Kalshi And Conflicts Of Interest: What The CFTC Proposed
The Kalshi conflict of interest question finally has an official framing, and it did not come from a lawsuit or an exposé. It came from the regulator itself. The CFTC has published a formal rule proposal about exchanges whose affiliated firms trade on their own markets, and it says out loud what that arrangement asks an exchange to do: police a company that makes it money. This page walks the regulator's own reasoning, told straight. What the agency says the conflict is, the specific constraints it proposed, the one exemption that shows where market-maker revenue is most reliable, and why it decided the one thing it would not do is ban the practice. Two things up front, because getting either wrong misleads you. First, this is a proposal, not a rule; nothing in it is in force. Second, this is not a Kalshi story. The CFTC says it is aware of at least six exchanges permitting affiliated trading, and the proposal would bind all of them.
The Quick Answer
The CFTC has proposed, not adopted, constraints on affiliated trading firms at prediction market exchanges: last place in the order queue, mandatory two-sided quoting, no fee or speed breaks, physical and staffing separation, plain-language disclosure in the app, and independent outside surveillance. The notice opened a 60-day public comment period that closes October 5, and even a final version would take effect only 30 to 60 days after adoption. The full list of proposed constraints, the parlay carve-out that reveals the business model, and the liquidity trade-off that explains why the agency will not simply ban these firms are all below.
What The CFTC Says The Conflict Is
Start with the structure. Kalshi is peer to peer: the exchange matches buyers against sellers and takes no side of any trade. But an affiliated firm, Kalshi Trading, participates on the exchange as a market maker, quoting prices other users trade against. An exchange is also a self-regulatory organization. It is supposed to surveil its own markets, investigate suspicious activity, and discipline participants who break the rules. Put those two facts together and you get the conflict, and the CFTC's own words state it plainly:
"[An] exchange's self-regulatory functions run directly against its commercial interest in the affiliate's trading. Where the firm under surveillance is the exchange's own affiliate and a potential profit center, the exchange is asked to investigate and, if warranted, discipline the source of its own revenue."
That is the whole indictment, and notice what it is not. It is not an accusation that any exchange has abused the arrangement, and it is not a claim that an affiliate is trading against you in any particular market. Market makers do, by definition, take the other side of customer orders, but Kalshi does not disclose which markets Kalshi Trading participates in; no current rule obliges any of these exchanges to say, and that is what the proposed disclosure requirement would change. The CFTC's point is structural: internal firewalls between an exchange and its trading arm ask a company to referee itself, and the agency's proposal exists because it does not consider that self-refereeing sufficient on its own. That structural framing matters, because the same structure repeats across the industry.
Six Exchanges, Not One
If you read this as a Kalshi scandal, you have been misled. The CFTC says it is aware of at least six exchanges that permit affiliated principal trading. The named or reported list: Kalshi, through Kalshi Trading. Novig, through Manhattan Athletic Group on its Ludlow Exchange. DraftKings. Crypto.com. Polymarket. And Rothera, the exchange where the trading giant Susquehanna holds 45% in a joint venture with Robinhood.
Some of those firms are not shy about it. DraftKings urged the CFTC to "take a permissive approach to vertical integration" and called affiliated trading "even more compelling" than trading on independent platforms. Whatever you think of that argument, it locates the subject correctly: this is a prediction market conflict of interest question, an industry structure question, not a Kalshi story. Affiliated market making is how young exchanges get prices on the board at all, which is exactly why the agency's proposed answer is a set of constraints, not a prohibition.
What The Proposal Would Actually Require
Every item below is a proposal. None of it is in force, and the CFTC is not obliged to adopt any of it. Stated as proposals, the constraints:
| Proposed Constraint | What it would mean in practice |
|---|---|
| Last Priority On Resting Orders | At every price point, the affiliate's order fills after every non-affiliate order at that price, even if the affiliate got there first |
| Continuous Two-Sided Quotations | The affiliate must quote both Yes and No, earning only the bid-ask spread rather than picking spots |
| No Fee Discount | The affiliate pays the same fees as any other participant |
| No Latency Advantage | No faster data, no faster pipe to the matching engine |
| Physical And Operational Separation | Separate software, separate staff, separate office space from the exchange |
| In-App Disclosure | The app must disclose the affiliate alongside every market, in "plain language reasonably understandable to a non-specialist" |
| Independent Surveillance | A third party, not the exchange, watches the affiliate's trading and reports periodically to the CFTC |
The row I keep coming back to is the first one, because it is the only proposal that changes the market's actual machinery. The rest is paperwork and plumbing; queue position is real money to a market maker.
A Worked Example: The Queue Rule
Say you and an affiliate both want to buy Yes at 40 cents, and the affiliate's resting order arrived an hour before yours. Price-time priority is the rule on every order book you are likely to trade: at the same price, the earlier order fills first, so the affiliate trades and you wait. Under the proposal, that flips. The affiliate waits behind you at your own price, at every price, always. Combined with mandatory two-sided quoting, the proposal's shape is clear: an affiliate may exist to provide liquidity, and it would be allowed to earn the spread for doing so, but it would surrender every structural advantage that makes affiliated trading more profitable than the independent kind.
