Houston is at the center of a first-of-its-kind deal to protect companies against fallout from the city’s punishing summer heat: a bet that the temperature will hit 103 degrees in August.
If it does, risk-management startup Discrete will walk away with $25,000, almost four times what it put into the trade brokered by Houston-based Greenlight Commodities. The company’s leaders think they’ll come out ahead, even if they lose the bet.
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The prenegotiated wager on Houston’s extreme heat was posted to Kalshi, a multibillion-dollar prediction market that lets users put money on everything from sports to politics to whether Taylor Swift will meet the pope.
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This deal is different: Instead of an open-platform bet, it was the first weather-based prediction market block trade, a large privately negotiated transaction, which was then listed on Kalshi. Since the spring, companies have begun making similar trades on outcomes that would actually hurt their bottom lines, creating a type of insurance payout in case disaster strikes.
Nicolas Hull, Kalshi’s director of business development, said the platform was a natural fit for companies concerned about extreme weather.
“We can create an event on any risk that you have,” Hull said, and execute it within a few hours — as long as someone is willing to take the opposite position.
As Kalshi faces accusations from states like New York that it is illegally running a gambling operation — an allegation the federally regulated marketplace denies — it is leaning into its Wall Street appeal. It was the first prediction market to get federal permission for block trades.
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Proponents say companies like energy retailers can use these trades to hedge against the risk that soaring temperatures will strain the grid and spike wholesale electric prices. A company bets money that the worst-case scenario will happen. If it does, the company gets cash to fall back on.
And if it loses the bet? That’s OK, too. Less extreme temperatures would likely mean the grid and electric prices remained stable, so the company would still make money from its normal operations.
Energy companies facing these risks are the target clients for Discrete, the risk management startup that initiated the $25,000 deal tied to Houston’s temperatures. Risk mitigation is a massive sector with many options these companies already use to protect themselves. But Discrete founder Harp Singh thinks the block trades on prediction markets offer something new.
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“We talked to many clients referencing (traditional insurance) options that took like six weeks to negotiate,” Singh said. His Kalshi weather deal only took a couple of days.
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If Houston’s weather station at William P. Hobby Airport hits 103 degrees by the end of August, the company will get an automatic payout.
Why the weather?
Standard prediction market deals depend on indisputable, time-bound events in the real world that can have only one of two outcomes. Once the trigger happens, it is verified, and the investors immediately get their payday.
Enter the weather: The government’s daily data is publicly available, and many people think they can beat their local meteorologist. According to research from Rutgers University scholar Jamie L. Pietruska, as early as 1886, betting on rainfall “was described as ‘in vogue.’” And for many companies, weather is just unpredictable enough to complicate their bottom line.
Weather bets on prediction markets are not the only option for companies hoping to hedge against certain atmospheric conditions. Weather derivatives, which also pay out if adverse weather hits, were created in the 1990s and have become increasingly popular in the past few volatile years.
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Companies including energy retailers and utilities already use these derivatives to guard against some of their revenue and volume risks, often pairing them with hedges tied directly to prices. Contracts can be based on a cocktail of meteorological variables known as a weather index, and are typically paid out after the period in question according to a predetermined formula, minus a premium.
Proponents of the new prediction market option offered by Kalshi do not anticipate it will replace weather derivatives entirely, but rather expect it to become a simpler, quicker alternative for some scenarios.
Critics of prediction market platforms often point to their moral hazards.
When multiple prediction markets allowed wagers last summer on California’s wildfires, scholars and arson investigators raised concerns that people could bet big on fires and then make them happen.
Kalshi has said it does not allow any wildfire trades for this reason, and it also bars trading on war, assassination and violence. It does, however, allow deals on other consequential issues that could trigger perverse incentives, including politics.
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Looking for protection
While Houston’s August temperature threshold became the first prenegotiated, big-dollar weather trade on Kalshi, the platform is already flooded with ways for hobby investors to place small climate bets.
An independent Los Angeles ice cream shop made headlines in July for its self-made hedge strategy. Its owners put $20 a day on Kalshi’s open platform, betting each time that it would rain.
Brothers Jason and James Jiang, who run the shop, would prefer to lose their bets: A typical sunny day should bring in well over $20 in profit. But the Kalshi strategy means that even wet days give them a cushion of cash that has helped pay their shop’s rent. The brothers said the strategy has generated up to $1,500 extra a month.
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Larry Burns, a partner at Houston-based Greenlight and the broker who made Discrete’s block trade happen, said mitigating risk with prediction markets gives businesses a lot of flexibility.
“It’s the easiest, cleanest hedge you could do,” Burns said, noting that the trades can often offer better deals with quicker execution than more traditional options.
“If you’re worried about a hurricane coming next month, you can trade a contract expiring October 1,” he said, “or whatever terms you want.”
Based on interest so far, Burns thinks this new method will become an increasingly important protection for Texans worried about the market chaos extreme weather can bring.
A legal quagmire
As Kalshi is working to attract business from energy companies, insurance firms and startups trying to offset real-world risks, it is also fighting court battles and public opinion over its mission.
In 2020, the government gave Kalshi the green light to run the first financial exchange for event contracts regulated by the Commodity Futures Trading Commission. This let it set up a publicly accessible platform where individuals can bet on future events with less than a dollar at a time.
Trading on Kalshi and competitor Polymarket has since ballooned, rising sharply in the last year. The combined monthly trading volume of the platforms surpassed $50 billion in July, about 25 times what it hit one year earlier.
According to Pew Research data, sports is the most popular topic on Kalshi, making up 80% of its trading volume in the past two years. This has drawn scrutiny from state governments that regulate gambling, including online sportsbooks.
New York Attorney General Letitia James was one of several state leaders to sue the company in recent months. James has argued that state gambling rules should govern prediction markets like Kalshi because they are betting platforms, “no matter what they call themselves.”
In a response to The Guardian, Kalshi spokesperson Elisabeth Diana said this stance would push investors offshore since a state “can’t just shut down a federally licensed exchange.”
Texas has not joined the multi-state legal pushback against Kalshi, and Houston is already playing a key role in the company’s push to market prediction bets as risk-management tools.