You know what’s funny? There is a real legal dispute about whether Kalshi and other prediction markets should be allowed to offer sports bets without complying with state gaming laws. Kalshi and the US Commodity Futures Trading Commission take the view that (1) Kalshi is federally regulated by the CFTC, (2) sports bets are “swaps” under federal regulation, (3) federal regulation preempts state gaming regulation, so (4) buzz off, states. Many states disagree, and there has been litigation around the country. (We have talked about this several times.) Two federal appellate courts have sided with the states, but another has sided with Kalshi. The state that lost that last case (New Jersey) is asking the Supreme Court to review it, and last week 39 states filed a brief supporting New Jersey’s request. So did the National Football League. I assume that the Supreme Court will take the case. I have no idea what it will decide. I think this is a tough question, courts have disagreed on the answer, it is all pretty politically charged, the Supreme Court can kind of do whatever it wants, and I have no real model of what it will want. I could not tell you the probability that Kalshi will win and get to continue offering sports bets.

So, out of muscle memory, I fire up Kalshi to check that probability. “Supreme Court Will Rule Kalshi Sports Bets Are Legal, Yes/No,” where is it? But Kalshi doesn’t list that contract! [1] Here’s “A Kalshi Contract on the Legality of Kalshi Contracts,” by Joseph Grundfest:

This note proposes that Kalshi list a "Kalshi Sports Legality" contract indexed to the outcome of United States Supreme Court litigation addressing whether Kalshi's sports-indexed contracts are federally regulated in a manner that preempts state law. Kalshi has previously listed at least 16 contracts indexed to Supreme Court determinations. No rule or regulation prevents Kalshi from listing the proposed contract. The proposed contract would provide a market estimate of the probability that the Supreme Court rules that Kalshi's sports-indexed contracts are legal. The contract would thereby create valuable hedging opportunities for Kalshi investors. It would also create hedging value for Kalshi customers who might lose access to Kalshi markets. These hedging rationales are more substantial than rationales Kalshi presents to support other Kalshi contracts, such as contracts indexed to parlays or to specific in-game events, such as whether the first play in a football game leads to a touchdown.

I mean, sure, of course. You and I and Joseph Grundfest can propose sarcastic Kalshi event contracts, but Kalshi doesn’t have to list them. Hypotheticals!

1. If Kalshi listed this contract, and it traded in reasonable volume and showed a [90%][10%] probability of Kalshi winning, would that make it [more][less] likely that Kalshi actually would win? Would the prediction market implied probability affect the outcome? Would talented appellate lawyers look at the market and think “oh Kalshi is definitely going to [win][lose], so I should join [their][the other] legal team”? Would the Supreme Court justices, or their clerks, look at this market and think “ah, the smart money is that Kalshi will [win][lose], so that’s probably right?” People have concerns like this about prediction markets on elections: A prediction market showing one candidate winning might drive money and attention and support to that candidate and become self-fulfilling. And here is a Wall Street Journal article about the effects of prediction markets on juries: “If millions are wagered on the belief that a defendant will be acquitted,” it asks, “could that make a jury more reluctant to convict?” I don’t think that the Supreme Court exactly works like that, but on the other hand the Supreme Court, like an election or a jury, is a mechanism for aggregating the votes of several humans, so maybe it works a little like that. 
2. If it did work like that, and it showed a 10% probability of Kalshi winning, would Kalshi delist the contract? (Does the lack of this contract suggest something about its expected probability?)
3. If it did work like that, and it showed a 10% probability of Kalshi winning, could Kalshi, you know, buy a bunch of this contract and push its probability up?
4. All that aside, if Kalshi listed this contract, could it hedge its sports gambling risk by betting against itself on its own market?

Discuss!

I guess if I had to take a view on this case, I would say that Kalshi is the slight favorite. The CFTC does have broad jurisdiction to regulate financial derivatives, and its regulation preempts state law. In the olden days, many states thought that, like, wheat futures were gambling, and would ban them. Congress gave the CFTC the power to regulate wheat futures, and to preempt state gaming regulation of those futures. Over time, the CFTC expanded its jurisdiction to other, less obviously commodity-like financial contracts (interest-rate futures, stock index futures), with general acceptance. States don’t get to second-guess the CFTC’s decisions about allowing interest-rate futures or whatever, and they don’t get to apply gambling regulation to those futures. 

