Making Predictions Is Hard, Especially About the Future—Or It Used to Be

Prediction markets – platforms where users trade contracts tied to the outcome of future events – offer potential forecasting and risk management benefits for firms, but also raise significant concerns about insider trading, market manipulation, consumer protection, and reputational risk.

• Research indicates that prediction markets can compare favorably to traditional data sources and offer near real-time information on a wide range of issues, including economic trends, geopolitical events, and government policy actions.
• Prediction markets could also help firms more directly hedge risks stemming from events such as weather phenomena, military conflict, or interest-rate decisions that traditionally have required the use of less precise proxies.
• The regulatory framework remains unsettled, with questions over the roles of various state and Federal regulators and potential Congressional action.
• Firms could face risks even if they have no direct involvement with prediction markets since contracts could trade on sensitive events involving their business, such as a product launch, regulatory approval, lawsuit, executive change, or financial milestone.
• Firms should review ethics, compliance, and employee-trading policies as prediction markets expand, particularly where employees may possess confidential information or influence events tied to contracts. Firms should also monitor reputational risk tied to prediction markets.

Prediction Markets, Truth Machines?

On the eve of the 2024 presidential election, while polls showed a race that was too close to call, online platforms called “prediction markets” told a different story. Contracts trading on the largest prediction market, Polymarket, placed the President’s odds of victory as high as 67% in the closing week of the race.¹ For supporters of prediction markets, the President’s eventual victory – with nearly 58% of electoral votes – was evidence of their power to more accurately predict future events than existing methods, a phenomenon that has led Polymarket’s CEO to call them “global truth machines.”² The outcome also helped shift what had once been a relatively obscure interest of some economists and traders into a mass market phenomenon – monthly volume on Polymarket and Kalshi jumped from less than $1 billion in mid-2024 to nearly $24 billion by early-2026.

Fundamentally, prediction markets are simple – users trade contracts tied to the outcome of a future event. In the most common format, an “event contract” might pay $1 if a candidate wins an election, if a hurricane makes landfall in a specified region, if inflation exceeds a stated level, or if a sports team wins a championship. This functionality could have both entertainment value – in the case of a contract that hinges on the length of the Super Bowl halftime show, for example – and real economic value – such as contracts predicting US gas prices.

For events with significant trading volume, supporters argue that these markets can translate large amounts of complicated real-world information into a market price that more accurately predicts events than existing methods such as polls or expert analysis. However, prediction markets have also raised significant regulatory and legal concerns related to alleged insider trading, outcome manipulation, regulatory arbitrage, and other issues. These questions have prompted policymakers and stakeholders to debate whether legal or regulatory action may be needed to protect users, clarify the boundary between trading event contracts and gambling, and preserve the potential economic value of prediction markets.

Extraterrestrials and Economics

Kalshi’s CEO has said that “the long-term vision is to financialize everything and create a tradable asset out of any difference of opinion.”³ This ambition has led Kalshi and other markets to list contracts on a wide range of topics. Some have little economic relevance – such as whether the US will confirm the existence of aliens by 2029. Others resemble traditional futures markets – such as the price of oil by the end of the year. However, for many supporters, prediction markets offer two important innovations: more accurate forecasting and improved hedging.

Philosophers since Aristotle have espoused the “wisdom of the crowd” as being superior to the judgment of a small group of individuals. More recent economic research has shown that prediction markets can be effective at harnessing information from many sources to produce remarkably accurate forecasts. For example, a 2012 paper showed that prediction markets quickly incorporate new information and generally outperform professional forecasters and polls.⁴ Likewise, a 2026 Federal Reserve staff paper showed that trading on Kalshi related to economic trends such as GDP growth, inflation, and unemployment compared favorably to traditional economic data sources and forecasts. These findings are particularly important considering long-running concerns about declining economic data quality due to lower survey response rates and increasing interest from policymakers and researchers in using more real-time economic data to improve decision-making.

In addition to more accurate economic forecasting, supporters argue prediction markets could help investors and firms hedge risks stemming from events such as recessions, military conflict, weather phenomena, and government policy decisions. Using traditional systems, investors often manage risks through proxy investments. For example, risks arising from military action in the Middle East could be hedged indirectly through oil futures. Risks stemming from government policy decisions regarding tariffs or changes in interest-rate policy could be hedged with equities, currencies, or commodities expected to move in response.

