Kalshi had a rough week. The prediction market giant clashed with a content creator over an ad, faced reports of friction with tribal gaming operators and a pair of Wall Street Journal reports highlighted fresh controversies.
The most consequential WSJ piece came Tuesday, detailing allegations of wash trading, a form of market manipulation intended to create an impression of high volume, in Kalshi’s ether perpetual futures market. Kalshi denied the claims.
Now, regulatory and legal experts are weighing in — and several see cause for serious scrutiny.
“Depending on how it's handled, it could be handled compliantly, or it could be handled poorly,” Joe Konizeski, a former attorney with the Commodity Futures Trading Commission — the agency that oversees derivatives wash trading in futures markets — told This Week in Fintech. “Then that would give the commission, the CFTC, its primary regulator, a reason to conduct a thorough investigation.”
His verdict: “There's a lot of smoke here, and it seems like there's fire.”
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At the center of the controversy is Kalshi’s recently launched perpetual futures contracts. The company announced in May its expansion into perpetual futures, otherwise known as perps, a derivative that allows traders to place bets on an asset’s future price. The move came just weeks after Kalshi raised $1 billion in a funding round that valued the platform at $22 billion.
A $5 Billion Pattern
The alleged wash trading was first flagged by Shaira AI co-founder and former quant trader Benoit Dubosson on X on Saturday. A WSJ story followed on Tuesday, detailing $5 billion worth of suspect trades around $5,500.
Kalshi pushed back on the allegations in a blog post titled The Facts Behind Kalshi’s Perpetuals Volume. The company said that all the trades highlighted were “trades that both sides wanted to take at the time, because they disagreed on the fair price,” and noted that “this is a sign of genuine economic activity rather than wash.”
The company also noted that programs it has in place are intended to maintain resting liquidity and that they “do not provide an incentive for traders to wash trade because they do not reward volume traded, just resting liquidity provided.”
Konizeski, who worked at the CFTC for over 26 years, said the trades qualified as “unusual activity.”
“It's not activity that you would ordinarily see in a well-functioning regulative market,” Konizeski said.
Market Liquidity
Renato Mariotti, a former federal prosecutor and regulatory attorney, said that “in most markets that are regulated by the CFTC, high frequency trading firms are present and they're trading, and that is how modern markets work.”
“It wouldn't surprise me if Kalshi has arrangements with high-frequency trading firms to provide liquidity in these markets.”
Photo by Vladislav Maslow on Unsplash
Joshua Mitts, a professor at Columbia Law School who specializes in securities laws, told TWIF that “evaluating whether something is unusual may be just the very first step,” but “evaluating the role it served in a broader scheme is really important.”
Mitts also noted the evolution of AI could play a broader role as automated bots give rise to similar trades taking place in markets.
“It doesn't mean necessarily that a human sat behind a screen and sort of mapped out a particular logic very meticulously,” Mitts said. “It could be just the product of an algorithm's own internal optimization or some sort of agentic view as to how to make money.”
Experts agreed that a more in-depth look would be needed to determine if the trades fell within regulation.
“This is a reasonable starting point for an investigation, but ‘undeniable proof’ goes further than the evidence presented,” Gerry Tsoukalas, a professor at the University of Oxford, told This Week in Fintech.
“Assessing these allegations would require an analysis suited to perpetual futures, with more information about the participants behind the disputed volume.”