The theory of Kalshi and the CFTC is that the CFTC is the exclusive regulator of “swaps,” and that sports bets are a type of “swap” under the definition included in the Dodd-Frank Act of 2010. That definition is quite broad, and includes any contract whose payout “is dependent on the occurrence, nonoccurrence, or the extent of the occurrence of an event or contingency associated with a potential financial, economic, or commercial consequence.” The theory is that sports have potential economic consequences — your bar will sell more beer if your local team makes the playoffs, etc. — and so all sports bets are swaps, in the same way that bets on wheat prices or interest rates are swaps. Because they are swaps, they are exclusively regulated by the CFTC, and state law doesn’t apply. 

This is obviously annoying. The states’ brief says:

Prediction markets … claim to have discovered this no-state-law-applies escape hatch buried within a subsection of a section of a federal financial reform bill passed in the wake of the 2008 mortgage crisis. That bill — the Dodd-Frank Act — gave the Commodity Futures Trading Commission “exclusive jurisdiction” over specified derivatives, including financial instruments called “swaps.” Prediction markets say that classic sports bets — things like whether Joe Burrow throws three touchdowns or Ohio State beats Michigan — are not bets at all. They are actually “swaps” within the CFTC’s “exclusive jurisdiction.” So Ohio, New Jersey, Nevada, and any other State can do nothing to regulate those transactions.

The prediction markets are wrong. They cannot strip the States of their core sovereign power through relabeling and window-dressing. Our constitutional structure is much more durable than that. And the promise of federalism ensures that States do not lose their ability to protect their citizens so easily. Yet that is precisely what would happen under the prediction markets’ theory.

Gary Gensler, the former chair of the CFTC, also filed a brief pointing out that this is absurd; as he notes:

If Kalshi were correct that sports bets were swaps, then all off-exchange retail sports bets since October 2012 — in every state — have been illegal because persons other than “eligible contract participants” (‘ECPs’) were prohibited from entering into off-exchange swaps under 7 U.S.C. § 2(e).

We have discussed this point before: If you take seriously the argument that sports bets are swaps, that doesn’t just mean that Kalshi’s sports bets are exempt from state regulation. It also means that all sports bets are subject to CFTC (not state) regulation, and if they are not traded on CFTC-regulated exchanges then they are illegal. So all sportsbooks are illegal. (And they have been illegal since Dodd-Frank, long before Kalshi was even invented.) Gensler goes on:

Congress and the CFTC (at least until the past year) did not behave as though Congress had made such a fundamental change. No one suggested that casinos had to shut down their off-exchange sports-betting operations. Nor did the CFTC ask Congress for the staffing or appropriations to regulate sports-betting transactions after Dodd-Frank’s passage. …

Congress does not make fundamental changes in the balance of state and federal power in isolated snippets of text. As the Court has said, Congress does not “hide elephants in mouseholes.” … Preempting state authority over sports betting — an over $165 billion per year industry — has major implications for states’ power to protect their residents. It is not the kind of thing Congress hides in a subpart of a definition. If Dodd-Frank had preempted the states and tribes on sports betting, it would have been one of the biggest stories about Dodd-Frank at the time. But nobody ever mentioned it.

I find this argument very compelling as a policy matter and as an “oh come on of course sports gambling is not a commodities derivative” matter, but I’m not sure how compelling the Supreme Court will find it. The statute gives the CFTC pretty broad authority to decide what to allow, and for reasons of its own the CFTC has gone absolutely all-in on the theory that the US needs a unified national market for letting 18-year-olds bet on college football point spreads and in-game parlays. To me this seems obviously wrong, and not what Congress or anyone else voted for, but I am not sure it’s legally wrong. I would probably bet on Kalshi’s chances at even money. [2] If I could bet.

There is a business of residential utility customers selling electricity. Traditionally, if you have a house, you pay for electricity each month. But there are circumstances in which you might get paid. One, which we have discussed a few times, is called “demand response”: Your electric company might pay you for agreeing to turn off your air conditioning during periods of peak power demand, because using less power at those times is just as valuable to the grid as generating more power would be. Or if you have solar panels on your roof, you might sometimes generate more power than you use. Maybe your electric company will buy the extra power from you and send it where it’s needed.

These days, though, if you talk about demand for electricity, you’re probably talking about demand to power artificial intelligence computing. Hundreds of gigawatts of AI data centers are in the works, and AI data centers are measured in gigawatts in part because electricity is a critical limiting input. Big tech companies are getting into the nuclear power plant business, and permitting and building electric generation and transmission infrastructure is a big part of the AI boom.

And so surely in, like, a year there will be a residential utility customer angle? Some startup will be going door-to-door ringing bells and saying “hello, we will pay you $5 per month to let us put this Nvidia server rack in your basement and run it when you’re not home”? Just seems like the obvious next step in electric price arbitrage. Why should homeowners sell their power to the grid, when there is a high-profile specific urgent source of demand for that power? Why not sell their power directly to OpenAI?

