Event Options & Prediction Markets

“Event markets” is a category of trading venues where contracts settle based on whether a specified real-world event occurs. These contracts look a lot like binary options, since the eventual payoff depends on an external, verifiable outcome rather than the price path of a continuously traded asset. In many ways, they are also similar (or identical) to sports betting, and it is not surprising that regulators, courts, and authorities in the United States are currently struggling to clarify exactly how event markets should be treated from a legal point of view.

Before we go into the nitty-gritty of event market regulation, however, we will begin at the beginning, and look at how event market trading works and how it is both similar and different from other types of trading. Continue reading if you want to learn more about the mechanics of how these contracts are listed and traded in the United States, the arithmetic that determines profit and loss, how platforms structure payouts and margin, how the pricing should be read, and how market makers and arbitrageurs operate.

We will then look into the enforcement framework that matters for traders in the U.S. and why federal and state regulators, including the Commodity Futures Trading Commission (CFTC), are in conflict over these instruments. To understand the field better, we need to study both relevant litigation, state enforcement actions, and the policy objections that motivate the various viewpoints.

What are event markets?

An event market is a venue that lists one or more event contracts. An event contract ties a financial payoff to a discrete question: Does X happen by time T? The defining attribute is that settlement depends on the resolution of a clearly specified external fact rather than the gradually shifting price of a continuously tradable asset.

Event contracts are commonly structured as binary, cash-settled instruments. The typical retail framing is simple: a contract pays $1 if “Yes” occurs and $0 if “No” occurs. That design makes the contract equivalent, in payoff terms, to a binary option with a fixed terminal payoff and a clearly bounded loss for the buyer. That payoff template is why many exchanges and retail platforms refer to these instruments as “prediction contracts” or “event options”. Institutional descriptions use the neutral term “event contract” or “information contract”.

Practical implementations vary by platform and jurisdiction, but the core template is consistent. Price ranges from zero to one in decimal terms, and that price can be read as an implied probability under frictionless assumptions.

Event contracts fall into at least three useful buckets for traders and regulators, and each bucket has different counterparty risk, manipulability, and regulatory exposure.

• Objective operational events. Examples: “US CPI released on YYYY-MM-DD is above X.” These are easy to define, resolve, and monitor.
• Sports and entertainment events. Examples: “Team A wins the championship.” These are high-volume retail events, but from a legal and political perspective, they create state gaming friction.
• Political and governance events. Examples: “Will X party control Congress after Election Y?” These create the strongest policy objections and the most litigation risk.

Product mechanics

Contract details

A normal event contract will specify four things clearly: the event definition (what exactly constitutes “Yes”), the resolution source (which authority or data feed determines the official outcome), the resolution time (the exact clock time or event milestone that closes the market), and settlement rules (how the cash payoff is determined and when it will be paid). Platforms typically publish both contract specifications and an appeals process for contested outcomes.

That sounds obvious until you read disputes. Ambiguities can for instance arise from partial events (a game suspended then finished later), retroactive data revisions (an agency corrects a statistic after publication), or meta-questions (what does “control Congress” mean in the face of contested seats?). Quality platforms anticipate these problems by naming a primary source (such as an official league statement, an agency release, or a designated count of certified returns) and by describing fallback procedures. The fallback and appeals process is a real product risk. Example: If you trade on an event where the resolution source can be changed or reinterpreted later, you are taking resolution risk in addition to directional risk. The single biggest source of dispute is imprecise wording. Contracts that use undefined terms or ambiguity invite litigation. For example, “Will Candidate X concede” is harder to define than “Will Candidate X be certified as the winner by the state election authority by date T?” The latter is resolvable by referencing a named document and a date; the former is subjective. Precision matters for both trading and compliance.

Pricing as implied probability: intuition and caveats

The standard retail short-hand interpretation is that a contract priced at $0.62 implies a 62% probability of the event occurring. That interpretation is correct under frictionless market assumptions. If the market is deep and arbitrageurs can trade freely, the marginal price equates to consensus probability. Traders use that mapping extensively and that is why event markets are often discussed as forecasting tools.

