Kalshi's Real Threat Is Index Contracts, Not the Single Stocks in the Lawsuit

Wall Street firms have taken Kalshi to court over its single-stock contracts with no expiration date. However, Rajiv Sethi, an economics professor at Barnard College of Columbia University, believes the products that deserve the closest attention are those based on stock market indexes. Over time, these contracts could draw investors' savings away from traditional brokerage firms.

The Capital Markets Alliance Association, whose members include Cboe Global Markets and Citadel Securities, is challenging the Commodity Futures Trading Commission's approval of single-stock contracts offered by Kalshi, Coinbase Derivatives and Bitnomial. According to the association, these products are not futures and should be subject to the rules for securities-based swaps.

On November 3, U.S. District Judge Valerie Caproni denied the association's request for a preliminary injunction. She ruled that the association had not shown harm severe enough to require urgent intervention. Even so, she said the association was likely to prevail on the merits of the case. In its November 10 filing, the association claimed that Kalshi listed more than 50 single-stock contracts within two days and that about $375 million in notional trading volume was reported over the previous 24 hours.

According to Sethi, the lawsuit shows that institutions are worried about losing retail investor flows. In his view, index contracts could have larger consequences for retirement savings. The lawsuit does not address this issue. Sethi says Kalshi, and perhaps Polymarket US, could compete with Fidelity and Vanguard. Index contracts allow investors to take positions that are far larger than their starting capital.