Concerns are mounting within financial circles regarding the reported trading volumes on leading prediction market platforms, Kalshi and Polymarket, with some industry observers raising red flags about potentially inflated figures and even suggesting the possibility of wash trading. These allegations come at a critical juncture for both companies, which are leveraging surging volume metrics to justify multi-billion dollar valuations as they reportedly eye public market debuts as early as next year. The scrutiny highlights the delicate balance between innovation in nascent financial markets and the imperative of regulatory oversight and market integrity.
Rising Questions Over Market Integrity
At the heart of the controversy are unusual trading patterns observed across both platforms. On Polymarket’s international exchange, which operates outside the direct purview of U.S. regulators, a peculiar trend has been noted: markets featuring multiple contracts often exhibit disproportionately higher activity on options with significantly lower probabilities of occurring compared to those with higher, more realistic chances. This anomaly has been consistently identified across diverse market categories, including political elections, sports outcomes, and central bank policy decisions, prompting seasoned market observers to question the organic nature of such trading.
Simultaneously, Kalshi, a U.S.-regulated designated contract market (DCM), is facing similar questions regarding its perpetual futures market for the ether cryptocurrency. An observant user on the social media platform X first highlighted a suspicious pattern on September 20. The user pointed out that a substantial share of transactions involved trades of approximately $5,500, contributing to an abnormally high 24-hour trading volume relative to the actual resting liquidity available on the contracts. A subsequent analysis by CNBC corroborated these findings, revealing that nearly half of the total dollar volume traded on Kalshi’s ether perpetuals on that specific day originated from trades sized within a narrow band of $5,495 to $5,505.
These converging patterns have ignited fears among some financial experts that the reported volumes on these platforms may be artificially inflated. At worst, critics suggest the activity could be indicative of "wash trading," a manipulative practice where traders collude to simultaneously buy and sell an asset, thereby creating a false impression of robust economic activity and liquidity without any genuine change in ownership or market exposure. Such practices are explicitly prohibited in regulated markets due to their capacity to mislead investors and distort price discovery.
Both Kalshi and Polymarket have vehemently denied engaging in or facilitating wash trading across any of their products. They further assert that the observed patterns do not represent inorganic activity, attributing them instead to legitimate market dynamics.
The Regulatory Landscape and Industry Expectations
The Commodity Futures Trading Commission (CFTC) plays a pivotal role in overseeing designated contract markets like Kalshi, tasking them with upholding market integrity. Tamika Bent, a partner at K&L Gates, underscored this responsibility, stating that a DCM "has a duty to protect market integrity by monitoring market conditions, price movements, and volumes in real time for abnormalities." While Bent clarified that the described patterns alone do not definitively establish misconduct, she emphasized that observers would "expect DCMs to be surveilling unusual volume and looking into any signs of market disruption."
The Wall Street Journal recently reported that the CFTC is actively examining the trades on Kalshi’s ether perpetual future contract. While CNBC could not independently verify this report, a spokesperson for the CFTC maintained the agency’s policy of neither confirming nor denying matters related to ongoing investigations. However, CFTC Chairman Michael Selig’s public remarks on September 23 on CNBC’s "Squawk on the Street" resonated with the broader concerns. "We have a zero tolerance policy when it comes to any sort of manipulative trading, including wash trading, insider trading, or fraud in our markets," Selig declared. He acknowledged the challenges posed by evolving markets, adding, "When you have new types of markets evolving, you’re going to see fraud with that." This statement, while general, underscores the regulator’s vigilance over emerging trading venues.
Valuations and Public Market Aspirations
The accuracy of trading volume figures is particularly critical given the aggressive growth trajectories and ambitious valuations pursued by both companies. Polymarket is reportedly seeking a private market fundraising round at a valuation exceeding $20 billion, following the launch of its U.S. exchange in May and reporting annualized revenues of $1 billion. Kalshi, meanwhile, is said to be in discussions to raise funds that would value the company at an eye-watering $40 billion, building on the momentum from its perpetual futures product debut in June. Both platforms have consistently highlighted surging trading volumes as a key metric to demonstrate their expanding popularity and justify these substantial valuations.
However, as both companies reportedly explore potential moves to the public markets as early as next year, the authenticity of these volume figures is under intense scrutiny. Andre Guettler, a finance professor at Ulm University in Germany, articulated the gravity of the situation in a working paper examining the patterns on Kalshi’s perpetual futures. He posited that "To the extent that a material share of reported perpetual volume is manufactured… headline volume and its trajectory may overstate the underlying trading demand on which such a valuation would rest." Guettler emphasized the critical importance of this distinction, particularly for retail investors who would be the "natural buyers of a prediction-market exchange at a public listing."
