When you enter the world of financial trading, it is crucial to understand the key players involved. Financial markets are vibrant ecosystems comprising various participants, each with unique motives and strategies. On Kalshi, there are three primary types of traders:

1. Directional traders: these are individuals or institutions who believe the pricing of a Yes or No contract is attractive relative to the likelihood of that event occurring.
2. Hedgers: these are individuals or institutions who have some external risk (inflation risk, interest rate risk, hurricane risk, etc) and want to protect themselves on the downside using Kalshi’s Event Contracts. Typically, hedgers are willing to pay a slight premium for the contracts, since it is more about protecting the downside in an extreme case, rather than maximizing upside.
3. Market makers: common participants in financial markets, a market maker's primary role is to provide liquidity to the market to ensure people can easily enter and exit their positions. One way a market maker does this is by buying a contract, then soon after selling that contract to someone else at a slightly higher price. Market makers make money by collecting the spread (the difference between the bid and ask) - generally, they don’t have an opinion as to whether the price of a contract should go up or down. There are a number of market makers on Kalshi, primarily individuals and small institutions, who have found it remunerative to play the ever-important market-maker role on Kalshi. You can learn more about market making on Kalshi in this article.

Today most participants on Kalshi fall into the first two categories. Additionally, the majority of participants on Kalshi today are retail traders, as opposed to institutional traders. Another significant player on the exchange is Kalshi Trading. Kalshi Trading is a separate entity from Kalshi Exchange - a different company with completely separate operations, and subject to strict informational barriers that prevent any non-public exchange information from being shared; they are a participant on the exchange just like everyone else.

Liquidity is one of the most important parts of a well-functioning exchange. For that reason, we’ve launched a volume incentive program, which provides rebates for those who trade higher volumes. Many on the exchange have begun utilizing this program.

Who is the counterparty

Because Kalshi as an exchange is designated as a Designated Contract Market (DCM) by the CFTC, we are required by law to clear all transactions through a CFTC-regulated clearing house, referred to as a Designated Clearing Organization (DCO).

There are many benefits that come with a clearing house. A primary benefit of the clearing house comes from counterparty risk reduction. A clearing house actually novates all transactions between parties meaning the clearing house becomes the counterparty to each participant in a transaction, rather than the two parties transacting being counterparties to one another. Said differently, once A and B agree to transact on the exchange, the trade between A and B becomes two trades between A and clearinghouse + clearinghouse and B.

This means that even if one side in a transaction were not able to pay for any reason, the other party would not be impacted, as the clearing house is now legally obligated to complete the transaction as the counterparty. Clearing houses are required to set aside large amounts of reserves for this unlikely scenario. Novation is extremely important, as it greatly reduces counterparty risk that you see with OTC transactions, or other transactions where the two parties trading are counterparties to one another.

To reduce risk even further, Kalshi requires all trades to be fully cash collateralized, meaning all of the trades are fully funded once a trade is agreed upon; this further reduces the risk of the clearing house reserve funds being needed and greatly reduces systemic risk to the Kalshi ecosystem broadly.

Other benefits of partnering with a CFTC regulated clearing house include:

• Segregated members accounts - all customer funds on Kalshi remain in a segregated United States bank account dedicated to customer funds; they cannot be touched for other operational reasons.
• A number of CFTC-mandated risk controls, including daily reporting reviewed by the CFTC.