Kalshi proposes 5% cap on its affiliated trading activity per quarter

Kalshi offered the federal government on Monday to limit the participation of its affiliated trading desk to 5% of betting volume per quarter on its prediction markets exchange. The proposal is presented as an alternative to rules proposed by the Commodity Futures Trading Commission (CFTC) to curb affiliated relationships where a firm owns both the exchange and a principal trading unit that takes bets on that same platform.

What Kalshi proposes and why it submitted it

Kalshi’s letter is part of the public comment period the CFTC opened on its proposed conflict-of-interest rule. The company accepts the CFTC’s assessment that the corporate structure — an exchange with an affiliated trading desk — creates potential “risks” that should be addressed through new rules. Kalshi had not previously acknowledged that reading explicitly.

In addition to the quarterly 5% cap, Kalshi recommends the CFTC clearly define affiliation “based on percentage of voting power and ownership” and require independent financial surveillance of affiliated relationships that include principal trading desks. The firm also asks for compliance controls that ensure the existence of information barriers between the trading desk and the exchange, including separate physical offices.

“We support allowing affiliated market making only under publicly disclosed programs filed with the CFTC,” wrote Elisabeth Diana, Kalshi’s spokesperson, by email.

Kalshi insists it already applies good practices to maintain information walls, while rejecting some CFTC proposals that, in its view, would “de facto prevent an affiliated desk’s ability to be profitable, which would be operational and easy to evade with game designs.”

The 5%: scope and practical effects

Kalshi’s proposal understands the 5% quarterly cap as an industry rule that would apply to both single bets and parlays executed via a request-for-quote (RFQ) system outside the central order book. In practice, an affiliated trading desk would not be able to exceed 5% of volume in either single bets or parlays.

According to figures cited from Aldrin Research, if the cap had been applied in September the 5% would have represented roughly USD 2.3 billion in that month, considering maker-only volume. Kalshi says that figure remains significant.

Kalshi reported that its unit Kalshi Trading has represented roughly 1.5% of volume on the company’s exchange this year. The firm believes the 5% cap preserves meaningful liquidity without creating disproportionate incentives.

Disclosure and oversight: what Kalshi asks the CFTC

In its letter to the regulator, Kalshi urges exchanges to publish quarterly affiliate trading volumes broken down by type of bet. The company views disclosure as a transparency mechanism so supervisors and the public can detect deviations.

Kalshi also proposes independent audits of affiliated desk activity and concrete requirements for operational separation. Practical measures include periodic verification that trading units maintain information barriers and do not share sensitive data with the affiliated exchange.

Where Kalshi disagrees with the CFTC proposal

One of the CFTC proposal’s most controversial measures would force affiliated desks to receive “last priority” at each price level in the order book, ceding priority to independent market makers. Kalshi warns that rule would be operationally burdensome and could be circumvented through market-design tactics.

Kalshi accepts limits and controls but rejects what it calls rules that would “practically strangle” an affiliated desk’s ability to provide liquidity when independent market makers are inactive.

Arguments for and against affiliates that Kalshi makes public

Proponents of affiliated desks argue they can supply liquidity when independent market makers do not want to take on risk. Kalshi recalls that argument in its letter and asks that any restriction preserve the exchange’s ability to function during periods of low independent participation.

Critics and the CFTC, by contrast, point to the potential conflict where an affiliate could prioritize profitability over fairness in price formation. The proposed regulation seeks to neutralize strategies that favor the parent company or affiliated desk to the detriment of general participants.

Regulatory market reaction and public comments

The CFTC proposal has received more than 50 public comments with divergent positions. Among responses cited by Sportico is CME Group’s request that the agency impose a total ban on principal trading by exchange affiliates. Fanatics, by contrast, has argued that affiliate activity should not be restricted.

With its cap and transparency mechanisms, Kalshi offers a middle-ground solution: it acknowledges risks and suggests controls while opposing measures it considers disproportionate.

What exchanges and operators should prepare

Exchanges with affiliated desks will need to prepare detailed quarterly disclosures on volumes by bet type and establish independent financial audits if the CFTC adopts Kalshi’s suggestions. Operators that rely on affiliated liquidity should model compliance scenarios where their in-house desk is limited to 5% of maker volume.

If the CFTC adopts strict information-barrier requirements, exchanges will have to demonstrate physical and technological separation between units. That obligation would affect both governance and operating costs.

Next regulatory steps

The CFTC still must review comments and decide whether to incorporate limits like the 5%, a formal affiliation definition based on ownership and voting, or keep tougher measures such as the order-priority rule in its draft. The comment period already reflects the full range of positions: from the total ban requested by CME Group to the opposition to control expressed by Fanatics.

For analysts and compliance officers, the CFTC decision will define the acceptable operational boundary for exchanges that retain affiliated trading desks.