Prediction markets will overcome big binary risks

Intercontinental Exchange

17/09/2026 16:16

    (The author is a Reuters Breakingviews columnist. The
opinions expressed are his own.)
    By Jeffrey Goldfarb
       NEW YORK, Sept 18 (Reuters Breakingviews) - Prediction
markets are redefining “future shock.” Businessman Alvin Toffler
popularized the term with his 1970 book about technological
advances overwhelming society. The proliferation of online swap
contracts for a broad array of events have created similar
effects. Crystal balls remain cloudy, but there's enough
momentum to confidently foretell some financial outcomes for
Kalshi, Polymarket, Robinhood Markets  HOOD.O  and others.
    A nearly 40-year-old academic exercise behind the
not-for-profit Iowa Electronic Markets has spawned an industry
on pace to exceed $1 trillion in trading volume. Punters can now
speculate on everything from the winner of the BMW PGA golf
championship to who will be Donald Trump's next press secretary
and when Jesus Christ will return to Earth. Structured as
peer-to-peer binary transactions, prices fluctuate between a
penny and 99 cents to reflect implied probability; a contract
trading at 75 cents, for example, indicates a perceived 75%
chance of the event occurring.
    As with many fast-paced tech developments, leading
prediction venues traverse regulatory gray areas. Sports-betting
sites reeling from the competition and US state governors
missing out on tax revenue are waging cutthroat legal battles
destined for the Supreme Court.
    Prediction-market business models are also, well,
unpredictable. What is now largely a consumer product could
morph into one more dependent on data or order flow. Wall Street
may become a valuable user or partner, though investment banks
and traditional bourses may prefer to harness the wisdom of
crowds themselves. Consolidation already has begun, and it’s
likely to accelerate.
    The societal value of prediction contracts is also
unsettled. Unequal access to information makes suckers of most
customers today, while breakneck expansion leads to risky new
products, including gold futures with no expiry date that can be
juiced by leverage and traded all day every day. The backlash
will inevitably extend far beyond a fuss over endorsements from
naked actress Sydney Sweeney.
    Despite all these weighty variables, the chances that
prediction markets will gather additional steam are better than
a coin flip. After forecasting in April that contract volume
would reach $1 trillion by 2030, 80% annualized growth from
2025, Bernstein analysts are revisiting their assumptions.
Robinhood generated more revenue from event contracts in the
year through June than from crypto assets or equities.
    Kalshi, conceived in 2018 by Tarek Mansour and Luana Lopes
Lara, may nearly double its worth in mere months. Sequoia
Capital and Wellington Management are in talks to lead a $750
million injection that would set the fledgling company’s
valuation at $40 billion, The Information reported.
    It might even be a bargain. Kalshi’s weekly notional volume
has jumped about 10-fold in a year, according to data cruncher
Dune. World Cup soccer turbocharged growth, and US professional
football and midterm elections should help sustain the surge.
Moreover, at 10 times annualized revenue, the imputed valuation
multiple would be on a par with most exchange peers, including
Nasdaq  NDAQ.O , Coinbase  COIN.O  and NYSE owner
Intercontinental Exchange  ICE.N .
    A pitched legal battle over sports contracts represents a
significant binary event. New Jersey and other states argue that
swaps on eventualities like whether Manchester City striker
Erling Haaland will score against Arsenal constitute illegal
sports betting. Federal courts are split over whether the
Commodity Futures Trading Commission should be the industry’s
exclusive regulator.
    Kalshi, which collects a fee of around 1% to 1.5% on trades,
insists that as a nationwide financial exchange it cannot be
overseen by 50 different authorities. The company won a separate
lawsuit against the CFTC in 2024 after the agency tried to ban
its election contracts.
    Yet even if prediction markets lose sports-related trading,
they will have built popular brands, amassed millions of users
and tempted them with a variety of other swaps. This clout may
allow the markets to strike deals with online sports-betting
operators like DraftKings  DKNG.O  and Flutter
Entertainment-owned  FLUT.N  FanDuel, which only recently
debuted their respective prediction apps.
    There are more points of contention, however. Some contracts
raise qualms about election campaign staffers and soldiers
leveraging non-public information, the spread of misinformation
and war profiteering. Kalshi fined and suspended US political
candidates for betting on their own races. The European
Securities and Markets Authority warned earlier this month that
prediction markets present serious market integrity issues. The
top 1% of Polymarket users capture 77% of the profit, one recent
study found, while Citizens JMP Securities analysts said that
only investors trading at least $500,000 make money on
predictions.
    The CFTC has probed insider trading, but money managers
collectively urged the agency to beef up investor protections,
including by reviewing any new prediction-market products ahead
of being released. The Managed Funds Association trade group
also recommended giving the Securities and Exchange Commission
oversight of securities-related contracts.
    As all these controversies simmer, the industry is eyeing
banks, fund managers and insurers as possible customers. Mansour
got a kernel of the idea for Kalshi while working at Goldman
Sachs, where he saw clients being sold tortuous and expensive
options to hedge against Brexit because there was no simple way
to trade the outcome of the UK referendum. His venture has
teamed up with electronic marketplace Tradeweb, The Weather
Company and others to help investors price and offset exposure
to macroeconomic and geopolitical events.
    Citadel Securities boss Jim Esposito indicated some early
interest, but most big institutions will await more regulatory
clarity and liquidity. Event contracts on Polymarket and Kalshi
reached $39 billion combined in August, according to research
outfit The Block. It's more than the $14 billion Americans
wagered monthly on sports last year on average, but a tiny
fraction of the $61 trillion of volume across asset classes
reported by TradeWeb during the month.
    A spate of companies in adjacent businesses are mobilizing,
however. ICE said last October it would invest up to $2 billion
in Polymarket at an $8 billion valuation. International lottery
operator Allwyn secured a toehold in predictions this year by
backing fantasy sports app PrizePicks. UK-based online trading
company IG Group  IGG.L  took bolder aim at the market, agreeing
in June to buy Underdog for nearly 11 times annualized EBITDA.
    These transactions augur more investment and activity
despite the murky trajectories. FanDuel and DraftKings have
powerful brands, but their depressed stock prices could make
them tempting takeover targets. Upstarts such as Novig, whose
Hollywood equity partner Sweeney stripped bare in the company’s
ad campaign, also might attract suitors. The accumulated
attention, money and usage suggest that the idea of a future
with prediction markets embedded in the financial firmament will
soon lose any shock value.
    Follow Jeffrey Goldfarb on X and Linkedin.
     
    CONTEXT NEWS
    A US federal court on September 16 blocked ​Kalshi from
offering sports event contracts on the lands of two California
tribes, the ‌prediction-market operator's second legal setback
in less than a month.
    The 9th US Circuit Court of Appeals in San Francisco said
two federally recognized California tribes, Blue Lake Rancheria
and Chicken Ranch Rancheria of Me-Wuk Indians, deserved a
preliminary injunction because they would likely show that
Kalshi's ​contracts violated the federal Indian Gaming
Regulatory Act and the tribes' own gaming ordinances.
    A Kalshi spokesperson said the ruling was "hard to square"
with other federal laws that leave regulation of on-exchange
derivatives trades exclusively to the Commodity Futures Trading
Commission.
    The same court said on August 28 that ​Kalshi was subject to
oversight by Nevada gaming regulators.

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    (Editing by Peter Thal Larsen; Production by Pranav Kiran)
((For previous columns by the author, Reuters customers can
click on  GOLDFARB/ jeffrey.goldfarb@thomsonreuters.com))