be the most fun to trade and the way to design a contract that will be the most useful for hedging,” he said.
Kalshi, founded in 2018 by veterans of Goldman Sachs and Citadel, has venture capital backing from billionaires Charles Schwab and Henry Kravis, as well as firms including Sequoia, Y Combinator and SV Angel. The company received approval in November 2020 to offer event futures from the CFTC. The New York City-based startup tells the regulator, which oversees futures and options trading, it wants to allow retail investors to hedge everyday risk.
Whether or not that comes to pass, at the least Kalshi’s event prediction could end up creating information of value as the platform becomes more robust. Prediction markets “actually work very well, on average,” said Zitzewitz. “The problem is regulation is very nervous about these things that are really popular [like sports]. I think that constrains growth a little bit.”
(The story has been updated to reflect that the company is headquartered in New York City.)