But the mapping breaks down where frictions exist. Position limits, low liquidity, asymmetric participation, fees, and transaction costs all distort the price-as-probability reading. A $0.62 price in a tiny market with a wide spread and low volume is not the same information as $0.62 for a thick, continuously traded contract. Platforms with thin depth can be pushed, and pricing may reflect the willingness of a small set of counterparties to take risk rather than an objective probability.

The binary payoff simplifies the arithmetic. For a buyer of a “Yes” contract purchased at price p, the payoff at settlement is either $1 (if Yes) or $0 (if No). Profit equals (1 − p) if “Yes” occurs and (0 − p) if “No” occurs, before fees. That boundedness is what makes these instruments feel similar to classic binary options.

Continuous trading and exit options

Most exchange-style event contracts allow buying and selling up to resolution. That transforms the product from a fixed-wager “bet and wait” instrument into a tradable derivative where position management matters. Traders can enter early, scale in as probability shifts, and exit before settlement (if liquidity permits). Continuous trading also creates the conditions for market-making and arbitrage. Platforms that enable continuous trading thereby increase the likelihood that prices reflect aggregated marginal beliefs (under sufficient liquidity and appropriate market design) rather than idiosyncratic wagers. They also introduce typical market microstructure issues, e.g. spread, latency, and market impact.

If we take a closer look, we can see how continuous trading changes the nature of the product, because once you can trade up to resolution, an event contract behave like a tradable derivative rather than a fixed “bet and wait” wager. Position management (entry timing, scaling, hedging, early exit) becomes central. Continuous trading also allows prices to incorporate marginal belief updates over time, rather than being dominated by initial wagers or a small set of early participants. This is one of the classic arguments for prediction markets. If there are multiple related contracts, time decay toward resolution, or cross-venue pricing differences, continuous trading creates room for liquidity provision, calendar arbitrage, cross-market arbitrage, and dynamic hedging.

With continuous trading, you inevitably get spreads, adverse selection, inventory risk, latency advantages, and market impact, exactly as you’d expect from any order-driven or Automated Market Maker (AMM) based market. Once you allow continuous trading, you inherit the same frictions and strategic problems that exist in any real market, even if the underlying payoff is just a simple yes/no outcome.

It is important to remember that continuous trading enables better aggregation, but doesn’t guarantee it. Thin markets can still be dominated by a few informed traders, manipulation attempts, or stale prices that don’t move until someone pays the spread. Examples of factors that can play a major role are fee structure, position limits, and information asymmetries near resolution. Not all participants are belief-driven. Some traders are hedging, some are speculating short-term volatility, and some are liquidity providers. Prices reflect marginal willingness to trade, not a pure belief average.

Settlement and edge cases

Settlement is triggered when the contract’s specified resolution condition is met and the named resolution source issues an outcome, subject to any appeal window. Settlement is normally cash-only: the correct side gets $1 per contract, the incorrect side gets $0. Platforms publish settlement dates and timelines for cash transfers. High-quality venues specify what happens if the primary source is corrected, whether delayed outcomes push settlement to a later date, and how disputes are adjudicated. These rules are substantive financial product details. In litigation, courts and regulators have focused on whether the rulebook offered a reasonable, publicly available process for resolution.

Payouts, fees, collateral and financing: Understanding the economics for traders and platforms

The basic payout arithmetic

Most retail event contracts use a fixed payout model. The buyer’s maximum loss equals the purchase price, and the maximum gain equals one minus the purchase price. If you buy a “Yes” contract at p, at settlement your P/L is:

• If Yes: + (1 − p) before fees.
• If No: − p before fees.

Sellers realize the mirror image. That simple math makes position-level risk trivial to compute. Aggregate risk for the platform and for leveraged participants is more complex because of margining, netting, and concentration.

Fees and the “house edge”

Platforms extract value through explicit fees (per-contract fees, commissions), through spread and market-making margins, and through financing or interest on collateral. Two platforms can quote the same mid price but differ materially in economics if one charges higher transaction fees or keeps interest on full collateral while another pays interest or offers margin. As a trader, you should compute the actual effective cost per round trip and per day for carry, instead of relying on the marketing headlines when selecting a platform.

Some venues require full collateral up front, which means that customers must post cash equal to the full potential loss. This makes the product effectively pre-funded and reduces counterparty credit risk on the exchange side. Other venues have sought permission to offer margin, at least to institutional participants. Margin changes both user economics and platform risk. It reduces the capital required to take a position but increases the platform’s exposure to default and creates paths to rapid account liquidation in volatile events. News reporting has highlighted that Kalshi sought to introduce margin trading for institutional users, a change that would make event contracts look more like futures from a funding perspective.

