A prediction market is an exchange where people buy and sell contracts tied to whether a future event will happen, and Americans are increasingly using them to make sense of what’s coming. They use them to forecast Federal Reserve rate decisions, election results, hurricane landfalls, and even the outcome of Sunday’s games. Prediction markets generated $51 billion in trading volume in 2025, and Bernstein Research estimated that figure could reach $240 billion by the end of the year and $1 trillion by 2030.
Growth that fast brings confusion about the value and nature of these new markets, and regulators around the country are watching closely. Critics say prediction markets are gambling outfits with little real value and argue they should be regulated like sportsbooks. A prediction market and a sportsbook can involve the same football game, but they are different businesses with different incentives, and treating them as the same thing would hinder the value that prediction markets offer to broader society.
What Is a Prediction Market?
Each contract on a prediction market is tied to a yes-or-no question and works like a ticket with a fixed payout. Take the question “Will the Federal Reserve cut interest rates at its December meeting?” A trader who expects a cut can buy a Yes contract for 63 cents. If the Fed cuts rates, the contract pays $1, and the trader earns 37 cents. If the Fed holds, the contract pays nothing. A trader who expects the Fed to hold can take the other side by buying a No contract for 37 cents, which pays $1 if there is no cut.
The price of the contract doubles as a forecast. When Yes trades at 63 cents, traders collectively put the chance of a rate cut at about 63 percent. As new data comes out and traders update their views, the price moves with them.
That price comes from buyers and sellers meeting on an open order book, the same way the price of stocks or futures is set. The platform has no role in setting it. In the United States, the largest prediction markets such as Kalshi and Polymarket U.S. operate as federally registered exchanges overseen by the Commodity Futures Trading Commission (CFTC) under the Commodity Exchange Act, the same framework that governs traditional futures and derivatives.
That oversight is built into federal law. The Commodity Exchange Act treats event contracts as a class of commodity, and as a federal court has explained, any platform that wants to offer them to the public must first win CFTC approval as a regulated exchange. Event contracts belong to the same family as the futures and options that farmers and airlines have used for decades to manage the risk of price swings in crops and fuel.
Why the Prices Matter
The main economic value of a prediction market is the price it produces. A market price pulls together the judgment of everyone willing to trade, and every trader has a reason to get it right, since a wrong forecast costs money. The result is a probability estimate that updates in real time and is free for anyone to see.
Those estimates have a strong track record. Researchers who studied the Iowa Electronic Markets, a university-run prediction market, found its forecasts outperformed 964 polls across five presidential elections, and the market’s advantage over polls grew the further out from Election Day the forecast was made. Economists trace the idea back to Friedrich Hayek’s observation that knowledge is spread across many people and that prices are how markets bring it together.
That is why the prices are useful to people who never place a trade. A business deciding whether to lock in a loan rate ahead of a Fed meeting, or an emergency manager tracking a storm, can check a live, market-tested probability in place of a single pundit’s prediction.
Event contracts also give people a way to manage risk. An outdoor festival that stands to lose money if a hurricane makes landfall can buy contracts that pay out if it does, offsetting part of the loss. That is the same logic farmers have used for more than a century when they sell futures to protect against a drop in crop prices, and it adds to the public value the forecasts already provide.
How a Sportsbook Is Different
A sportsbook runs on a different model. The house sets the odds, and customers bet against the house. When a customer wins, the sportsbook pays out of its own pocket, and when a customer loses, the sportsbook keeps the money.
Because the house takes the other side of every bet, a customer who wins consistently costs the sportsbook money. Sportsbooks commonly cut the maximum wager sizes of bettors who win consistently, since their model assumes most customers lose over time, and American books have broad latitude to limit whoever they choose.
A prediction market has the opposite relationship with its best forecasters. On an exchange, traders buy and sell with each other, and the platform earns a transaction fee on each trade regardless of how a contract settles. A trader who studies the evidence and forecasts well makes the prices more accurate, and accurate prices are what give the market its value. A sportsbook’s business depends on customers being wrong, while a prediction market’s value depends on its prices being right.
Market Rules for a Market Product
Because prediction markets are financial exchanges, federal law holds them to the Wall Street-standard market-integrity rules, including prohibitions on trading with inside information, so to maintain confidence in their forecasts and ensure that predictions aren’t distorted by those trading with insider knowledge. A forecast is trustworthy when the people setting it are trading on fair terms, and insider trading fundamentally undermines the product.
In a recent enforcement advisory, the CFTC described a case where an exchange’s compliance team contacted a political candidate who had traded on his own race, imposed a financial penalty, and suspended him from the exchange for five years. State gambling laws were written for casinos and sportsbooks, where the house sets the price, and were never designed to oversee an open market of this kind.
The Stakes of Getting Prediction Markets Wrong
Some states have moved aggressively to treat prediction markets as unlicensed gambling, and twenty states are now in active litigation over whether they can regulate these platforms. Just last week, New York filed suit against another federally regulated prediction market. The CFTC has pushed back, initiating legal actions against nine states to defend its jurisdiction.
The courts are split. In April, the Third Circuit found that the CFTC has exclusive authority over the sector, but the Ninth Circuit reached the opposite conclusion in a case involving Nevada. New Jersey has now asked the Supreme Court to settle the question.
The result is a regulatory map where the same federally regulated product is legal in one state and illegal across the border. A patchwork of state laws is the wrong answer for markets that are, by design, national. Prediction markets work best when participation is broad, and fragmenting them along state lines means fewer participants, thinner trading, and less accurate prices. It also pushes activity toward offshore platforms with none of the oversight Americans deserve.
Congress has faced this problem before. In the early 1970s, futures markets operated under a mix of state laws that Congress concluded was impairing the development of national commodity markets, and it responded with the Commodity Futures Trading Commission Act of 1974, which created the CFTC and gave it exclusive jurisdiction over futures trading. Two decades later, the National Securities Markets Improvement Act of 1996 ended the requirement that nationally traded stocks register separately in each state. Imagine a share of stock that could be bought in Pennsylvania but was illegal to trade in New York, or a wheat future that a Kansas farmer could use to hedge while a Nevada farmer could not. Americans would never accept that for their stock and commodity markets, and the same logic applies to event contracts.
Policymakers should protect a single, clear federal standard that keeps these markets open, transparent, and accountable, so Americans can keep using the wisdom of crowds to understand the future.
Image via Unsplash.