Prediction markets – platforms where traders buy and sell binary options contracts tied to the outcome of real-world events – are rapidly gaining traction in financial markets, but the sector’s future may hinge on how regulators ultimately define them.
The heads of several of the world’s largest exchanges debated the issue during a panel discussion at the FIA Global Cleared Markets Conference in Boca Raton on 10 March, where the fast growth of event-based trading has collided with lingering questions about whether such contracts are financial products or simply gambling.
“Markets thrive when we have consistent regulation,” said Adena Friedman, chief executive of Nasdaq. Clear rules, she said, help ensure investors are protected while allowing exchanges to develop new products. “It allows us all to figure out how we can construct products that can be made available to investors…to express their views about market outcomes.”
Prediction markets allow participants to trade contracts on events ranging from elections and economic indicators to sports results and weather. Supporters argue the markets aggregate collective forecasts – sometimes called the “wisdom of the crowd” – into prices that reflect the probability of an outcome. Critics say many contracts resemble gambling and may be vulnerable to manipulation.
The debate reflects the sector’s explosive growth. Platforms such as Kalshi have attracted billions of dollars in trading tied to economic indicators, political outcomes and sporting events. On the panel, Kalshi chief executive Tarek Mansour said the surge in activity shows that consumers want a marketplace where they can trade on their views about the world.
“People have opinions about politics, the economy, sports and culture,” Mansour said. “The question is whether they’re engaging in a transparent marketplace where participants trade with each other, or whether they’re walking into a house where the business model is customer losses.”
Mansour argued that prediction markets resemble other financial instruments that allow speculation and hedging, drawing comparisons to early debates over futures contracts. “Speculation, hedging and price discovery have always been intertwined in markets,” he said. “Without liquidity and speculation, these markets don’t function.”
Ambiguity
Terry Duffy, chief executive of CME Group, said the legal classification of event-based contracts remains ambiguous, particularly as regulators grapple with whether they should be treated as derivatives or betting products.
“When you look at what the Commodity Futures Trading Commission has done, they have defined some of these as swaps,” Duffy said.
For the industry, he added, the biggest priority is regulatory clarity. “The best way for prediction markets to grow is to get solid regulation around them that’s sustainable through multiple administrations,” Duffy said. “Otherwise, you have rules that change every time the political winds shift.”
Some exchanges are already testing how far the model can extend within existing regulatory structures.
Nasdaq recently sought approval from the US Securities and Exchange Commission to introduce event-based options tied to the Nasdaq-100 index. The contracts would allow traders to take a simple directional position – whether the index will finish above or below certain levels on a given day.
Friedman said the approach is designed to give investors a simpler entry point to options trading while keeping the products within the protections of the regulated securities market.
“It’s a very simple way for investors to engage with the market,” she said. “But it comes with the protections, transparency and clearing infrastructure that the options market already provides.”
Executives from other exchanges said event-driven contracts are not entirely new, even if their underlying events are expanding beyond traditional financial indicators.
Thomas Book, member of the executive board at Deutsche Boerse Group, noted that derivatives linked to outcomes, such as dividend futures, have existed for years. The difference now, he said, is the growing range of events being traded.
“What you see is a spectrum,” Book said. “At one end are macroeconomic events with genuine hedging needs. At the other are sports or entertainment outcomes.”
That spectrum also raises questions about consumer protection, particularly when retail investors participate. Some jurisdictions in Asia and Europe have taken a more cautious stance towards event-based contracts than the US.
Boon Chye Loh, chief executive of SGX Group, said regulators in most Asian jurisdictions have not given official approval to prediction markets, though the underlying idea of trading probabilities remains appealing.
“Prediction is a very interesting signal,” Loh said. “The question is how to set the bar high enough that institutional investors can participate and still ensure the integrity of the market.”
New frontier
Despite the regulatory uncertainty, exchanges increasingly see prediction markets as a potential new frontier for derivatives trading. Analysts say the products could attract a broader pool of retail traders and provide exchanges with new revenue streams as competition intensifies in traditional futures and options markets.
Innovation in the space is already accelerating. At the Boca conference, derivatives exchange Cboe Global Markets outlined plans for a new framework for prediction market contracts that could offer partial payouts rather than the traditional “all-or-nothing” outcome. The model would introduce a “payout zone,” allowing traders to earn a partial return if their forecast is directionally correct, even if it misses the exact target.
Cboe plans to launch its first contract tied to the S&P 500 later in 2026, using an options-style structure that settles in cash and is centrally cleared. Executives say the product could make outcome-based trading more accessible while maintaining the safeguards of the regulated options ecosystem.
For now, however, the industry’s biggest challenge may not be designing new products but determining where prediction markets fit within the broader financial system.
As Friedman stated during the panel discussion: “Innovation is important, but so is making sure we have the right oversight and structure to ensure markets remain fair, transparent and trusted.”
View a recording of the panel discussion on Bloomberg Television here.