Platform economics and float

Event markets typically require traders to post collateral sufficient to cover their worst-case loss, and that collateral remains with the platform until positions are closed or the event resolves. During this time, the collateral constitutes economic float. Where platforms hold collateral, the treatment of that float matters.

If the platform retains any interest earned on that float without crediting users, traders are effectively providing zero-interest financing to the platform, which functions as an implicit fee even when explicit trading fees are low or absent. Conversely, platforms that credit interest or otherwise rebate funding reduce this source of carry.

In markets with heavy turnover, the aggregate amount of collateral held can be large relative to explicit fees, making interest on float a potentially significant revenue source. Because this cost is not directly visible in quoted prices or transaction fees and varies with interest rate conditions and settlement timing, transparency about collateral treatment, interest allocation, and related fees is necessary for participants to accurately assess the total cost of trading.

Example:

Imagine an event market where contracts pay $1 if an outcome occurs and $0 otherwise. The platform requires traders to post collateral equal to their maximum possible loss.

Suppose Sarah trades actively. Over the course of a month, she maintains an average open position that requires $10,000 of posted collateral. She doesn’t notice this much because she’s constantly entering and exiting positions, but at any given time roughly $10,000 of her capital is sitting on the platform.

Assume short-term interest rates are 5% annually. That $10,000 of collateral therefore earns about $500 per year, or roughly $42 per month.

If the platform retains the interest and credits Sarah nothing, Alice is implicitly paying about $42 per month in financing cost, even if the platform charges zero explicit trading fees. If her explicit trading fees over the month are only $10, then the hidden financing cost is actually the dominant component of what she’s paying to trade.

Now scale this up to the platform level. If the platform has 5,000 active traders like Sarah, each with $10,000 of average collateral posted, the platform is holding $50 million of float. At a 5% annual rate, that float generates $2.5 million per year in interest revenue. That can easily exceed revenues from trading fees alone, especially in high-turnover markets where collateral is continuously recycled.

If instead the platform credits interest back to users the platform must instead rely more heavily on explicit fees or spreads to cover its costs. That’s why the treatment of collateral matters, and why users need clear disclosure to understand the true cost of participation.

Clearing and counterparty risk

A venue registered as a DCM and backed by a regulated clearinghouse reduces bilateral credit risk because the clearing house stands between counterparties and manages defaults via margin and default rules. That is a central reason why platforms pursue CFTC designations. Federal clearance and central counterparty mechanisms change counterparty risk profiles.

When a trade executed on a DCM is cleared through a Derivatives Clearing Organization, the clearinghouse novates the transaction and becomes the buyer to every seller and the seller to every buyer. As a result, participants no longer face direct credit exposure to one another and instead face exposure only to the clearinghouse. The clearinghouse manages this risk through standardized margin requirements, mark-to-market processes, default funds, and predefined default management procedures designed to ensure continued performance even if a participant fails. If one trader defaults, the clearinghouse absorbs and mutualizes the loss so that non-defaulting counterparties still receive payment. This structure is particularly important for event markets, where payoffs can change discontinuously at resolution and default risk can spike sharply at settlement. Federal regulation and central clearing therefore change the counterparty risk profile from a network of bilateral obligations into a centralized, rule-based system with legally enforceable protections. This reduction in bilateral credit risk is a central reason platforms seek CFTC designation, although the risk is transformed rather than eliminated, since exposure is concentrated in the clearinghouse and depends critically on margin models, governance, and default management rules.

Looking at it from a trader´s perspective

Event markets are tradeable instruments that offer clear, bounded payoffs and the potential to express precise, event-level views. For disciplined traders who treat legal exposure as a risk factor, who read contract rulebooks, and who trade on venues with robust clearing and surveillance, these contracts can be a practical tool. They are not, however, a frictionless or juridically neutral market.

From a pure P/L perspective, event contracts are inexpensive to model at the individual trade level because outcomes and maximum losses are bounded. The cost side, however, is multidimensional, as explicit fees, embedded spreads, collateral interest treatment, and any applied margining system all change true trading economics. Always model gross P/L and then net it down by an explicit cost schedule rather than rely on headline prices alone. Different venues publish different fee schedules and collateral rules.