Polymarket’s "Sharps" and Low-Odds Anomalies
Polymarket’s head of revenue and analytics, Kyle Gesuelli, offered an explanation for the popularity of low-odds contracts on its international exchange. He contended that this phenomenon is not a result of wash trading or inorganic activity, but rather driven by highly active, sophisticated traders, often referred to as "sharps." These sharps, Gesuelli explained, employ complex software and algorithms to identify and exploit minute mispricings across various contracts, including those with seemingly negligible probabilities. He argued that this activity is "actually healthy for markets because it brings pricing imbalances back into balance."
However, the examples cited by observers paint a picture that many find difficult to reconcile with natural market behavior. Barron’s reported in April on unusual activity in 2028 presidential election contracts on Polymarket’s international exchange. For instance, a contract asking if JD Vance would be the Republican presidential nominee in 2028 registered less volume than one for Elon Musk, despite Musk’s ineligibility for the presidency. Similar inexplicable volume patterns were observed in markets concerning prospective Democratic nominees for the same election cycle. In stark contrast, a CNBC analysis of Kalshi’s markets revealed that low-odds presidential candidates for 2028 consistently generated less volume than those with higher probabilities, reflecting a more conventional market dynamic. Furthermore, the peculiar pattern of high volume on low-odds contracts was not detectable on Polymarket’s CFTC-regulated U.S. exchange, suggesting a potential difference in market participant behavior or regulatory environment.
The anomalies extend to sports-related contracts on Polymarket international. In the context of the 2026 FIFA World Cup, Spain, the eventual victor, saw $152 million traded on its odds. Intriguingly, this figure was less than the $158 million traded on Egypt’s odds (a team whose probability of winning never exceeded 0.5%) and only slightly smaller than Morocco’s, which never had more than a 2% chance.
Perhaps the most striking example involves a contract predicting the next prime minister of Ethiopia. Despite the election having concluded in June, with Prime Minister Abiy Ahmed winning and holding a 98% probability on the contract, only about $170,000 had been traded on his chances. Conversely, Gedion Timothewos, whose probability had consistently remained below 3% for months, saw an astonishing nearly $56 million traded on his odds. A Polymarket spokesperson stated that this contract would resolve upon the official swearing-in of the new government, scheduled for October 5. Joe Saluzzi, head of equity market structure research at Themis Trading, expressed his bewilderment: "Those are ridiculous long shots. It sounds like someone’s trying to put some very, very low risk volume up there… Why would anybody be trading that?" Data from Dune Analytics further revealed that volume for the Ethiopian election contract surged over 6.7 times from June 21, when Ahmed’s victory was confirmed, to September 25. The market’s highest reported daily volume, over $15.3 million, occurred on July 30, more than a month after the election results were widely known.
Gesuelli reiterated that the heightened activity in low-odds contracts is more prevalent on Polymarket’s international exchange due to a greater concentration of sharps, who leverage sophisticated tools to profit from minor mispricings. He contrasted this with the U.S. exchange, which he characterized as being dominated by casual retail traders.
Concerns about wash trading on Polymarket are not entirely new. A study released in November 2025 by Columbia University researchers found that trading patterns indicative of wash trading constituted 60% of Polymarket international’s weekly volume in December 2024, though this figure reportedly declined to 20% by October 2025. Lead author Allen Sirolly noted that this measure further fell to a negligible amount by April 2026. A Polymarket spokesperson attributed this reduction to expanded surveillance and the introduction of fees, which they claim have diminished opportunities for market manipulation. However, Sirolly cautioned that the persistent popularity of low-odds contracts remains a concern.
Many prediction market observers have speculated that these strange discrepancies on Polymarket’s international exchange are linked to past hints from the company about a potential cryptocurrency token "airdrop." Jay Malavia, co-founder and CEO of prediction market trading terminal Kairos, explained that token airdrops are a common strategy for crypto-based companies to incentivize and reward early users who contribute to platform growth. Polymarket’s international platform operates on the Polygon blockchain. While the exact criteria for receiving such rewards, if an airdrop were to occur, are typically vague, Malavia noted that platforms often consider metrics like users’ open interest or individual trading volumes when determining eligibility. Polymarket has declined to comment on the airdrop speculation.
