Summary
From the article:
Here is the actual Kalshi goat herding contract I want to make a few points about it. First, it was listed last week, purely for this trade. This is not a case where Kalshi had an active market in California goat herding legislation probabilities. This is a bilateral trade between the goat guy and Susquehanna, which was then listed on Kalshi. CNBC explains the pricing:
Led by Susquehanna senior trader Eric Passmore, the firm established pricing and the contract terms on Kalshi. Constructing those provisions came after deep research on California’s goat herding business, speaking with industry professionals and connecting with Arrowsmith, Passmore said.
The contract has a $500,000 payout that Arrowsmith paid a 10% premium or $50,000 on.
Second, as of about noon today, Kalshi showed a volume of about $500,476 on this contract. It was listed purely for the one guy’s over-the-counter trade, but now it is listed, so if you want to bet on California goat legislation now you can. Intriguingly, the contract has traded (in tiny size) at lower probabilities than 90%, meaning that arguably Susquehanna significantly underpriced this risk. The goat herder put one over on Susquehanna!
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Fourth, why did Kalshi list it at all? If this is a bilateral trade between the goat herder and Susquehanna, why does it need to be publicly listed on Kalshi? (“Kalshi took a ‘backseat’ in facilitating the hedge,” notes CNBC.) Some possible answers:
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- Regulation. Insurance is a highly regulated business, and Susquehanna can’t actually sell Arrowsmith something called “insurance” against his goat cost risk. It is selling him an event contract, which is a kind of “swap” under the US Commodity Exchange Act. That law says that “It shall be unlawful for any person, other than an eligible contract participant, to enter into a swap unless the swap is entered into on” a registered exchange. (An “eligible contract participant” basically means a large institutional trader; the goat herder wouldn’t qualify.) That is, it’s actually illegal for Susquehanna to do this trade as a pure bilateral over-the-counter contract. But if you do it as a bilateral contract that prints on Kalshi, it’s fine.
That last answer is probably the most important. As I have noted before, the definition of a “swap” is quite broad, and if you take it literally you might conclude that every sort of bet has to be traded on a registered prediction market like Kalshi. Arguably, now, anyone who wants to offer a business a weird bespoke event hedge like this has to trade it on Kalshi.