How people trade event contracts: Market making, hedging and behavioral patterns

Market making and liquidity provision

Where markets are deep enough, market makers quote two-sided prices and collect the spread while managing inventory. Market making in event contracts is conceptually identical to making a market in a thinly traded equity. Dealers must manage inventory risk (exposure to a single event), adverse selection (sudden revelation of information), and the tail risk of an outcome surprise. Inventory management is often harder because the underlying event has discrete resolution and often correlated newsflow. An overnight political leak can move the entire book.

For larger platforms attempting to attract institutional liquidity, market-making incentives (rebates, fee waivers, or designated liquidity provider programs) are normal. The combination of incentives, position limits, and balance sheet capacity impacts the available depth and the realized spreads.

Arbitrage and synthetic constructions

Event contracts can be combined synthetically to express more complex views. Traders construct calendars, straddles and spreads across correlated event outcomes, and when platforms support continuous trading traders arbitrage between related contracts. For instance, a contract on “Party A wins Senate” and contracts on individual state results can be used in combinations to exploit inconsistent probabilities. That arbitrage is effective only when execution costs, position limits, and settlement rules make the composite replicable. Arbitrageurs are the classic source of price discipline. If liquidity and fee structures support it, arbitrage reduces persistent mispricing. But when markets are thin or when contract wording prevents exact replication (e.g. due to different resolution sources), arbitrage is limited.

Hedging real-world exposure

Participants can use event contracts to hedge real exposures. Examples include political risk hedging by corporate treasuries when elections threaten trade policy, or sports-related media companies hedging advertising exposures.

Examples:

• • • A multinational company might worry that a new government could impose tariffs affecting its exports. If there’s an event contract that pays out based on that election outcome, the company could aim to offset potential losses. This is a type of hedging against political risk.
    • A media company may depend on ad revenues linked to a sports team’s performance. By using a contract tied to the team’s results, it can hedge against the risk of poor performance reducing revenue.

For hedging to be rational, the contract’s defined outcome must match the corporate exposure precisely, because a mismatch in definition can make the hedge ineffective. Hedging only works correctly if the contract’s payoff is highly correlated with the exposure. If the contract is too broad or doesn’t align perfectly with the company’s risk, it might fail as a hedge or even amplify risk. Examples: If a company fears tariffs on imports from a specific country, but the event contract only pays based on the overall election winner without specifying trade policy, the hedge could be ineffective. Similarly, a contract that pays if a league’s champion is a particular team might not properly hedge ad revenue if the revenue depends on a different performance metric (like attendance or TV ratings).

The bottom line is that event contracts can be rational hedging tools if the contract’s outcome aligns closely with the exposure. Otherwise, the hedge may not work as intended.

Retail behavior and volume dynamics

Retail participants often treat event contracts like entertainment and make speculative “micro-bets”. This behavioral tendency amplifies volatility in sports and political contracts. The entry of retail money increases amplitude and frequency of price moves and can result in short-term dislocations that are exploitable only if transaction costs and margin permit.

Surveillance, manipulation and trade monitoring

Because many events are influenceable or subject to insider information, exchanges that expect professional liquidity invest in surveillance. That function tracks suspicious volume patterns around news, concentration in single accounts, and unusual timing relative to known information events. Exchanges can also provide audit logs and cooperation channels for law enforcement when manipulation is suspected.

The risk of inside trading was highlighted in early 2026, when an anonymous trader made over $400,000 by placing a large bet on a prediction market (Polymarket) just hours before Venezuelan President Nicolás Maduro was captured by U.S. forces. The wager was placed via a newly created account right before the event became public, and it sparked widespread suspicion that the trader had access to insider or nonpublic information. This situation was widely discussed in news media and even prompted lawmakers to propose new regulation to curb insider trading in prediction markets.

The episode is significant because it shows how event markets can be vulnerable: if an actor has access to pertinent non-public information regarding a real world event (e.g. military or government actions), they may profit unfairly, underscoring the need for surveillance and controls much like in traditional exchanges. There is also the risk that being able to make big money from certain events happening could sway decision makers.

