How a niche forecasting tool went mainstream, why regulators are scrambling to catch up, and where the industry is headed over the next five years and beyond.
What Prediction Markets Actually Are
A prediction market is a trading venue where the thing being bought and sold isn’t a stock or a bond, but the outcome of a real-world event. Will the Federal Reserve cut interest rates next month? Will a given team win the championship? Will a bill pass Congress? Traders buy and sell contracts tied to “yes” or “no,” and the price of a contract, expressed as a number between 0 and 100, functions as the market’s real-time estimate of the probability that the event happens. Buy a contract at 30 and watch it settle at 100 if you’re right, and you’ve effectively been paid for being an accurate forecaster.
The idea isn’t new. Academic exchanges like the Iowa Electronic Markets have used this format since the late 1980s to study how well markets aggregate scattered information. What is new is scale: prediction markets have moved from an academic curiosity into a fast-growing, heavily capitalized segment of mainstream finance, complete with Wall Street market makers, CFTC oversight, and a running legal battle over who gets to regulate them.
The Current Landscape: Explosive Growth, Unsettled Rules
Two platforms dominate the space today: Kalshi, a U.S. exchange regulated directly by the Commodity Futures Trading Commission, and Polymarket, which built its user base on a decentralized, crypto-settled model offshore before acquiring a CFTC-approved exchange to serve U.S. customers directly. Robinhood, DraftKings, and FanDuel have all layered event contracts onto their existing platforms as well, and the volumes involved are no longer small.
Combined monthly trading volume across Kalshi and Polymarket grew from under $5 billion in September 2025 to roughly $24 billion by April 2026, at one point overtaking the volume wagered monthly through licensed U.S. sportsbooks. Kalshi alone processed more than $17 billion in trading volume in a single month this spring, a year-over-year increase of roughly 2,500%. Sports contracts, unsurprisingly, are the engine behind most of that growth: an estimated 87% of Kalshi’s volume over the past year has been tied to sports outcomes, which has put these platforms on a collision course with the traditional, state-licensed sports betting industry.
A Federal-State Turf War
That collision is now playing out in courtrooms across the country. The CFTC’s position, reinforced by public statements from the current administration, is that it holds exclusive federal jurisdiction over event contracts under the Commodity Exchange Act, and that state gambling law simply doesn’t apply. A growing number of states disagree. As of mid-2026, the CFTC has filed suit against roughly nine states, including Arizona, Nevada, Illinois, New York, Kentucky, Connecticut, New Mexico, Rhode Island, and Wisconsin, arguing that state enforcement actions against Kalshi and Polymarket unlawfully interfere with federal authority.
The disputes have produced a genuinely mixed record so far:
- Minnesota became the first state to pass an outright ban on hosting or advertising prediction markets, a law set to take effect August 1, 2026 and immediately challenged by the CFTC.
- Nevada’s gaming regulator won injunctions against both Kalshi and Polymarket on the theory that their contracts require state gaming licenses; both rulings are now on appeal.
- A federal court in Tennessee found that Kalshi’s sports contracts can be treated as regulated swaps under existing law, a decision widely read as favorable to federal oversight.
- Arizona’s attempt to bring criminal charges against Kalshi was permanently blocked by a federal judge, though appeals continue.
- Kentucky has gone a different route, enacting a 14.25% excise tax on event contracts, which the platforms are now challenging in court as pre-empted federal turf.
Legal observers increasingly expect this jurisdictional fight to land at the Supreme Court within the next one to two years, since no number of district and appellate rulings will fully settle the question of who regulates prediction markets until the nation’s highest court weighs in.
Washington and the World Are Watching Closely
Domestically, the CFTC advanced a formal prediction-markets rulemaking process in early 2026, and the SEC has separately paused a wave of proposed prediction-market ETFs from firms including Bitwise, Roundhill, and GraniteShares pending public comment. Insider trading has also emerged as a live concern: the CFTC has already pursued enforcement actions tied to suspicious trading around geopolitical events, underscoring that these markets can attract the same bad actors that plague any other venue where non-public information has monetary value.
Internationally, the reception has been far less welcoming. India’s government ordered internet providers to block Polymarket outright in 2026, classifying prediction markets as prohibited online money gaming, with a similar order reportedly in preparation for Kalshi. That split, permissive in the U.S. under federal oversight, restricted or banned in a number of other jurisdictions, is likely to remain a defining feature of the industry for years to come.
