CFTC Orders Kalshi to Keep Trading, Pre-empting New York's $36 Billion Suit

The federal derivatives regulator has ordered a prediction market to stay open in the state trying to shut it down, and it did so before any court has ruled on the motion. It is the second time in under a month that the Commission has used emergency powers against a state acting on Kalshi.

• The Commodity Futures Trading Commission (CFTC) issued an emergency order on 11 August directing KalshiEX LLC to continue operating its exchange in accordance with its normal practices and the Commodity Exchange Act's Core Principles
• Kalshi itself triggered the intervention, notifying the Commission of a market emergency on 1 August, the day after New York sued it in state court
• New York is seeking disgorgement of all Kalshi's event contract profits, a penalty of three times that amount, and $36 billion in compensatory damages "at minimum pending accounting"
• The Commission invoked Section 8a(9) of the Commodity Exchange Act, finding that the state's enforcement action amounts to a "major market disturbance which prevents the market from accurately reflecting the forces of supply and demand"
• The order lands days after a Connecticut judge rejected Kalshi's legal theory in its entirety, leaving the exchange losing in court while winning at its own regulator

The Exchange Asked Its Regulator for Help, and Got It

Letitia James, Attorney General of the State of New York, filed a complaint against KalshiEX LLC at 12:01 a.m. on 31 July in the Supreme Court of the State of New York for the County of New York, alleging that the exchange's operations contravene New York gambling laws. The following day, Kalshi notified the Commodity Futures Trading Commission that it faced a market emergency. On 11 August the Commission agreed, issuing an order titled "Order Directing Kalshi to Continue Exercising DCM Functions".

The order directs Kalshi to continue to operate its exchange in accordance with its normal practices and the Commodity Exchange Act's Core Principles. In its notification, Kalshi said the emergency put at risk its ability to comply with Core Principles 2, 4, 6, 7, 9, 11, 12 and 21, and warned that a restraining order would expose traders to losses exceeding the collateralised value of their contracts. The exchange also argued that the disruptive effect of the lawsuit might be felt even before any order was granted.

The relief New York has requested is what converted a state licensing dispute into a federal jurisdictional confrontation. The state's motion seeks to prohibit Kalshi from "operating a business that offers contracts relating to sports, culture, elections, and other events" "within or from New York or to persons in New York". The Commission's reading is that because the motion offers no definition of "other events", and because New York is Kalshi's principal place of business, the practical effect would be to stop a federally registered exchange offering event contracts to anyone in the world. Alongside the restraining order, New York seeks disgorgement of all profits from event contracts, a penalty of three times that figure, and at least $36 billion in compensatory damages, excluding punitive damages.

The authority the Commission invoked is Section 8a(9) of the Commodity Exchange Act (CEA), codified at 7 U.S.C. 12a(9), which provides that where the Commission has reason to believe an emergency exists it may direct a registered entity "to take such action as in the Commission's judgment is necessary to maintain or restore orderly trading". The statute defines an emergency to include any "major market disturbance which prevents the market from accurately reflecting the forces of supply and demand". The Commission found that New York's enforcement action and restraining order motion met that definition with respect to event contracts, and noted that it reached this conclusion even though the state action has already been removed to federal court.

Chairman Michael S. Selig framed the decision in constitutional terms. "New York intends to make event contract derivatives waste away under its iron curtain of state gaming laws before the courts get the chance to issue final rulings," he said, adding that "Congress did not intend for derivatives exchanges to be regulated under a patchwork of state gaming laws." The order itself puts the concern more starkly, warning that if New York's lawsuit proceeds with the relief it seeks, "a single State will effectively become the nationwide regulator of event-contract swaps on DCMs".

This is the Commission's second emergency intervention on Kalshi's behalf in under a month. On 14 July it stayed a Kalshi rule change and ordered the fulfilment of pending trades after a Michigan state court directed the exchange to cancel transactions involving Michigan residents that had already executed. Selig said at the time that "a state cannot force a DCM to violate its obligations, and federal law does not permit a DCM to discriminate against a state's residents." Kalshi has been a designated contract market since 3 November 2020.

The Regulator Has Answered a Question the Courts Are Still Deciding

Every state case against Kalshi turns on whether the Commodity Exchange Act pre-empts state gambling law, and whether sports event contracts qualify as swaps. Those are questions for judges, and judges have increasingly answered them against the exchange, in Connecticut, in Washington, and in the federal court that declined to block New York's enforcement. The Commission has now supplied its own answer by administrative order while that litigation is live. Selig's objection is that New York wants to act before the courts issue final rulings, but the same observation applies to the Commission, which has directed the exchange to keep trading before any court has ruled on the motion in question. What exists now is not a resolution of the pre-emption fight but a second, parallel source of authority pointing the opposite way.

Asking for $36 Billion Created the Opening for the Federal Response

New York's damages claim is extraordinary, and its breadth is what allowed the Commission to characterise a single state's motion as a market-wide emergency. The order's reasoning depends almost entirely on scope: the undefined phrase "other events", and the fact that Kalshi's principal place of business sits inside the state, are what let the Commission describe a New York restraining order as a worldwide prohibition. A motion drafted more narrowly, aimed squarely at contracts offered to New York residents, would have been considerably harder to present as a disturbance to the national market, and considerably harder to answer with Section 8a(9). The state's most aggressive framing supplied its opponent with the predicate it needed.

Licensed Operators Face a Consequence Kalshi Does Not

For the regulated sector the significance is competitive rather than constitutional. An operator that loses a state enforcement action stops taking bets in that state, pays the penalty and absorbs the loss, because no federal agency will instruct it to carry on. Kalshi now has a regulator that will. That asymmetry is the substance of the complaint the licensed industry has been making about event contracts on tax, on fees and on licensing, and it strengthens the argument that two businesses offering economically similar products face materially different consequences for the same regulatory failure. It also raises the stakes of the competing bills in Congress that would settle whether the sector is finance or gambling, since a legislative answer is now the only thing that would bind both the states and the Commission.

The Conflict Still Needs a Court Willing to Resolve It

Nothing in the order settles what happens if a judge grants New York's restraining order and Kalshi, following the Commission's direction, continues trading anyway. That would place a federal agency's instruction and a court order in direct opposition, with a private company deciding which to obey. The order does note that emergency orders are reviewable only in the federal appeals court for the circuit where the party seeking review resides or has its principal place of business, which points the eventual challenge towards the Second Circuit and narrows the ground on which New York can contest it.

The Commission has given Kalshi something no court has been willing to give it, which is permission to keep operating while it loses. Whether that permission survives contact with a state court order is now the only question that matters.