I guess I’m kidding, both in the sense that an Nvidia server rack uses more power than most households and in the sense that putting one rack in thousands of houses is a lot less useful for AI workloads than putting thousands of racks in one data center. Still. I just think “let homeowners sell their power to AI companies” is close enough to a real thing that someone’s going to do it.

For now, the Information reports:

New York-based Xeal manages a network of thousands of EV charging stations, mostly in luxury apartment complexes and upscale retail and office buildings in about 500 cities across the U.S. and Canada.

Xeal CEO Nikhil Bharadwaj says the company’s charging stations are in use less than 10% of the time on average, although its utility contracts give it the right to charge cars 24 hours a day. That typically leaves Xeal with a humongous store of idle electricity—enough to power around 130,000 homes or 110,000 Nvidia AI chips around the clock. 

So the company is launching a service that will use that electricity to power AI chips. In December, Xeal will begin installing Nvidia AI server racks, housed within custom-made protective metal containers the size of a single parking space, next to chargers located in Chicago, Houston and Dallas parking garages. The power behind the chargers will instantly juice the racks, which will each contain roughly 48 Nvidia AI chips. …

Xeal’s advantage is its novel access to the grid. That’s attractive to AI data center developers who often face multiyear waits for grid connections and have turned to natural gas turbines and nuclear power, though those alternatives also face long delays. ...

Bharadwaj said he calls the owners of buildings using Xeal chargers and offers to pay them a rental fee to allow Xeal to install just one of the GPU containers in their garage. “How would you like your payback to be 2½ years instead of five,” he tells them. “No capex to you, no opex. I'll pay for all the power bills.”

If you signed long-term electricity contracts in 2020, you’ve got a valuable asset in 2026. Here’s its press release from last month:

Xeal today launched Laitent, the world’s first edge inference compute network using idle EV charging capacity. With one of the five largest Level 2 EV charging footprints in the U.S., Laitent will tap more than 200MW of permitted, installed electrical infrastructure across 1,600+ properties. …

“If you need inference compute today and can’t wait for a new data center to come online, Laitent can accelerate your timeline from years to months,” said Nikhil Bharadwaj, co-founder and CEO of Xeal. “Laitent is the fastest way to bring new compute online, tapping already permitted and grid-connected, yet idle energy capacity, located right where it's needed for ultra-low latency, with no water hookup requirements.”

AI training data centers can be anywhere, so they go where there is cheap land and good power, but AI “edge inference” should be “where it’s needed for ultra-low latency,” that is, close to where the customers are. [3] The customers are probably where the Teslas are.

There are two conflicting stories about private credit this year. One is that private credit is doing great. There are not a lot of defaults, the artificial intelligence boom is creating a lot of attractive new loans that pay high rates, and institutional investors are putting a lot of money into private credit funds.

The other is that business development companies — retail-facing private credit funds — are doing bad. Private BDCs, which do not trade on the exchange, are seeing large withdrawal requests, as retail customers want out. Public BDCs, which do trade on the exchange, tend to trade at large discounts to net asset value: The investors who own the BDCs don’t seem to think the loans are worth what the managers say they are worth.

One possibility is that the institutional investors are right, the retail investors are wrong, private credit is great and the BDCs are irrationally underpriced. Another possibility is that the institutional investors are wrong, the retail investors are right, private credit is in trouble and the institutional funds are irrationally overpriced. There are other possibilities along the lines of “actually the institutional funds and the BDCs have different holdings or structures or whatever so this comparison is wrong.”

There really ought to be a trade, though. Like, if institutions think that private credit is broadly worth 100 cents on the dollar, and if BDCs are broadly trading at 70 cents on the dollar, the institutions should buy the BDCs? Shouldn’t the gap be arbitraged away? Part of the problem might be that the gap is so wide — there is so much room for value creation — that you have to argue over who gets it. Should the institutions buy the BDCs at 100 cents on the dollar, because that’s what they think their loans are worth, or at 70, because that’s what the BDCs’ holders think they’re worth?

So we have talked about Boaz Weinstein bidding 70ish cents on the dollar for some BDCs and not getting much takeup. We talked in May about KKR & Co. putting some of its own money into its publicly traded BDC in a way that kind of split the difference: Loosely speaking, KKR put half its money in at market prices (like 58 cents on the dollar) and half of it at net asset value (roughly 100 cents on the dollar). We talked in March about Blackstone Inc. and its employees putting some of their own money into Blackstone’s private BDC at 100 cents on the dollar, which I thought was a generous of them. “The intellectually satisfying and potentially lucrative thing for Blackstone to do,” I wrote, “would be to say ‘hey, a lot of you want your money back, and we’d be happy to cash you all out, but at 90 cents on the dollar.’”

