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00:00I want to start with the CFTC and Justice Department accusing a U.S. soldier with using classified information to
00:05make more than $400,000 on polymarkets international exchange.
00:09How does Kalshi police that type of activity, so-called insider trading, on its platform?
00:15So Kalshi is a regulated prediction market. So we are registered with the CFTC.
00:20That's the first distinction between the international polymarkets.
00:24Very big distinction. So the CFTC has a number of regulations that apply to regulated prediction markets, including a requirement
00:30that we surveil all transaction activity on the platform.
00:33So we have surveillance systems that monitor all of our markets, and they have thresholds that are curated for insider
00:38trading, market manipulation, wash trading, similar types of activity that you see on other exchanges.
00:42So would it be fair to say that that trade would not have happened on Kalshi's platform?
00:46I don't think that's fair to say. That's never the standard that we apply to platforms.
00:50There's illicit activity that happens on all kinds of exchanges, on the New York Stock Exchange, on NASDAQ, and on
00:56prediction markets.
00:57It would be flagged, detected, investigated.
01:00And if we found evidence of actual illicit wrongdoing, we would refer it to the Justice Department of the CFTC.
01:05So can you share with us what it is that you do, what kind of surveillance Kalshi does?
01:10Yeah, absolutely. So we have an internal surveillance system that we've built that's curated for prediction markets specifically.
01:16But we also have partners that help us in the space. So we've partnered with Solidus Labs, which has a
01:22background in cross-product monitoring and surveillance in crypto.
01:26And they're developing prediction market-specific solutions. We've partnered with them to layer on top of our own internal surveillance
01:31systems.
01:32And we also partner with integrity monitoring services.
01:35So we use IC360, for example, for sports-specific monitoring, and we're expanding that partnership in other directions, too.
01:41Is there a specific red line that warrants action that prompts you to go all in?
01:44You know, I think this is where the leverage between tech surveillance and AI tools and human touch sort of
01:50comes in.
01:51We get a lot of flags, and we're able to use AI and other tools to prioritize certain alerts.
01:56But we still rely on an investigative team of human analysts that look at every case and question traders, collect
02:01documents,
02:02and make determinations based on what the evidence is in a particular case.
02:06How big is that team right now?
02:07It's growing. It's growing fast.
02:09You know, Kalshi has exploded in volume in the last year.
02:11So, you know, we're putting a lot of resources in our surveillance and detection, and our external vendors help us
02:16a lot in this space, too.
02:17We saw the news, Bobby, last week related to three enforcement investigations.
02:20They were all involved people betting on things they were personally involved in.
02:25Where do you draw the line when it comes to what's insider information?
02:28So, in other words, like, who can and who can't make a prediction in a certain market?
02:32So, there's a nice layer in the regulated exchange framework that the CFTC oversees.
02:37So, exchanges have their rules, and those rules can police certain activity that might be unique to the platform.
02:43So, on Kalshi, we have unique insider rules that prohibit people trading with material non-public information,
02:48but also people can influence outcomes of contracts.
02:51And then, of course, in terms of cases that we escalate, we hew closer to federal law, right?
02:56We're not going to flag for the CFTC something that might be against the Kalshi rules, but not against the
03:01actual federal regulations or federal law.
03:03So, we try to hew closely to the federal rules as they apply, but there are these unique products that
03:07we offer that Kalshi's exchange rules
03:09acts as, like, a sort of front layer of enforcement on the platform.
03:13So, I mean, you can make the argument that insider trading happens across all financial markets.
03:17We've certainly seen it in traditional markets, like the stock market, for instance, and we've seen it in sportsbooks as
03:22well.
03:23Prediction markets clearly aren't immune, but I'm curious as to whether they're more susceptible to it than other markets.
03:31You know, I don't think they are more susceptible.
03:33I think that it's true that the array of products is wider, but the depth of insider information is actually
03:39a bit tighter.
03:40I mean, an event contract is a product that's distilled to one very unique question.
03:45And so, the scope of information that's actually material to that question is narrower than all the information that might
03:51be material to a stock or a commodities future.
03:54You know, just to follow up on, Scarlett, you have this post out on LinkedIn today.
03:57It says that insider trading happens in all financial markets just because the use of information, these are your words,
04:03just because the use of information on prediction markets looks different doesn't necessarily mean it's any more susceptible to insider
04:09trading.
04:10I think critics would point out that there's a difference between prediction markets and other exchanges.
04:14The culprits are clearly defined when it comes to these other exchanges.
04:17So, they're corporate officers, directors, employees.
04:21On CalShe, insider could be a lot of people.
04:23It could be a producer who knows who a certain guest could be on a show, a soldier with classified
04:28information, an athlete.
04:29How do you police a market where you can't define who the insiders are and, like you said, with a
04:35limited but growing team?
04:37So, I think that you start with where the federal rules exist, right?
04:40So, we can overlay those on the clean cases where you have some sort of duty of confidentiality.
04:45You're a corporate insider or you're a fiduciary or you're misappropriating information, taking something that, you know, you got access
04:51to and aren't supposed to use for personal gain.