But these proxy hedges are often imprecise – oil may move for reasons unrelated to a conflict, and a sector fund may not track the specific impact of a policy decision on a particular firm. Prediction markets could, in theory, allow investors and businesses to hedge more directly against the event itself, such as when traffic through the Strait of Hormuz will return to pre-war volume or what the jobs numbers will be next month. This in turn could reduce basis risk and create a clearer market price for discrete sources of uncertainty.

Potential Concerns

Despite their potential benefits, prediction markets have raised many concerns. As in any market, the potential that some participants may trade based on nonpublic information undermines market integrity and introduces potential investor harm. These risks may be especially acute in prediction markets because the types of information relevant to prediction markets and the monitoring systems designed to catch fraudulent behavior are potentially less robust than in securities markets. For example, the Commodity Futures Trading Commission (CFTC) recently sued a Google employee for alleged insider trading using nonpublic information to trade contracts related to the company’s annual list of most frequently searched terms.⁵ Prediction markets have also in some cases used company data without authorization. For example, Kalshi recently announced its plans to use data from FlightAware to settle contracts related to flight cancellations, but FlightAware has stated that they have no agreement with Kalshi and such usage would violate their terms of service.⁶

Prediction markets may also pose national security risks – research has found that suspiciously high “win” rates for bets on military operations are likely signs of insider trading.⁷ Indeed, the Justice Department recently charged a US soldier with allegedly using classified information to profit from prediction market bets related to military operations in Venezuela.⁸

Prediction markets also create the possibility that traders may have the ability not only to trade on information about an event, but to influence the event itself. For example, Kalshi recently suspended the accounts of three Congressional candidates for making trades related to their own campaigns.⁹ French authorities are also investigating whether someone may have tampered with a temperature sensor at Paris’s Charles de Gaulle International Airport to win a Polymarket bet on the highest daily temperature at the airport.¹⁰

Regulatory Landscape

The range of contracts being traded on prediction markets and concerns about insider trading, national security, and other issues has led to debate about how they should fit into existing regulatory regimes and whether additional legislation is needed. For example, many state regulators have argued that event contracts tied to the outcome of a sporting event should be regulated under state gambling laws. Contracts based on the price of a commodity on the other hand resemble futures contracts regulated by the CFTC. Other contracts tied to the price of a stock may be considered security-based swaps regulated by the Securities and Exchange Commission (SEC). This regulatory patchwork has fueled calls for Federal legislation to clarify regulatory authorities, ban certain types of contracts considered not in the public interest, and introduce other consumer protections and ethics requirements for elected officials.¹¹

Current Status

In the absence of a statute specifically designed for prediction markets– a term that doesn’t currently appear in Federal statute – oversight has evolved over time through regulatory agency actions and court decisions dealing primarily with the Commodity Exchange Act’s (CEA) treatment of event contracts. Early Federal engagement with event contracts began in 1992 when the CFTC, under its CEA authority to regulate futures and swaps traded on registered markets (later called “designated contract markets” (DCMs)), issued a no action letter allowing the University of Iowa to operate a limited prediction market for contracts related to the outcome of the presidential election for academic research purposes. The following year, the CFTC allowed the University to expand its exchange to allow the trading of contracts based on corporate earnings and economic indicators.¹² Notably, these markets involved relatively few participants making small investments and no compensation to the operators.

Interest in prediction markets remained primarily academic until the early 2000s when increased public interest in trading on a wider range of events led the CFTC in 2008 to request public comment on the appropriate regulatory treatment of event contracts.¹³ In its request, the CFTC raised many questions that remain unresolved today including the scope of the agency’s jurisdiction, whether contracts based on certain types of events should be prohibited, how to address contracts with gaming characteristics, and how Federal oversight should interact with state gambling laws. However, the CFTC did not move forward with a rulemaking.

In 2010, Congress acted on one of those issues, granting the CFTC authority to prevent DCMs from listing contracts if they “involve activity that is unlawful under any Federal or State law, terrorism, assassination, war, gaming, or other similar activity determined by the Commission, by rule or regulation, to be contrary to the public interest.” For the next decade the CFTC used its authority to generally block prediction market activities in the US outside of limited academic settings, including a 2022 settlement with Polymarket that led it to exit the US market and a 2023 lawsuit in which it unsuccessfully sought to block Kalshi from listing contracts related to the 2024 election. In 2024, it also proposed a rule seeking to clarify the regulatory treatment of event contracts, including by attempting to define what it means for a contract to “involve” a particular type of event and what constitutes “gaming” and activities not in the public interest.

