On 1 September 2026 a judge in Ingham County, Michigan signed an order stopping KalshiEX LLC from offering sports event contracts to anyone in the state. Most attention went to the number in it, a fine of 500,000 dollars for each day the court finds the geolocation requirement unmet. One paragraph near the end got very little, and it is the one a venue should read twice. It tells the exchange to hand the order to every futures commission merchant that makes its sports contracts available to customers, and then explains why the exchange will not be answerable for what those firms do next.
The reason the court gives is evidentiary, not moral: the exchange does not choose an intermediary's customers, and the record of where those customers are sitting is held by the intermediary. In one sentence, a state court has described the limit of what a federally designated market can see about its own order flow. If a state demanded to know how many of your open positions are held by people inside its borders, how long would that take, and whose phone would you pick up?
The paragraph that limited the fine also drew a boundary
Judge Rosemarie E. Aquilina signed the order in Nessel v. KalshiEX LLC, No. 26-1087-CZ, after a hearing on 17 August 2026 at which both sides asked the court to rule. Michigan Attorney General Dana Nessel announced it on 2 September 2026 in a press release publishing the full five page text, the source of every quotation below.
The injunction is an access order. It enjoins five heads of conduct, running from offering and settling internet sports betting for a person located in the state, through deposits, advertising and account creation for that purpose, to operating products the order calls "functionally similar" to internet sports betting. Compliance requires a third party geolocation provider licensed by the Michigan Gaming Control Board, capable of meeting the geofencing specifications of its Technical Bulletin No. 2024-03.
Then comes the FCM paragraph. Within three business days of entry, which in that week ran to 4 September 2026, Kalshi had to give a copy of the order to every futures commission merchant that makes its sports event contracts available to that firm's customers, with contact details for the state's counsel of record. The court then withholds liability and states its grounds: because the exchange "does not control which FCM customers an FCM chooses to make sports event contracts available to", nor the platforms used, and because "information about where FCMs customers are located is in the possession of each FCM", the exchange will not be held liable for what a noticed intermediary does or fails to do.
The carve out is narrow. It covers an intermediary's own conduct after notice, while the five prohibitions and the daily fine still bind the exchange, and the order stands until a final order issues in the case; no published decision changing it was found as of 16 October 2026. The structural point travels further. A court has recorded that the distribution layer is where the location record lives, which makes that layer a question of evidence rather than of marketing. The temporary restraining order in the same case reached open trades, and on 14 July 2026 the Commission stayed the exchange's emergency rule and directed it to fulfil them in the ordinary course (press release 9267-26), which is where we examined open positions when a state blocks the exchange. The September injunction says nothing about open positions, and its only reach past the exchange's own front door is the FCM paragraph.
That matters more in this circuit than elsewhere. On 25 September 2026 the United States Court of Appeals for the Sixth Circuit, which covers Michigan, held in KalshiEX LLC v. Schuler, Nos. 26-3196 and 26-5235, that the exchange had not shown its sports event contracts to be swaps and that the Commodity Exchange Act does not preempt the gambling laws of Ohio and Tennessee (opinion of Judge Julia Smith Gibbons). Inside that circuit, which positions sit where has stopped being hypothetical.
The federal record set answers a different question
The court did not invent this gap. It read out a boundary the federal rules drew years earlier, for reasons that had nothing to do with sports. Start with the duty the exchange does carry. Commission Regulation 38.254(b) says a designated contract market with participants trading through intermediaries must either run a comprehensive large trader reporting system "or be able to demonstrate that it can obtain position data from other sources in order to conduct an effective surveillance program". The obligation is about position data. Paragraph (a) makes the market impose record keeping on traders and collect those records "upon request", and request is the verb the architecture runs on. Regulation 38.153 adds the enforcement arrangements, including authority to examine books and records "kept by the designated contract market's members and by persons under investigation".
Now the identity record. Regulation 1.37(a) puts it with the intermediary: every futures commission merchant and introducing broker keeps a permanent record of the true name, address and principal occupation of the person for whom each account is carried. Paragraph (c) imposes a parallel duty on the exchange itself, but only for foreign traders, and paragraph (d) switches that duty off in precisely the case at issue here, when the trades are executed through or held in accounts carried by a registered futures commission merchant. The rule does not merely tolerate the gap. It writes it in.
The daily federal feed behaves the same way. Regulation 16.02 requires reporting markets to file transaction level trade and order data every day, and adds that identification of each trader accompanies it on request, qualified by five words that decide everything: "if the reporting market maintains such data". The route to the person behind an omnibus position runs through the regulator rather than the venue, since under Regulation 17.01 special accounts are identified to the Commission on Form 102 and omnibus sub accounts only after a special call from the Commission or its designee.
Read together these are a division of labour, not a failure: the venue sees size, the intermediary knows the customer, and the regulator holds the special call that reaches through. Nowhere in the set is there a field for what a state attorney general asks, which is not who the account belongs to but where the person was sitting when the order went in.
The Commission has already written the gap down
In its proposal on reporting for what it calls Covered Event Contracts, published at 91 FR 40102 on 1 July 2026 (full text on govinfo), the Commodity Futures Trading Commission describes the split plainly. Some markets listing these contracts "permit participation of intermediaries, and some do not", and that one fact decides who files large trader reports. Where no intermediary can touch customer money the contract is "exclusively self cleared" and the exchange reports; where clearing is intermediated, the Commission expects clearing members to report instead.
