A mere day after we reported that Robinhood has partnered with Kalshi to release sports events contracts starting with the Super Bowl, it has just announced that it will stop its foray into sports betting contracts after it received a request from the Commodity Futures Trading Commission in the US.

Robinhood has halted the rollout of its event contracts that would have allowed users to bet on the outcome of the upcoming Super Bowl, following a request from the US Commodity Futures Trading Commission. The decision marks a significant regulatory roadblock for the online brokerage as it seeks to expand into new market segments.

The company announced the suspension on Tuesday, just one day after launching the product. Expressing its disappointment, Robinhood stated that it was complying with the regulator's directive, despite the fact that the CFTC has not explicitly deemed Kalshi's football championship contracts illegal. "We are heeding their directive to cease offering these contracts despite the fact that the CFTC has not deemed Kalshi's football championship contracts illegal," stated Robinhood's general counsel, Lucas Moskowitz.

Kalshi, a financial exchange that specializes in event contracts, did not immediately respond to requests for comment regarding the regulator's intervention.

Regulatory scrutiny and industry concerns

Robinhood's move into event-based trading products was seen as a way to capitalize on the rising popularity of sports betting, particularly around high-profile events such as the Super Bowl. However, the CFTC's intervention underlines regulatory concerns surrounding the growing interest in event derivatives trading.

A spokesperson for the CFTC, in an emailed statement, reiterated the agency's position on the matter. "The CFTC has serious concerns about FCMs [Futures Commission Merchants] offering access to their customers to any contract that may not be permissible under the law and will exercise its oversight authority to the fullest extent as appropriate." The spokesperson further emphasized that "FCMs have strict duties and obligations pursuant to the CFTC's customer protection rules and are held to the highest standards to safeguard the public."

Limited rollout and impact on users

Prior to the halt, Robinhood had made the betting contracts available to just 1% of its clients. The company assured that those who had already placed trades would have the option to either let them resolve as originally planned or close their original positions.

Event derivatives trading, including betting on economic data releases, policy decisions, and even elections, is gaining traction among retail investors. However, such contracts operate in a complex regulatory environment, making them susceptible to scrutiny.

"Prediction markets and event contracts can be subject to complex regulatory landscapes," stated Michael Ashley Schulman, chief investment officer and partner at Running Point Capital Advisors. "The CFTC may be concerned that this could be perceived as an active retail betting platform disguised under an investment umbrella, especially since sporting events are much more frequent than presidential elections."

The future of event contracts at Robinhood

Despite this setback, Robinhood remains committed to expanding its derivatives business. The company has announced plans to launch a 'more comprehensive' event contracts platform later this year, signaling its continued interest in the space.

Event contract trading is still a relatively new phenomenon, yet it has received a positive reception among certain investors. The regulatory landscape surrounding these products remains uncertain, particularly in light of a recent US court ruling that overturned the CFTC's attempt to block the election betting contracts from KalshiEX.

Robinhood's foray into event trading demonstrates the trend of retail investors seeking alternative ways to engage with the market. However, this latest regulatory pushback suggests that firms entering this space may face continued scrutiny, particularly when the line between investing and betting becomes blurred. As the financial industry navigates this evolving terrain, the outcome of Robinhood's regulatory negotiations could set a precedent for the future of event-based trading platforms in the US.