However, the CFTC’s approach shifted with new leadership under the current Administration, notably dropping its appeal of the Kalshi decision and withdrawing the 2024 proposed rule.¹⁴ Instead, the CFTC currently argues it has “sole regulatory jurisdiction over prediction markets” and has filed multiple lawsuits against states that have sought to block prediction market operations for allegedly violating state gambling laws.¹⁵ In March 2026, the CFTC sought public comment on a range of questions, indicating plans to proceed with rulemaking related to prediction markets.¹⁶ A recent filing confirms that the CFTC plans to issue a proposed rule.¹⁷

Unresolved Questions

Given the existing fragmented regulatory landscape for prediction markets and novel legal questions posed by certain contracts, many key questions remain unresolved. One of the most important questions concerns the jurisdictions of various regulators at both the state and Federal levels. This question is being debated through various lawsuits involving at least 17 states attempting to enforce state laws governing gambling. In many cases, the states have been countersued by the CFTC. It is unclear how the ongoing litigation will be resolved. For example, in April a federal judge permanently blocked Arizona from pursuing charges against Kalshi for allegedly violating state gambling laws. These issues may ultimately be decided by the Supreme Court.

Additional questions remain regarding the jurisdictions of Federal regulators. While the CFTC claims sole jurisdiction over prediction markets and contracts that fall within Federal derivatives law, it has noted that other contracts may be security-based swaps subject to the jurisdiction of the SEC. To that end, the heads of the two agencies released a joint statement last fall agreeing to collaborate on prediction market regulation.¹⁸

Another unresolved question is which types of contracts should be off limits even if they fall within Federal derivatives law. The CEA authorizes the CFTC to prohibit certain event contracts if they involve unlawful activity, terrorism, assassination, war, gaming, or similar activities that the Commission determines are contrary to the public interest. But the statute does not define the full scope of those categories. Furthermore, the proliferation of examples of insider trading or market manipulation in prediction markets has raised questions about whether additional statutory or regulatory authorities are needed to maintain market integrity and protect participants.  

Potential Congressional Action

Responding to concerns about the current regulatory status of prediction markets, Congress is considering several legislative options. Some proposals are relatively narrow, amending the CEA to define a “casino-style game” and a “sporting event or athletic competition” and clarifying that the CEA does not preempt state laws regulating those categories. Other proposals would establish a much broader set of prohibited contracts, such as those based on events under the control of any person or are not “financial, commercial, or economic” in nature. Still others would create new frameworks that would prohibit contracts considered susceptible to manipulation or fraud and would give states the authority to prohibit or regulate such markets.

Several proposals would establish more ethical guidelines for elected officials and certain government employees, including prohibiting participation in prediction markets.¹⁹ The US Senate, for example, recently issued a prohibition on Senators and staff from buying event contracts. However, the House and executive branch have not yet followed suit.²⁰

Business Impacts

Prediction markets are still developing, but they offer both potential benefits and risks requiring attention from business leaders.

First, firms should assess whether prediction markets could eventually help hedge risks that are difficult to manage through existing tools. Companies with exposure to weather events, commodity shocks, tariffs, interest-rate decisions, geopolitical disruptions, or regulatory outcomes may find value in event contracts that pay out when a specific adverse event occurs. Prediction-market prices may also become useful inputs for business planning. A liquid market tied to inflation, unemployment, energy prices, election outcomes, or policy decisions could provide real-time market intelligence.

Second, companies should revisit ethics, compliance, and employee-trading policies. Prediction markets expand the range of contexts in which employees may be tempted to trade on confidential information. Firms should consider whether policies should explicitly prohibit employees from trading event contracts related to the company or on events over which they have influence. Firms should also examine whether communications with or actions on prediction markets require disclosure under Regulation FD.

Third, companies should examine their user agreements, customer contracts, and other legal provisions governing the use of their proprietary data and monitor whether prediction markets are using proprietary data without authorization.

Finally, firms should be aware of reputational risk. A company may face criticism if it appears to profit from contracts tied to natural disasters, military conflict, layoffs, disease outbreaks, litigation outcomes, political instability, or other sensitive events. Even legitimate hedging activity may be difficult to explain publicly. Companies should also monitor whether prediction markets begin trading on events involving their business, such as a product launch, regulatory approval, lawsuit, executive change, or financial milestone. In some cases, companies may feel pressure to respond to a market that has created a public probability around a sensitive corporate event, even when the company has no formal relationship with the platform.