Institutional Money Is Starting to Arrive
Perhaps the most consequential shift in the past year has been the entrance of serious financial institutions. Susquehanna International Group became Kalshi’s first official market maker, and firms across the derivatives world are now testing the waters: a recent industry survey found that roughly 9% of institutional derivatives firms are already trading prediction markets, with another 35% actively considering entry. Proprietary trading firms are furthest along, and large asset managers, hedge funds, and prime brokerages have begun using contracts tied to scheduled events, like monthly jobs data, to hedge risk rather than simply speculate.
The clearest signal of where this could be headed came from outside the prediction market world entirely: Intercontinental Exchange, parent of the New York Stock Exchange, made a multibillion-dollar investment in Polymarket, with plans to distribute its event-driven data as a market sentiment product for institutional clients and to explore joint tokenization initiatives. Kalshi has pursued a parallel institutional courtship, including a partnership arrangement with Nasdaq.
That said, most participants close to the market caution against overstating how far this has come. Liquidity on many individual contracts remains thin by institutional standards, sometimes just tens of millions of dollars in total depth, meaning a single large trade can move prices sharply. As one industry executive put it, the space is still “in the foothills” of institutional adoption, even if it’s climbing quickly. Regulatory uncertainty remains the top-cited barrier to broader institutional participation, ahead even of liquidity concerns.
Where This Goes From Here: A Five-Year Outlook
Year One to Two: The Legal Fog Starts to Clear
Expect the state-versus-federal jurisdiction fight to reach, or at least be accepted by, the Supreme Court within this window. Whichever way that ruling breaks, it will likely trigger a wave of subsequent adjustments: either a patchwork of state carve-outs and negotiated settlements if states retain some authority, or a more unified, CFTC-led national framework if federal pre-emption is upheld. A formal CFTC rulemaking on event contracts, already underway, should also be finalized in this period, giving platforms and their institutional counterparties a firmer rulebook to build on.
Year Two to Three: Consolidation and Product Maturity
As the legal picture stabilizes, expect consolidation among smaller platforms unable to absorb ongoing litigation costs, alongside continued convergence between prediction markets and traditional derivatives exchanges. Kalshi’s approval to list the first CFTC-regulated perpetual futures product is an early example of the category blending with mainstream derivatives infrastructure rather than remaining a separate novelty. Expect similar product expansion into economic data, corporate earnings, and macro indicators, areas that are less politically fraught than sports or elections and more naturally suited to institutional hedging use cases.
Year Three to Five: A Genuine Institutional Asset Class, If Liquidity Catches Up
If regulatory clarity holds, the most plausible path is that prediction markets settle into a recognized, if still niche, corner of institutional finance, used for hedging event risk the way options and futures are used today, alongside a much larger, sports-dominated retail business that increasingly resembles licensed sports betting in substance if not in name. The ICE-Polymarket data distribution arrangement hints at a further possibility: event-contract pricing becoming a standard sentiment input for asset managers, similar to how implied volatility or credit spreads are used today, regardless of whether the underlying contracts themselves see mass institutional trading volume.
Beyond Five Years: Convergence or Retrenchment
The longer-term trajectory really has two plausible branches. In one, prediction markets become a permanent, well-regulated fixture that formally converges with existing derivatives and betting markets, and the current sense of controversy fades the way it did for options trading or, more recently, sports betting after the 2018 Supreme Court ruling that opened that industry to the states. In the other, a Supreme Court decision or a wave of new federal legislation constrains the sports and political categories that currently drive the bulk of volume, pushing the industry back toward its original niche in economic, corporate, and scientific forecasting, smaller, but with a clearer and less contested purpose.
Either way, the underlying idea, that markets can be an efficient mechanism for aggregating dispersed information into a single, tradable probability, is not going away. What remains genuinely unsettled is how large a business can legally be built on top of it, and who ultimately gets to decide.
This article reflects the publicly reported state of the prediction markets industry and its regulatory environment as of July 2026. Given how quickly litigation and rulemaking in this space are moving, readers should verify current legal status before relying on any platform in their jurisdiction.