The Commodity Futures Trading Commission has proposed the first codified framework for vertically integrated market structures in US derivatives markets, targeting the conflicts of interest that arise when an exchange and its market maker share the same ownership. The proposal stops short of an outright ban, but draws a hard line between legitimate liquidity provision and directional proprietary trading.
The Commodity Futures Trading Commission has proposed the first codified framework for vertically integrated market structures in US derivatives markets, targeting the conflicts of interest that arise when an exchange and its market maker share the same ownership. The proposal stops short of an outright ban, but draws a hard line between legitimate liquidity provision and directional proprietary trading.
The Commodity Futures Trading Commission published a notice of proposed rulemaking on 30 July 2026 setting out principles-based regulations for vertically integrated market structures on CFTC-regulated exchanges. The proposal directly targets the relationship between designated contract markets and affiliate principal trading firms, known in the prediction market context as in-house market makers: entities that are owned by the same business as the exchange on which they trade.
According to the Commission, it has observed continued growth in the number of such affiliations across the full range of CFTC-regulated entities, including derivatives clearing organisations, designated contract markets, swap execution facilities, and futures commission merchants. The announcement noted that the phenomenon is most pronounced in prediction markets, which characteristically list a large and continuously refreshed population of individual, short-lived contracts. The CFTC said it was aware of approximately eight such affiliate principal trading firms currently in operation.
The mechanics vary by platform. Kalshi, for example, operates Kalshi Trading as an in-house market maker wholly owned by the same company as the exchange. In other cases the relationship is less complete: the CFTC's source material referenced Susquehanna International Group as a market maker on the exchange Rothera, with Susquehanna holding a 45% stake in Rothera via a joint venture. The Commission said that exchanges typically have existing disclosures and internal rules to prevent in-house market makers from trading on confidential market information, but characterised that existing framework as voluntary, constructive, and uneven.
"A codified framework would afford registered entities and market participants predictable expectations; help ensure that comparable conflicts are subject to comparable safeguards regardless of the venue on which they arise; and render those safeguards durable and subject to Commission oversight," the CFTC wrote in the proposal document.
The regulator did not propose an outright prohibition. It acknowledged the liquidity bootstrapping function that in-house market makers serve, particularly for new exchanges facing what it described as a coordination problem: unaffiliated market makers are reluctant to commit capital until a market has sufficient volume, yet volume is hard to attract without quoted liquidity. The CFTC said this dynamic is especially pronounced in prediction markets, where the volume of small and idiosyncratic contracts makes it economically unattractive for independent firms to provide initial liquidity.
Instead, the proposal draws a distinction between bona fide market making and directional proprietary trading. A bona fide market maker, under the proposed definition, would be contractually obligated to maintain continuous two-sided quotations and would be filled only after unaffiliated members at every price level. Taking a position on one side of a market, which is how many market makers generate significant profits, would fall outside what the rules would permit for an in-house affiliate.
The Commission also identified a self-regulatory conflict that its proposed framework seeks to address. Exchanges operate as self-regulatory organisations, responsible for monitoring and disciplining conduct on their own platforms. Where the firm under surveillance is the exchange's own affiliate and a potential profit centre, the CFTC noted, the exchange is being asked to investigate and potentially discipline the source of its own revenue. The proposal would subject that relationship to direct Commission oversight rather than leaving it to internal governance.
The comment period is open for 60 days. The Commission will consider responses before deciding whether to finalise the rules.
The 'Bona Fide' Standard Will Be the Hardest Part to Enforce
The most consequential and most uncertain element of the proposal is the definition of bona fide market making. Drawing a bright line between legitimate two-sided liquidity provision and directional proprietary trading is straightforward in principle but considerably harder in practice, and the source material acknowledged ambiguity in how elements of the proposed rule would be enforced. A market maker that skews its quotations consistently toward one outcome without formally abandoning two-sided quoting occupies a grey area that a principles-based framework may not resolve clearly. Regulators in equity and futures markets have wrestled with the same definitional problem for years, and the outcomes have not always been tidy. For prediction markets, where individual contracts are small, short-lived, and numerous, the surveillance burden is substantially larger than on a conventional futures exchange. The CFTC's decision to proceed with principles rather than bright-line rules is pragmatic given the novelty of the sector, but it also means that the enforcement quality of the final rule will depend heavily on the Commission's supervisory capacity and willingness to act when the line is crossed.
Voluntary Disclosure Has Not Been Enough, and the Industry Already Knows It
The CFTC's description of existing practices as "voluntary" and "uneven" is a measured way of saying that self-regulation has not produced consistent outcomes across venues. Prediction market exchanges have grown rapidly in the past two years, capturing a significant share of US sports betting volume during major events such as the 2026 World Cup, according to iGaming Times data. That growth has outpaced the regulatory infrastructure around it. Meanwhile, platforms including Kalshi have faced legal challenges in multiple US states and at federal level, with courts in Washington and Michigan issuing blocking orders, and a federal judge declining to shield Kalshi from New York enforcement. A codified conflict-of-interest framework does not resolve those jurisdictional disputes, but it does address a credibility problem: if prediction market exchanges want to be treated as regulated derivatives venues rather than unlicensed gambling platforms, demonstrating that their internal market structure meets enforceable federal standards matters. The CFTC proposal moves the sector in that direction.
The Self-Regulatory Conflict Is the Structural Problem the Proposal Is Really Solving
Beyond the specific question of directional trading, the more durable issue the CFTC has identified is the self-regulatory organisation conflict. An exchange that is simultaneously responsible for policing conduct and financially dependent on the entity it is asked to police cannot credibly perform either function without independent oversight. The proposal's framing, that exchanges investigating their own affiliates are being asked to discipline a source of their own revenue, is the clearest statement yet from a US federal regulator that the current governance model for in-house market makers is structurally compromised. Comparable conflicts in other financial markets have typically been resolved either by mandatory structural separation or by direct regulatory substitution of the self-regulatory function. The CFTC has chosen neither option at this stage, preferring instead to layer Commission oversight on top of the existing structure. Whether that is sufficient will depend on how actively the Commission exercises that oversight once the rules are in force. The 60-day comment period is a material opportunity for both exchanges and their critics to shape the answer.
