What would a “Turing market” look like?

(alt title: “Marketizing the Kalshi Market”)

Kalshi is only allowed to trade prediction contracts, but these could be like NAND gates of market microstructure. It might be possible to replicate most of the financial effects of many existing (and many new and useful!) transactions by buying a basket of predictions.

If Kalshi trades are more efficient than buying the actual stocks/options/futures/bonds (not a hard bar to overcome!) then you could move much of the speculative activity onto the prediction contracts, leaving much of the trading in the actual underlying instruments to effectively become a way to net settle the prediction market activity.

Why would moving all this activity to something like Kalshi be a good thing?

Most (all?) of the existing capital markets are burdened with entrenched rent seekers and the regulatory (and monetary!) costs they impose. Reducing these costs would allow many more transactions to happen. And some fresh competition might shake things up a bit and maybe pressure everyone else to either clean up their act or wither away.

Prediction markets are also more flexible. In theory, it is possible to monetize almost any kind of impactful information in a prediction market – the flip side being it is also possible to hedge against almost any kind of impactful risk. Who doesn’t want a world with more information and less risk?

I also really like Kalshi’s non-existent risk management model. They do not need any risk management because every trade is always fully capitalized and is guaranteed to settle instantly on resolution of the question. On Kalshi, there is no such thing as counter party risk, no failure to deliver, and no capital calls. Settlement procedure is simple – credit the cash you already have custody of to the winning side. That’s it. If you are not worried about these risk management problems on other markets… well… you should be because it is a scary mess even though no one talks about it.

So what does Kalshi need to do to become a thriving Turing market?

AN OPEN LETTER TO KALSHI:

Open up a “meta-market” for adding new markets. This is by far the most important item. The current curation system where you try to hand pick winners and losers is anti-market. If you believe that markets are a good way to develop and distribute information, then you should trust them to pick which markets you should make! Publish clear rules about what markets are allowed on Kalshi and let any funded account propose a new market. Quickly evaluate proposals and publicly site the specific rule issues for any rejects. Non-rejected new markets are immediately available for entering orders, but only allow trading to start after some minimum threshold of open orders on the book is met. User “votes” and “suggestions” are worthless  – if someone wants a market then they should propose it and convince others to enter orders into it. Nothing wrong with charging a “market proposal fee” that could be in the thousands of dollars to cover your costs and incentivize people to only propose markets they really care about and are likely to be approved. Consider offering a reward to users who propose markets that successfully open. Have the reward value based on the total volume the contracts the market generated. Kalshi markets all the way down.

Lift the $25,000 per contract-account maximum. This limit reduces the incentives for many of the highest value participants to invest the resources it would take for them to join your market. Any limits should reflect actual risk management controls or regulatory restrictions, not just wanting to take things slow and easy.

Pick better ways to fund an account. Get rid of Plaid. At very least make it be an alternative choice rather than your default one. No reasonable person should be willing to give full access to their bank account away, and there are better rails available. Take credit cards if practical (with processor fee pass through), or just focus on wire transfers. Applying incoming wire transfers to account balances quickly should be a very high priority over almost any other operations task.

Fees are way too high. If you succeed, then you will be wildly profitable on de minimis fees. If you charge high and complicated fees now, you reduce the chances of hitting the tipping point. If it was me, I would start at maybe $0.001 per contract, take-out side only and announce that these fees will go down as volume goes up. If you can’t afford to offer very low pricing then figure out why not. If it is because of fixed costs, then who cares because if you succeed then they will not matter (raise more capital if you really need to, this is what VC is for and exactly what they are looking for).  If it is because of variable costs, then you need to fix now this or you will go out of business if you ever do succeed. Do not plan for being mediocre in size or impact. Aim to be big and game-changing, or to fail fast trying!

Beter market data visualizations. Even I have a hard time reading Kalshi market data pages. I do not care that I can buy one contract at $0.75 and you should not care about users who do. I want to know, at a glance, things like “what is my average cost per contract to buy 1000 contracts?”.  I am partial to DepthCharts and think something like this would work well for your market structure. I understand that right now you might be reluctant show views that are unflattering to your current liquidity levels, but again you must aim high now to become big!

Better API connections. First there needs to be a market data firehose with real time updates on all contracts. Give it away. This encourages people to build views that your users want. Some will create Kalshi plug-ins for spreadsheets and others will build Kalshi widgets that other websites can display on their pages. It all drives interest and orders to your markets. Next there needs to be a programmatic way to quickly and reliably get orders into the system. Offering these will enable market participants to help you to build liquidity. There are already opportunities for things like arbitraging between Kalshi and other marketplaces and automated internal market making activities, give people the access they need to take advantage of them. If you allow “meta-markets” above then people will create the markets that they will then create the liquidity on.

-josh

PS: If you give me a market to make efficient, long-term bitcoin downside bets, I will come at that market like a spider monkey.

2 comments

  1. Bill Harts

    Great points, Josh. To amplify your comment about fees, why is the fee schedule so complicated? “…a variable percentage fee on the expected earnings…” Huh? What behavior are they trying to incent? Doesn’t seem to be very user friendly.

    Separately, what are the differentiators from PredictIt?

    (I realize PredictIt is only political election results. I could see Kalshi adding them as propositions.)

    • bigjosh2

      The limitations on maximum number of traders and maximum bet size in PredictIt’s no-action letter make it a toy market at best. You need to be able to deal in $millions USD before it is worth it for smart money to allocate attention and resources to a new venue. Predictit is great for expressing your personal opinions and having gambiling-ish fun, but not much more.

      …and political outcomes only represent a tiny, tiny fraction of the interesting questions prediction markets can cover.

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