Memorandum
- From
- Derek Weston via Fortune | FORTUNE
- Date
- Filed
- Business·4 min to read
- Re
Former CFTC Commissioner: Prediction Markets Give Small Businesses a Wall Street-Style Hedge
ReFormer CFTC Commissioner: Prediction Markets Give Small Businesses a Wall Street-Style Hedge
A Northern California goat herder used a Kalshi event contract to hedge against a state wage rule change, an example of how prediction markets are extending risk-management tools once reserved for Wall Street to small businesses.
A Northern California goat herder has used a financial derivative to hedge against a state policy risk, a transaction that a former top U.S. commodities regulator says shows how prediction markets are bringing Wall Street-style risk management to small businesses.
Tim Arrowsmith faced labor costs that were about to more than triple after a state wage exemption policy expired on June 30. No insurer would cover the risk, and no futures contract existed for it. He paid $50,000 for a contract on Kalshi that pays him $500,000 if Sacramento does not fix the rule by October 1. If the state acts, his labor costs stay the same and he loses the premium. If it does not, he receives $500,000 to cover the increased costs.
Brian Quintenz, a former commissioner of the Commodity Futures Trading Commission (CFTC), wrote in a commentary that the transaction is a first: small businesses now have access to risk-management tools that financial institutions have used for decades. He argued that event contracts, which pay out based on whether something happens in the real world, are a natural extension of the Commodity Exchange Act, the law governing U.S. derivatives markets.
The CEA recognizes that anything posing risk to people and businesses — a physical good, a financial concept, or an actual event — is a valid underlier for a derivative listed on a federally regulated marketplace, Quintenz wrote. Prediction markets, he said, are another innovation within that framework, not a departure from it.
Event contracts now cover risks that no previous risk-management product reached, according to the commentary. Examples include environmental funds hedging California carbon allowance prices and ice cream shops hedging against a rainy summer. Businesses too small to interest a Wall Street desk can transfer a specific risk to someone willing to price it.
Quintenz drew a sharp distinction between trading on federally regulated derivatives markets and gambling. Casinos and sportsbooks, which take the other side of a bet and set the odds, have every reason to feel threatened by a more transparent model, he wrote. Prediction markets, by contrast, are financial exchanges that act as intermediaries and do not favor one side of the trade. The market sets prices, and traders can exit positions at any time.
Beyond trading, the former commissioner argued that prediction markets provide valuable information. Unlike social media posts, which optimize for attention, prediction markets optimize for accuracy. He cited a recent Federal Reserve report finding that Kalshi markets give an accurate, real-time read on the economy, even beating Fed funds futures at predicting interest-rate moves.
Despite that utility, many states have allied with casino interests to try to ban prediction markets, applying state-level regulation meant for roulette wheels to instruments designed for price discovery, Quintenz wrote. New York, the capital of finance, is among the states that have sued prediction markets.
National markets need uniform, federal, and exchange-focused rules to work, he argued. He compared the situation to a state preventing a resident from buying Tesla stock because the governor disliked Elon Musk, or limiting stock exchange trades to in-state traders.
Quintenz concluded that derivatives have long helped farmers, oil producers, and financial institutions insure against the risks of doing business. Prediction markets, he said, produce a price for things nobody else will price, a function the law and its federal regulator are meant to protect.