The Carve-Out For Parlays
One exemption is worth a line, and it is a revealing one. The continuous two-sided quoting requirement would not apply to parlays, because parlay contracts execute through a request-for-quote mechanism instead of a standing order book: you ask, the market maker prices your specific combination, you accept or you do not. There is no book to quote both sides of.
Here is why that line matters more than it looks. Parlays reportedly account for more than 30% of trading volume at some of these exchanges, and they are the most reliable revenue stream affiliated market makers have. An RFQ quote also leaves the customer with nothing posted to compare the price against: no book, no last trade, just the number you are handed. Bettors know that judgment problem from sportsbook parlays, where a parlay builder can at least price each leg individually before you combine them; an exchange parlay quote arrives with no such reference point. Keep the carve-out in mind when you read the rest of the proposal: the two-sided quoting requirement would land on the order-book markets, while parlays, the segment where affiliated trading earns most reliably, would be exempt from that specific requirement because they execute through RFQ.
Why The CFTC Is Not Banning Affiliated Trading
The most revealing part of the proposal is the option the agency rejected. It considered prohibition and called it "the most disruptive" option, warning that removing affiliated market makers might leave markets too thin for users to enter or exit positions near a reasonable price. That is a real cost. Liquidity is the thing that decides whether you can trade at all, and in young markets the affiliate is often the only participant willing to quote continuously.
Remember what the proposal would require of the affiliate that stays: where it makes markets, quote both Yes and No continuously, earning through the bid-ask spread. That obligation has teeth because it removes a maker's ability to stand aside. A firm quoting the unlikely side of a market cannot simply pull its offer when it dislikes the risk, and every fill there leaves it short a contract that collected a few cents of premium against the risk of paying out most of a dollar. Our read is that independent firms tend to decline that obligation in small markets, which would explain why exchanges lean on affiliates in the first place. The regulator, then, is making an explicit trade-off: accept the conflict of interest, strip out the advantages that make it dangerous, and keep the liquidity. You can think the balance is struck in the wrong place, and the comment file will surely contain both camps, but it is a considered trade-off, not a loophole.
The FTX History The CFTC Cites
The proposal did not appear from nowhere, and the regulatory history the CFTC itself cites explains the urgency. The rulemaking draws on public comments the agency received in 2023, in the aftermath of FTX's collapse, where the affiliated market maker Alameda Research was intertwined with the exchange and customer funds were used to bankroll its trades. That episode is why "the exchange and its trading arm are separate, trust us" stopped being a satisfying answer to regulators.
That history explains the urgency, and only the urgency. No reporting suggests any current prediction market exchange is doing what FTX did. Kalshi is a CFTC-regulated designated contract market, a different animal from an offshore crypto exchange; the regulation is the substance of why Kalshi is legit in the first place, with broad, state-specific availability under federal oversight. FTX is in this story as precedent, the event that taught the regulator what unpoliced affiliation can become at the worst-case end.
Where This Goes From Here
The mechanics from here are ordinary administrative procedure on a timeline longer than headlines imply. The notice of proposed rulemaking was posted to the Federal Register, opening a 60-day public comment period that closes October 5, 2026. The agency then reads the comments, and it may adopt the proposal, modify it, or drop any part of it; nothing obliges it to act at all. If a final rule does emerge, there is a further 30-to-60-day runway before anything takes effect. If you came here searching for the Kalshi CFTC rules, the accurate answer is that there are none yet, and the accurate verb for everything on this page is "proposed." Any article telling you the CFTC "has banned," "now requires," or "has cracked down on" affiliated trading is describing a rule that does not exist.
What This Means For You
The conflict of interest is real, the regulator has now described it in blunt terms, and the proposed answer is constraint, not prohibition, because the alternative is thinner markets for you. What changes on your screen today: nothing. The tell worth watching for is the one you could actually see, an affiliate named in the app beside every market it trades, in plain language, the disclosure requirement made real. The queue rule would matter just as much, but a fill confirmation never shows you who waited behind you in the queue, so that one would work invisibly. The label you would see. Until one of those exists, treat affiliated trading the way the CFTC itself does: as a structural fact of the industry, six exchanges of it, with no allegation in the proposal that any of them has abused the arrangement. And understand how these markets work before you trade them.
Reading market structure this closely is most of what OddsShopper's analysts do all day. Their daily output for the sports markets we do cover is collected at the free expert picks hub, a different exercise from the market-structure reporting on this page, and the full toolkit behind it, fair-price arithmetic across 20+ sportsbooks, comes with a free week trial of OddsShopper Pro; code FIREWALL20 takes 20% off your first payment if you stay.
Disclosure and fine print. Stokastic Inc. trades Kalshi weather markets and holds positions in them. We have no affiliate or commercial relationship with Kalshi. We do carry sign-up offers for some other prediction-market and betting platforms, including some named on this page, and comparisons should be read with that incentive in mind. Kalshi contracts are CFTC-regulated event derivatives traded on a designated contract market, not sportsbook wagers, and a position can lose its full value; selling an unlikely outcome collects a small premium and risks most of a dollar, and one losing sale can hand back the premiums from about 14 winning ones. 18+, available where Kalshi operates; eligibility and availability are state-specific and change. Nothing on this page is trading advice, a pick, a play, or a recommendation to enter any market, and no price shown here is a live quote.