Kalshi’s Perpetual Futures: A Debate on Incentives and Liquidity
The scrutiny surrounding Kalshi’s ether perpetuals was triggered by Benoît Dubosson, who first flagged unusual trading behavior on September 20 via X, theorizing that the trades potentially amounted to wash trading. Other critics quickly pointed to Kalshi’s incentive structures, including rebates for market makers providing resting liquidity and a waiver of trading fees through the end of 2026, as potential drivers of this behavior. These incentives, designed to attract traders to the company’s nascent futures product, were seen by some as encouraging artificial activity.
Kalshi responded to these claims in a blog post, asserting that hundreds of distinct users were involved in the flagged trades and that the platform employs robust mechanics to monitor for self-trades or collusion. The company suggested that the activity was likely driven by speculators capitalizing on arbitrage opportunities, exploiting minor discrepancies between the spot price of a cryptocurrency on another exchange and a market maker’s original order on Kalshi. This allows traders to "scoop up that slightly outdated quote and obtain a quick profit."
While experts generally agreed that the trades likely did not constitute explicit wash trading, a persistent problem was identified by Rajiv Sethi, an economics professor at Barnard College. Sethi argued that Kalshi’s fee structure effectively allows traders to consistently profit from arbitrage opportunities, but crucially, these profits are only viable because of Kalshi’s trading fee rebates, which are in place to attract early speculators to its perpetual futures. "What Kalshi is doing in a nutshell is they’re funneling money to aggressive liquidity takers through the market makers," Sethi explained.
Kalshi defends these incentives as critical for providing initial liquidity to a novel market. However, experts question the genuine success of these incentives, pointing to the high churn rate of liquidity. As of Wednesday morning, volume on Kalshi’s bitcoin and ether perpetual futures was approximately 42 and 66 times open interest, respectively. This ratio diverges significantly from other international perpetual futures products. Guettler remarked in an interview that such a ratio "doesn’t look very organic." For context, Polymarket’s ether perpetual futures exhibited a 24-hour trading volume of about three-quarters of its open interest, while industry leader Hyperliquid, also an offshore exchange, showed a 24-hour trading volume of just one-third of its open interest on the same day.
Craig Pirrong, a finance professor at the University of Houston’s C.T. Bauer College of Business, characterized Kalshi’s situation as "creating the appearance of liquidity, but it seems like a self-licking ice cream cone." He added, "It seems to be liquidity that’s provided to harvest the incentives."
Jack Such, a spokesperson for Kalshi, attributed the differences in volume-to-open interest ratios partially to the lower leverage offered on Kalshi’s contracts compared to offshore exchanges. Kalshi allows traders up to 4.9 times leverage, whereas Hyperliquid offers up to 25 times leverage on its ether perpetual future. Such also cited infrastructure and U.S. regulatory requirements, explaining that Kalshi does not permit market makers to requote orders if prices change, and U.S. regulations prohibit incentivizing users to park capital on the platform. He emphasized that comparing a CFTC-regulated exchange to offshore platforms is an "apples and oranges comparison: they are using a different system and playing by different rules." However, traditional bitcoin futures contracts on CME, a regulated U.S. exchange, typically demonstrate volume that is less than their open interest, suggesting that regulatory status alone doesn’t fully explain Kalshi’s high ratio.
Despite Kalshi’s explanations, Sethi maintained that the significant discrepancy between volume and open interest should prompt Kalshi to re-evaluate some of its incentives for its perpetuals exchange. "I’m not attributing it to wash trading," Sethi clarified, "But I disagree… that this is perfectly fine."
Broader Implications for the Prediction Market Industry
The unfolding situation for Kalshi and Polymarket underscores the inherent challenges in regulating rapidly evolving financial technologies and market structures. While prediction markets offer a novel way for participants to hedge against or speculate on future events, the integrity of their trading volumes is paramount for investor trust and regulatory confidence. As these platforms mature and potentially move toward public listings, transparency and verifiable market activity will be crucial. The current scrutiny serves as a potent reminder that while innovation can drive significant valuations, it must always be anchored by robust market surveillance and a commitment to fair and orderly trading practices. The outcome of these investigations and the companies’ responses will likely set important precedents for the future of prediction markets and their place within the broader financial ecosystem.
Disclosure: CNBC and Kalshi have a commercial relationship that includes customer acquisition and a minority investment.