04:53That's sort of the federal framework that exists now.
04:55And that's where you'd see it happen with public markets, with executives at companies.
05:00That's right.
05:00But I also think that Americans have shown themselves to be quite dissatisfied with the limitations of that approach.
05:06And so, at CalShe, our exchange rule framework is a bit broader than that.
05:10And I think overlaying that rule framework onto the products that we offer is helpful guidance for our regulators and
05:16for legislators who are considering, you know, potential rules that govern these different types of products.
05:22I think the federal rules and insider trading are helpful, but we've seen the limits of their enforceability on securities
05:28markets.
05:28And so, you know, it takes sometimes new products to emerge in regulated spaces to think about the way the
05:34rules are working and where they might fall short.
05:36And that's what we're trying to do.
05:37You said you have a small but growing, rapidly growing team.
05:39I wonder whether you just need a bigger enforcement team, or do you rely on tech to do a lot
05:44more of that for you?
05:45I mean, the tech, you know, the advancements in tech have helped us significantly.
05:49And I actually think being new and building these things from scratch in 20, you know, our exchange has existed
05:55for the last eight years or so.
05:57Building things from scratch in this time frame has been a lot nicer than, say, being an exchange that has
06:02surveillance systems dating all the way back to the 80s.
06:04So we are able to leverage tools a little quicker and build solutions a little faster.
06:09Ultimately, what we're doing is solving for what a lot of people see as the hardest use case on insider
06:14trading.
06:14And as we grow the product into sometimes, you know, more traditional types of event contracts,
06:19I think it's actually going to be easier for us to overlay the product we're building onto more traditional types
06:25of insider trading frameworks.
06:27Does a lack of case law around this versus traditional insider trading make your job more difficult?
06:33I don't think so.
06:34I mean, you can tell when people are utilizing unfair access to information to cheat.
06:40I think at the core of insider questions, that's always the driving force.
06:44Is there unfair information asymmetry?
06:46And that's sort of the guideposts that we're using as we think about insider trading on Kalshi.
06:51I also don't think that a lack of case law should ever inhibit us from, you know, launching new regulated
06:57products.
06:57That's how we make more case law and develop smarter rules around insider trading that might end up overlaying back
07:02on securities and other traditional markets.
07:05What kind of interaction do you have with traditional law enforcement?
07:08How active are they in referring things to you or pointing things out?
07:12I would say we refer a lot of things to them.
07:14And, you know, we've gotten questions from them as well.
07:17It's a very regular feedback.
07:19I speak with the enforcement division at the CFTC on a regular basis and DOJ where appropriate.
07:25So, you know, there's an open dialogue as there is with, you know, many financial exchanges in the United States
07:30that do regulation and, you know, banks and other regulated institutions as well.
07:33We're going to hear from Fed Chair Jay Powell tomorrow.
07:35There was a funny moment a few weeks ago when he was at this at Harvard and he was asked,
07:39like, what are you going to say?
07:41You know, and it was clearly a reference to like a good afternoon.
07:43Yeah, you're going to say good afternoon.
07:44It was like clearly a reference to a mentioned market.
07:46It does seem like these mentioned markets are particularly susceptible to insider trading.
07:51Do you have an obligation under the Commodity Exchange Act not to list contracts that are susceptible to manipulation?
07:57You know, I think it's important for a regulator to make that analysis.
08:00That's not the analysis the CFTC has made.
08:03We monitor mentioned markets the same, you know, way at a high level that we do for other markets.
08:07But we also look for specific behavioral patterns that are unique to mentioned markets.
08:12So, you know, it might take a different shape than another event contract, but we're still able to detect anomalous
08:17activity in a way that might be unique to mentioned markets.
08:20Can you share with us any sort of information about, you know, ways you've been able to prevent insider trading
08:28or potential insider trading?
08:29Because everything that we've seen is, like, reactive in the sense of, okay, this person was fined.
08:34This person was banned from the platform.
08:36Do you prevent trades from actually happening if they're flagged?
08:40The headline that didn't happen.
08:41Exactly, yeah.
08:42Yeah, so a few months ago we announced that we were implementing some new engineering solutions that would block candidates
08:48preemptively from trading on themselves.
08:49The cases that were announced last week and other cases that were flagged were part of that solution being implemented.
08:56We also preemptively block athletes from trading in their own sport and league that they are flagged from our partner
09:01IC360 or internal lists.
09:03And I think that that is a model that can be followed in more traditional markets as well.
09:08It's not something that you see in the stock market, but it is something that with more effective list sharing
09:12could be easily accomplished.
09:13So does that grow in the future? Like, more people being restricted from doing certain things on the platform?
09:19To me, it's the name of the game.
09:20If you can get information sharing, and we saw the CFTC announce an effort for MOUs between sports leagues and
09:26prediction markets,
09:27I think that that could apply across a panoply of markets and have financial institutions sharing information so that we're
09:34not chasing bad activity.
09:36We can't leave it to the regulators to run after, you know, the explosion of trading volume that we live
09:41with in the 21st century.
09:42It's great to put in these preemptive solutions. We certainly think we're leading the way on that effort.
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