Kalshi Ether Trades Show Minimal Pricing Advantage, Challenging Exchange Explanation

An analysis of $9.81 billion in concentrated ether futures trades on prediction market Kalshi found they captured a pricing advantage on only 33% of transactions, challenging the exchange's explanation for the activity.

Gambling Insider's investigation of 5.35 million trades in Kalshi's ether perpetual futures contract between Aug. 1 and Sept. 30 found that transactions clustered around six specific dollar amounts accounted for 55.9% of the notional value traded.

Kalshi has said the pattern arose when fast traders repeatedly executed against a market maker's outdated quotes.

"The most benign explanation I can think of is tolerated sniping," said Rajiv Sethi, an economics professor at Barnard College who had advanced a similar theory.

Gambling Insider's analysis found that the fixed-size trades beat the spot-implied price of ether on 33% of transactions, against a 35% benchmark for randomly selected buy-or-sell directions at the same moments and spreads.

Allowing up to one second for timing differences improved their result to 39%, against a 36% chance benchmark.

Other traders performed substantially better under the same timing allowance, beating the spot-implied price on 54% of trades against a 42% benchmark.

The findings challenge the expectation that the concentrated trading was predominantly driven by participants exploiting stale quotes, although they do not establish what caused the pattern.

After reviewing the results, Sethi told Gambling Insider, "I think only the account identifiers could settle this decisively, but I am starting to have doubts about my tolerated sniping explanation."

The findings do not establish wash trading, in which traders trade with themselves or coordinate transactions to inflate reported volume.

None of the three experts consulted by Gambling Insider concluded that wash trading had occurred.

Kalshi declined to comment on the new analysis.

To establish whether the concentration was unusual, Gambling Insider asked crypto market data company Kaiko to apply a comparable test to ether perpetual futures traded on Binance and Hyperliquid.

Kaiko found that the day's most-traded size accounted for 1.68% of notional value on Binance's ETH/USDT contract, 1.61% on Binance's ETH/USDC contract and 3.79% on Hyperliquid.

The comparable figure for Kalshi was 55.8%.

"We have not seen this degree of concentration at a single trade size on either venue," said Thomas Probst, a research analyst at Kaiko.

Probst noted that Binance and Hyperliquid are mature markets with many competing market makers, and that in a younger market with fewer participants, "the behavior of a single large participant can show up much more strongly."

The comparison establishes that Kalshi's trade-size concentration was exceptional among the contracts examined.

It does not establish manipulation, since a market with fewer participants could produce more concentrated trading without coordination.

On Sept. 22, The Wall Street Journal reported more than $5 billion in almost one million near-identical trades of about $5,500 in Kalshi's ether contract.

The Journal also reported that the Commodity Futures Trading Commission (CFTC) was examining the trades, citing a person familiar with the matter.

Kalshi attributed the trading pattern to its market-maker incentive program, which paid participants to maintain orders on the exchange's order book.

Responding to the Journal, Kalshi said the pattern was "consistent with a single maker putting up resting orders of a fixed size."

It said the counterparties were "hundreds of distinct traders" who were "pretty consistently right," while the market maker was "pretty consistently wrong," and that it had seen "no evidence of collusion or wash trades."

Gambling Insider's markout analysis found that over intervals extending to five minutes, fixed-size trades showed positive markouts, but their gains were approximately half those associated with other trades.

After one minute, the fixed-size trades had generated an aggregate positive markout of approximately $106,000 on $9.81 billion in notional value, equivalent to 0.11 basis points, before fees.