Prediction markets: the CFTC’s proposal on affiliated market makers
The CFTC has proposed rules for exchanges whose own affiliate trades on them, and it names prediction markets as the place the question matters most. What the proposal would require, what one exchange’s rulebook says today, and how to comment by October 5, 2026.
The law in this article is current to Oct 1, 2026.
In a notice published in the Federal Register on August 6, 2026, the Commodity Futures Trading Commission proposed rules for exchanges, clearinghouses and brokers that share an owner. For prediction markets the part that matters is narrower: what an exchange must do when a firm under common control trades on it for its own account, usually as a market maker. Comments are due October 5, 2026.
The Commission notes that the exchanges with affiliated market makers have implemented a variety of measures to address potential concerns regarding these relationships. … This conflict has acquired practical significance with the emergence of affiliated structures, particularly in prediction markets. In these markets, the affiliate principal trading firm may serve as a significant source of liquidity on the affiliated exchange.
The Commission names prediction markets as the setting, and records that exchanges already have their own safeguards. The question is which safeguards become rules.
What an exchange’s own rulebook says today
Kalshi’s rulebook permits an affiliate to trade on its exchange, and sets out the terms: the affiliate is a member, it gets no non-public information, and it is operationally separate. It also says what the affiliate does and what other participants should expect from it:
The Company has ensured the Affiliate does not have access to the Company’s material non-public information, and the Company ensures the Affiliate’s access to information is limited to public information available to all Members. … The Affiliate participates on the Platform and provides liquidity to the Platform by placing orders on either (or both) sides of a market at competitive price levels. … The Affiliate has no obligation to trade all or even any contracts at any time, and other Participants should not rely on the potential presence of the Affiliate to make markets or otherwise augment or provide liquidity in any contract.
Information separation and disclosure are already in the rulebook. The proposal would add conditions on how the affiliate trades.
What the proposal would require
Proposed § 38.852 lets a designated contract market keep an affiliate market maker, on conditions. The first changes the order in which trades fill:
Specifically, the designated contract market's trade matching system shall fill the bid or offer of any unaffiliated member before the bid or offer of the affiliate market maker at the same price, without regard to the time priority of the affiliate principal trading firm's order. The bids and offers of the affiliate principal trading firm shall be filled last at every price level
At the same price, every unaffiliated order fills first, however early the affiliate’s order arrived.
The second governs the affiliate’s market-making terms. Any market-maker or incentive program filed with the Commission that covers the affiliate must spell out its obligations on terms no less favorable to the exchange than those offered to unaffiliated firms, and must include quoting duties and a limit on directional positions:
Require an affiliate market maker to maintain continuous two-sided quotations in each product in which it is obligated to make a market; … the affiliate market maker does not make bids or offers, or enter into transactions, inconsistent with that purpose, including by taking directional proprietary positions other than in connection with its obligation to maintain two-sided quotations.
Compare the rulebook above: today the affiliate has no obligation to trade. Under the proposal an affiliate that trades takes on quoting duties and may not take directional positions.
Two more conditions follow. An independent third-party regulatory service provider would monitor the affiliate and certify compliance to the Commission every year. And customers would be told, every session, before their first order:
(iii) Disclose the conditions and limitations imposed on the affiliate market maker under this section, including that the affiliate market maker's orders are filled after those of unaffiliated members at the same price; and (iv) Not be capable of being dismissed without the customer's affirmative acknowledgment. (v) The designated contract market shall require, by rule, that its intermediary participants and any other person operating an electronic interface through which customers enter orders deliver the notice in accordance with this paragraph (c)(3).
The notice reaches past the exchange: a broker or app through which customers enter orders on the exchange would deliver it too.
What the Commission did not propose
The Commission preliminarily declined to propose a flat prohibition because, as discussed above, a bona fide market maker can supply liquidity that unaffiliated firms may not, particularly across the broad and continually refreshed contract universes characteristic of prediction markets. … The Commission requests comment on whether it should instead adopt a prohibition on affiliate principal trading firms with no exception.
The proposal sits between two alternatives the Commission put out for comment: disclosure and procedures alone, and a flat ban. It also asks about a cap on the affiliate’s volume.
The same proposal covers swap execution facilities and clearinghouses with affiliates, bars a self-regulatory organization from acting as the designated examiner of its own affiliated futures commission merchant, and would require at least 35 percent public directors on an exchange’s board. It is a proposal: nothing in it binds anyone until the Commission adopts a final rule.
What a builder does with this
- If you run, or plan, an exchange with an affiliated market maker: decide now whether the design works with the affiliate filled last at every price and quoting two-sided markets under the terms of any filed program, and budget for an independent monitor and an annual certification.
- If you distribute a partner exchange’s contracts through your own app: plan for a per-session notice customers must acknowledge before their first order, delivered in your interface.
- If you are choosing a partner exchange: ask whether it has an affiliate that trades, what its rulebook says about that affiliate, and how it would meet § 38.852 if adopted.
- If the proposal affects your product: comments are due October 5, 2026, identified by “Conflicts and Affiliations” and RIN 3038-AF76, through Regulations.gov or the “Submit A Public Comment” button on the Federal Register page.
Sources
Originally published by Apparently Law at www.apparentlylaw.com/research/prediction-markets-conflicts-and-affiliations.