And a couple of times, I have suggested that private credit managers could raise institutional funds to buy out their own or their competitors’ BDCs at a discount. If you’ve got a public BDC trading at 70% of net asset value, and you can raise money at 100% of NAV, then buying out the BDC at 90% of NAV is a win for everyone.

Anyway Bloomberg’s Olivia Fishlow reported last week:

Private credit managers increasingly looking to offload battered funds are drawing interest from rivals eyeing cheap deals in one of the most turbulent periods for the $1.8 trillion market. …

Private credit managers have faced intense pressure this year, as investors pulled record amounts from nontraded funds and sold off shares of listed vehicles. Publicly traded funds including BlackRock Inc.’s beleaguered TCP Capital Corp., WhiteHorse Finance Inc. and Investcorp Credit Management BDC Inc. have said they’re weighing strategic options, which could include a sale. Apollo Global Management Inc.’s MidCap Financial Investment Corp. has also shopped its portfolio around, the people with knowledge said. …

A transaction can take several forms. A manager can buy a BDC through a merger or they can purchase the contract to run the fund. Other options include purchasing assets from the fund, which can allow the seller to combine what remains into an affiliated vehicle or simply return cash to investors.

And PitchBook reported:

Private credit manager WhiteHorse Capital is pursuing a credit secondaries transaction involving its publicly traded BDC that is set to move $680 million of private credit assets into a continuation vehicle, according to market sources.

The transaction would transfer all assets from the BDC, WhiteHorse Finance (Nasdaq: WHF), into a closed-end continuation vehicle backed by private credit secondaries investors, sources said. The continuation vehicle transaction will provide liquidity to WhiteHorse investors and lead to the delisting of the public BDC, which trades below its book value.

Bids for the continuation vehicle, which primarily includes first-lien direct-lending assets, are in the high 90s, sources said.

WhiteHorse Finance’s reported net asset value is $11.77 per share, and it trades at about $7.02, or about 60 cents on the dollar. So the high 90s would be more.

Sure!

Robinhood’s conference for active traders is the largest of the brokerage’s annual events. For two days in September, hundreds of everyday investors descend on a conference center in cities like Miami, Las Vegas and Houston to attend training sessions, swap trading tips and swarm the open bar. …

“The trend is always going to be up and to the right,” said Sara Brescia O’Rear, a former pharmacist who retired in her 40s thanks to her investing success. “I’m willing to take on risk because I know it can pay off.” …

In 2024, Colin Edsman bet half of his savings on a stock trading for less than a dollar a share. A year later, the company, mineral provider United States Antimony, saw its share price climb into the double digits. … “I’ve never relied on luck,” he said. “I figured I could make my own.”

It’s tempting to be like “probably if you lost money day trading on Robinhood you wouldn’t go to the convention,” but I’m not actually sure that’s true? Like, you might go to get some tips to stop losing money. Or you might delude yourself into thinking that actually you’re winning. Or you might take some pride in how much you’ve lost and want to go brag to your buddies. Anyway if I ran this convention I’d have a panel for the year’s biggest losing traders, but it looks like they don’t.

This is occasionally a puzzle hunt newsletter, and this weekend Midnight Madness was held in New York. (Here’s a Bloomberg Markets Magazine story about last year’s edition.) I was not able to play this year, but congratulations to Midnight Marauders, this year’s winning team.

Goldman’s $2.3 Billion Deal Puts Tax-Smart ETFs Under Scrutiny. It’s a Tough Time to Launch a Hedge Fund. Lone Pine Erases 44% Gain in Brutal Quarter on Poor Stock Bets. HSBC Moves to Wall Street Bonus Model, Cuts Fixed-Pay Deals. Wall Street’s record-breaking trading streak set to cool. Nvidia in talks to acquire US ‘open’ model start-up Reflection AI. Trump’s AI Liability Push Opens Blame Game for Models Gone Rogue. AI’s Supercharging a Scam Economy Bigger Than the Cocaine Trade. A.I. Music Fraudster Who Drew Millions in Royalties Is Sentenced to 18 Months. (Earlier.) A Credit-Score Shift at Fannie and Freddie Is Shaking Up the Mortgage Market. A New Type of Mortgage Is Reviving Long Abandoned Neighborhoods. Former Morgan Stanley CEO Lists Converted N.Y.C. Carriage House for $80 Million. Tesla Faces US Probe Over Claim of Robotaxis Speeding in School Zones. Anthropic’s Rogue AI Filled Out U.S. Visa Forms, Gave False Homicide Tip to Police. McKinsey Strips Partner of Leadership Role After LinkedIn Posts.

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