New asset class?
Massachusetts is going after Robinhood (HOOD) over its decision to expand its trading offerings to prediction markets. The brokerage recently teamed up with Kalshi to offer event contracts after testing the waters in the 2024 presidential election and a similar push for Super Bowl LIX. While the new prediction hub on Robinhood is focused on things like the NCAA March Madness tournament, there are plans to eventually expand into economic events such as corporate earnings and Fed rates, which are already offered on Kalshi’s website.
Quote: “This is just another gimmick from a company that’s very good at gimmicks to lure investors away from sound investing,” said Massachusetts Secretary of State Bill Galvin, adding that Robinhood was “linking a gambling event on a popular sports event that’s especially popular to young people to a brokerage account.”
The state’s securities regulator has sent over a subpoena for details on how many of Robinhood’s users in Massachusetts have requested to trade college sports events. Don’t forget that it also went after Robinhood in 2020, accusing the platform of encouraging risky trades among inexperienced investors via “gamification” strategies, and later secured a $7.5M settlement for the claims, as well as a data security breach in 2021. This time around the accusations are centering around “gambling,” though it might be harder to prove, especially for financial derivatives that are listed on a CFTC-registered exchange.
Gambling or investing? Robinhood is making the case that prediction markets are the future for traders, and has even called them an innovative asset class. “Instead of betting against the house, this is an exchange where buyers and sellers are meeting,” according to CEO Vlad Tenev, similar to futures contracts that are used for commodities or hedging portfolios. Others point to differences in price discovery and the liquidity offered by traditional derivatives, and argue that prediction markets aren’t generally based on solid research or hedging models, but might be the latest iteration of gambling services masked with a financial name (remember binary options?).
Read the full article here