The same document settles any internal argument about whether the gap is real. Although, the Commission writes, Regulation 16.02 "does not expressly require DCMs to obtain trader-identifying information for intermediated accounts", markets generally collect it anyway in the ordinary course of business. Its proposed Regulation 16.03(g) would enumerate a minimum set: name, physical address, email address and phone number, occupation and employer, and anyone guaranteeing the account or holding a financial interest of ten percent or more. The stated reason is that intermediaries "may not all communicate trader-identifying information to DCMs in a consistent form and manner", and the Commission expressly contemplates markets that collect only part of the list or none of it.
That list answers the identity question well and the location question not at all, because an address on file says nothing about where an order came from. And it is still a proposal. The comment period closed on 31 July 2026, and the Federal Register index of Commission documents published between 2 July and 16 October 2026 returns twenty seven items, none of them a final rule on this; the reporting levels in the same proposal stand the same way. Anyone waiting for the federal answer is waiting on a docket.
What a rulebook built for futures does with the question
Kalshi's own rules are public because it filed them with its regulator, and version 1.18 is available from the Commission. We read the whole filing, 32,185 words, and counted.
The definitions draw the line first. A "Member" is a futures commission merchant, an introducing broker or a self clearing member. An "FCM Customer" is a Participant and a Trader but not a Member, so the exchange's strongest information tools point at the firm rather than at the person holding the contract. Rule 3.6(a) obliges every Participant to answer a request for information and fixes the price of silence: failure to cooperate "within 15 days of the request" is itself a violation. Fifteen days is a sound clock for a futures investigation and not a clock for a state asking on a Friday afternoon.
Identifying information follows the same pattern. Rule 3.8(f) requires each intermediary to identify its customers by a distinct code supplied with every order message, and to provide, "upon request", identifying information including "names, numbers, addresses, and contact information". Rule 3.8(h) routes customer records the same way, from customer to intermediary on request, then from intermediary to exchange on request, and Rule 3.8(g) places know your customer work on the intermediary. The one standing feed in the book is Rule 5.19(e): at a regular cadence, intermediaries report the name and known KYC information of customers holding a position above a Reportable Level. That is a continuous view of the large end of the book only.
Two absences say more than any clause. Over the full text the words geolocation and geofencing appear zero times, and the phrase "IP address" appears exactly once, in Rule 5.2(c), where a self clearing member agrees the exchange may log the address it used to reach the site. The one location adjacent data point in the book is reserved for the single path on which nobody stands between the exchange and the trader. On the intermediated path, Rule 5.5(b) has the order arrive with the customer's account identifier and the intermediary's identifier, which is everything needed to clear a trade and nothing needed to place it on a map. Rule 2.17(e) closes the circle: notice to an intermediary counts as notice to its customers.
None of that is misconduct and we are not calling it that. It is a book written for a market in which location was never a product parameter. Michigan made it one, and documents written earlier do not retrofit themselves.
An address on file is not a place where somebody was sitting
The federal identity record, proposed or existing, is an account fact: who you are and where your post arrives. The Michigan order is about a person "located in Michigan" at the moment of trading, which is why it demands a provider licensed by the state's own gaming regulator rather than a database field. We set out what a geolocation diligence affidavit would have to show a judge when a court first named a vendor, and that was about the exchange's front door. The September order is about every other door into the same order book, where the check is run by someone else, on their users, with their vendor.
How many such doors are there? The order does not say and we could not establish it. Kalshi's rulebook creates a "registry of Members" in Rules 3.2 and 3.9 but carries no duty to publish it, so the public cannot count the intermediaries the order reached. One is on the public record: Robinhood Derivatives, LLC states in its own announcement of 17 March 2025 that it "is a registered futures commission merchant" and that its event contracts are offered "through KalshiEX LLC, a CFTC regulated exchange". Which intermediaries were served inside the three days, and what each did next, is on no public record we could find as of 16 October 2026.
What a venue should be able to produce about an intermediated position
The fix is contractual, not regulatory. The member agreement is the only instrument that reaches the data, and a venue waiting for Regulation 16.03(g) is choosing to be told what its own distribution owes it. A venue that wants to answer a state in an hour rather than in fifteen days should be able to put the following on the table, none of which asks an intermediary for more than it already holds about its own customers.
- A data schedule inside the intermediary member agreement naming the fields, the file format, the cadence and the maximum latency, written as a standing obligation rather than as a response to a request.
- A jurisdiction field defined as the result of a location check at the point of order entry, produced by the intermediary's named licensed provider, rather than the account's postal address.
- A daily position file covering all intermediated positions, not only those above a reportable level, because a state asks about the whole book and the reportable slice is defined by size.
- A published denominator: total open positions, the share held through intermediaries, and the share for which a jurisdiction field is actually present. A number without its denominator is a press line.
- A stated answer time for a regulator's location question, tested against a real file rather than asserted, with the test date recorded.
- An exception log of orders accepted while a location check failed or was unavailable, what was done, and who was told.
The layer is a fact about the venue, not an excuse belonging to the broker
Our second directive says that "fees, spreads, settlement sources, custody arrangements and conflicts of interest are stated in plain language on the surface where the trade happens". A venue that cannot say which of its open positions sit in a state that has enjoined it cannot honestly describe that surface, because it does not know how many such surfaces exist or who runs them. Our fifth says that "standards are set against the jurisdiction that regulates next, not only the one that has not yet". Michigan already regulates, and the Commission has published both a description of this gap and a proposal to narrow part of it.
The Michigan court did the category an unintended favour by putting the mechanism in writing before an enforcement action turned on it. On 1 September 2026 the exchange was spared liability precisely because it cannot see through its own distribution. That is a fortunate position to hold once and a terrible one to design around. A venue reading the carve out as an answer rather than as a warning has the paragraph backwards.