Prediction markets tipped for new growth as US trader interest mounts

Rising interest from US financial institutions in contracts that allow people to bet on future events is spurring new growth in a market best known for its regulatory battles over the legality of wagering on politics. 

Interactive Brokers, founded by electronic trading pioneer Thomas Peterffy, had planned to launch its own platform, ForecastEx, on Monday offering contracts based on significant economic data releases. It was subsequently delayed until later in the summer due to what the company said were “administrative issues”.

In April, trading firm Susquehanna International Group, co-founded by billionaire Jeff Yass, set up a dedicated team to make markets on Kalshi, a platform that offers users the chance to speculate on events from whether the Federal Reserve will cut interest rates this year to reviewers’ ratings of new films.

Event contracts are typically structured as yes-or-no bets that pay out $1 per contract if correct and zero if they are wrong. Before they expire, prices fluctuate in between, reflecting the changing odds. 

ForecastEx will launch with contracts tied to widely followed economic data such as the weekly jobless claims report and monthly consumer sentiment figures.

Steve Sanders, head of marketing and product development for Interactive Brokers, said he expected a range of clients to be interested. 

“I think hedge funds will find ForecastEx helpful in providing insurance to their portfolios and I certainly think individuals would not only find it helpful as insurance, but also maybe to take a view on where they think these indicators are going,” he added. 

SIG’s involvement with Kalshi so far has centred on its finance-related offerings. Monthly trading volumes have risen 227 per cent in the past year and in the three months since SIG joined, volume has risen 88 per cent, founder Tarek Mansour told the Financial Times. Kalshi is in discussions with several brokers about offering their clients a connection to its platform.

“Someone of the stature of an institutional market-maker like SIG can bring in a lot to a market growing like ours,” said Mansour, who also welcomed Interactive Brokers’ move. “It brings more credibility, education and interest to the market and we’re excited to see that.”

John Aristotle Phillips, founder of PredictIt, the only site in the US to offer contracts on the outcome of the US election, owing to a 2014 deal that its regulator is trying to void, said a lot of the company’s users came from the financial industry.  

“They have to be plugged in for their day jobs on, say, who’s going to have control of Congress, or who’s going to be the next Supreme Court appointee. These people will follow events.” he said. “Political risk is very much on investors’ minds and it’s evidenced by those who consume the odds.”  

The growing involvement by financial groups comes as regulators are considering new curbs on what events can be offered for trading. Because they are essentially futures contracts, the market is overseen by the Commodity Futures Trading Commission.

PredictIt is fighting the CFTC in court after the regulator in 2022 revoked a 2014 “no-action” letter that allowed it to operate as a non-profit in conjunction with a New Zealand university, essentially to provide data for academic research.

In 2023 Kalshi sued the CFTC after the watchdog barred it from offering election-related contracts. Both cases are ongoing.

The CFTC, however, took a new tack in May this year when it proposed a rule specifically banning contracts based on political contests, awards ceremonies or sports contests as “contrary to the public interest”. 

CFTC chair Rostin Behnam argued that regulating futures on those particular topics would push the commission far beyond its remit. He singled out political contracts, arguing they would degrade Americans’ “unique experience of democracy” and risk making the watchdog “an election cop”.

In its proposal, the CFTC noted prediction markets’ rapid growth, in which the number of new contracts each year, since 2021, has surpassed the number from the previous 15 years combined.

“I’m hoping that (the CFTC) use as light a hand as possible, so that we have a chance to see people try to innovate and then see what happens,” said Eric Zitzewitz, economics professor at Dartmouth College, who studies the market.

“Predictions markets are potentially a really useful way of providing an aggregation of people’s opinions on a particular subject that is maybe more meaningful than just taking the average of what everybody is saying. Its like an average but weighted by how much they’re willing to back what they’re saying with money.”