Wall Street Gambles on Prediction Markets

Good morning and happy Sunday.

Wall Street investors have been making bets for years, on the future of everything from electrical appliances and computers to the price of groceries. Now, Nasdaq and Cboe are developing products that will let users bet on binary market outcomes in much the same way that Kalshi and Polymarket enable wagers on random events such as whether Taylor Swift will release a song for Toy Story 5. What the new platforms will mean for Wall Street and who will regulate them is the subject of today’s deep dive.

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Wall Street wants to put a suit and tie on prediction markets.

Nasdaq and Cboe are introducing binary betting products that let investors wager on financial market outcomes, such as whether a stock index will hit a certain level or where a share price might land after a company’s earnings call. That subject matter could differentiate them from prediction market platforms known for hosting bets on topics like what color Gatorade will be splashed on Super Bowl champions or when the US government will confirm aliens exist (a real bet on Polymarket with more than $44 million in contracts).

The main way exchanges are trying to button up prediction markets is by launching their offerings under the approval of the Securities and Exchange Commission, not the Commodity Futures Trading Commission. While the former polices stock markets and has historically taken a more aggressive approach to enforcement, and the latter oversees markets for physical assets from gold to coca and corn, the boundary gets murkier with digital assets. In the world of prediction markets, the distinction is about as messy as a line a toddler might make with a marker, a wall, and five minutes unsupervised.

States Place Their Stakes

Kalshi, the largest platform in the US by far, and Polymarket’s US outfit are both regulated by the CFTC, as are binary-betting options from crypto exchanges Coinbase and Gemini.

But while these platforms maintain that their offerings should be federally regulated, many states don’t agree. Prediction markets have been on the hot seat for years as states side-eye their claims that outcome-related contracts on sports events aren’t the same as sports gambling, which is highly regulated by individual states.

While Minnesota enacted the first statewide ban on the platforms last week, President Trump is on the side of prediction markets, writing on Truth Social last week that the CFTC has, and should continue to have, sole authority over prediction markets. He called out state-level regulators who have pursued legal action against prediction markets, including Minnesota Gov. Tim Walz.

While Minnesota’s law doesn’t explicitly mention wagers on financial outcomes in its definition of prediction markets, it kicks off its list with the phrase “including but not limited to.”

The Devil Wall Street Knows

Cboe’s executive vice president and head of derivatives, Rob Hocking, draws a clear line on what kinds of binary bets should fall under the SEC’s jurisdiction. “If it directly affects the company’s financial performance or is material non-public information that, if I were trading in the traditional markets, would be disclosed, it should be a security regulated by the SEC,” Hocking said.

Any less direct prediction-style bets about a company (Hocking made up an example about how many times Elon Musk says “XYZ” in an earnings call) aren’t securities and aren’t going to directly affect a company’s performance, according to Hocking. Platforms including Kalshi and Polymarket offer bets similar to Hocking’s example, but also bets that more closely mirror the kinds of wagers Cboe and Nasdaq are planning for their own products. Kalshi’s “Finance” tab shows users have wagered billions on contracts for how high the S&P and Nasdaq will reach this year, as well as whether companies like Tesla and eBay will meet different financial targets.

Ambiguity could extend beyond the “Finance” tab, James Angel, an associate professor at Georgetown who specializes in financial regulation, explained to The Daily Upside. When asked about prediction-market bets on the weather, Angel said, “You can make arguments that there are people who have legitimate risk management issues around things like rain, like farmers.”

Angel said the reason financial companies want their products regulated by the SEC and not the CFTC could be as simple as, “The devil you know is better than the one you don’t.” Cboe and Nasdaq have long-standing relationships with the SEC that platforms like Kalshi lack.

Kalshi and Polymarket, which aren’t registered security exchanges, have valid reasons for wanting the CFTC’s mandate over prediction markets to be as broad as possible, Hocking said. “If these get designated as securities, either they need to go through the registration process to become a licensed securities exchange or they have to alter the contracts,” he noted. For now, the platforms have Trump’s backing to stay under the CFTC.

The Trump presidency has skewed the power balance toward the CFTC, a sharp pivot from when a Gary Gensler-led SEC (under former President Joe Biden) pushed to regulate another emerging market that stirred debates about which agency should monitor it: crypto. Under Trump, the SEC has backed down from attempts to have more oversight over new financial products, scrapping various lawsuits. Meanwhile, “The CFTC is being very aggressive, trying to pull things into their jurisdiction,” Hocking said.

The New York Times last week detailed numerous cuts within the CFTC, which currently has only one commissioner, and examined how those cuts have affected its regulation of crypto and prediction markets. Gensler, earlier this month, said the CFTC has become too small and narrowly focused to monitor prediction markets and that states should take the reins.

More Worth Than It’s Trouble

Global trading volume on Kalshi and Polymarket, not including Polymarket’s much smaller US arm, rose to $24 billion a month this April, Pew found in an analysis of data from digital assets information firm The Block, up from less than $5 billion in September. While the majority of that cash flow is related to sports, which Nasdaq and Cboe don’t plan on directly touching, there’s still a chunk of change to be made on wagers squarely in their financial wheelhouse.

Hocking also said Cboe expects binary options to bring a new user demographic to its brand, which could help it earn more name cred. Anyone who’s scrolled TikTok and been hit with a Kalshi ad can guess that prediction-market users skew young. Binary betting could be a familiar beach for new users to land on before they explore other products.

For investors, binary bets can serve as a hedge against both their broader portfolio and real-world risks (think: placing a small wager on the S&P plummeting). They can also serve as a predictive tool, acting as a broad survey of people’s opinions. That’s not to say they’re likely to see strong returns in and of themselves. The majority of Polymarket traders (69%) have lost money, a Bloomberg study going back to 2022 found, while the top 1% of traders raked in three-quarters of the profits.

SEC-regulated prediction markets could limit losses by being more restrictive about who can place wagers and for how much. But it’s up in the air who will regulate the sector, and it seems likely to head to the Supreme Court before it comes back down.

Written by Jamie Wilde

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