The CFTC Is Defending Prediction Markets and Auditing Their Liquidity at the Same Time

The CFTC invoked emergency authority on Tuesday to order Kalshi to keep operating despite New York's attempt to shut it down, then on Wednesday told contract markets that a growing number of filings for market-maker, liquidity, trading and other incentive programs are arriving with procedural or substantive deficiencies ^[10][1]. The federal jurisdictional shield is holding, but the regulator holding it has now put in writing that the machinery producing these venues' liquidity is not properly documented.

That second item is the one operators should read twice. Prediction markets sometimes pay traders rebates or "yield" to generate depth ^[2]. The CFTC did not object to the practice; the notice flagged how fast these programs are going live and how little detail some exchanges provide about how they actually work, and it singled out programs tied to event contracts ^[3][1]. An incentive program is not a growth experiment sitting outside the regulated perimeter. It is a filing. If the filing is deficient, the volume it produced is standing on a defect, and the exchange's own liquidity story becomes its own compliance exposure.

This is not the CFTC's first correction. In February its Enforcement Division issued an advisory after two Kalshi cases involving improper trading, one in which a political candidate traded on his own candidacy and another involving insider information about upcoming YouTube videos ^[4]. In March it reminded prediction markets that they are "front-line regulators" responsible for ensuring the contracts they list are not readily susceptible to manipulation ^[5]. In July it ordered George Santos to pay roughly $35,000 and banned him from trading for three years, finding he manipulated a Kalshi market on whether he would attend the State of the Union ^[6]. Kalshi, for its part, partnered with Nasdaq Market Surveillance on Monday ^[7].

The defense side is more dramatic and, for planning purposes, less durable. New York Attorney General Letitia James sued Kalshi on July 31, alleging it operates an illegal, unlicensed gambling business, and sought a temporary restraining order that would bar Kalshi from offering event contracts nationwide ^[8]. Kalshi is headquartered in the state, which made the requested relief close to existential ^[9]. Kalshi told the CFTC the relief amounted to a market emergency, and on Tuesday the regulator agreed and ordered it to continue operating ^[10]. That is the second emergency intervention of the summer; the CFTC did the same in July when a Michigan state-court order threatened to halt trades ^[11].

The advertising front opened separately. On Wednesday the New York City Council announced a probe into prediction market advertising, building in part on a June Wall Street Journal investigation that found more than 70% of the roughly 1,100 Polymarket promotional videos it reviewed featured trades conducted on fake versions of the platform, or upwards of 770 clips ^[12][13][17]. The Council is extending the inquiry to Kalshi, Coinbase and Gemini Titan, asking about allegedly deceptive advertising, influencer promotions and marketing aimed at young users ^[14]. Polymarket said it would audit its promotional content and has said it looks forward to engaging with the Council ^[15]. The four platforms have 14 business days to respond ^[16].