The Maduro case is not unique, and there have been other reported controversies in prediction markets involving suspicious trading ahead of planned announcements. For example, analysts and observers have flagged unusual bets on outcomes tied to corporate announcements (such as MicroStrategy’s Bitcoin purchases), where large, anonymous trades moved markets before relevant news was made public.

In December 2025, several anonymous traders placed unusually large bets (approximately $140,000 in total) on a Polymarket prediction market that asked whether MicroStrategy would announce a Bitcoin purchase of >1 000 BTC between December 2–8, 2025. These bets were placed just hours before MicroStrategy publicly disclosed that it had bought 21 550 BTC (circa $2.1 billion). All three wallets involved were new accounts with no prior history, funded immediately before the trades, and concentrated exclusively on that one outcome, a pattern often seen as a classic insider signal. The market’s odds jumped from around 40 % to circa 61.5 % ahead of the announcement, and the traders then collected their winnings. Some event markets have limited surveillance compared with regulated equity or futures exchanges, so patterns like sudden, large, well timed bets can be more likely to go unchallenged. In this case, Polymarket’s leadership stated that such trades were not even prohibited.

 

It should be noted that the media attention and regulatory focus on the MicroStrategy event isn’t just about prediction markets, it is part of a broader trend where regulators have been looking at unusual market movements before public announcements involving crypto treasury strategies and corporate disclosures. For example, U.S. regulators including the SEC and FINRA have been probing large price movements ahead of crypto related announcements by companies with such strategies, partly spurred by attention around firms like MicroStrategy.

It is also important to remember that while the above are modern examples tied to new forms of trading (prediction markets), traditional markets have long had high profile insider and manipulation cases too, e.g., the Galleon Group insider trading scandal in the U.S., where hedge fund managers and executives were prosecuted for trading on confidential corporate information.

Regulatory mechanics in the United States

The U.S. regulatory debate about event markets largely centers on whether such contracts fall within the Commodity Exchange Act (CEA) and how the CFTC should exercise its statutory authority. Two elements are central to market design and compliance: (a) exchanges and clearinghouses that register under the CEA, and (b) Regulation 40.11 (17 CFR § 40.11), which provides a review mechanism for certain event contracts. The interaction of federal registration and state gaming statutes is currently the main battleground.

Event markets are not a new invention. Humans have been betting on the outcome of certain events for a very long time, and, if we look at the modern event contract, academic and market literature dates back at least a few decades. What is new is the effort by some firms to operate event contracts at scale in the U.S. under federal derivatives rules, rather than as state-regulated wagering products. That shift is what has created the modern regulatory fight, because a platform can now register as a Designated Contract Market (DCM) with the CFTC, list event contracts, and claim federal preemption over state gambling laws. States have disputed that claim in multiple legal venues. The CFTC itself has actively engaged: it defined the relevant rule language in Regulation 40.11 and has recently been moving to clarify where it will draw the line between permissible event contracts and those it will treat as contrary to the public interest. The agency’s posture has shifted over time. Under current leadership, the CFTC has directed staff to withdraw earlier prohibition proposals and to proceed with new rulemaking to define standards. That development is itself a material event for anyone exposed to these markets.

U.S. platforms that operate under federal derivatives rules are currently subjected to strong friction caused by derivatives law interacting with state gambling law, and recent litigation and administrative actions have turned a previously niche topic into a mainstream regulatory controversy. Reporting by main outlets such as Reuters and the Financial Times, along with CFTC notices, track this evolution, and show how market structure choices create legal questions rather than purely commercial ones.

Designated Contract Markets and federal oversight

Exchanges that register as Designated Contract Markets (DCMs) operate under CFTC supervision and are required to comply with reporting, surveillance, and market-integrity rules. DCM designation places platforms under the CEA framework and enables federal oversight, which platforms argue should preempt conflicting state regulation. Notably, the CFTC designated the famous Kalshi platform a DCM in 2020. It later amended the designation to permit intermediated futures trading and third-party clearing under specified conditions.

Federal oversight via the CFTC delivers surveillance, reporting obligations, clearinghouse rules, and a dispute framework that is uniform across states. That reduces some forms of counterparty risk and can improve transparency. It does not automatically immunize contracts from state law claims, nor does it eliminate the risk that courts will hold a particular contract subject to state gambling statutes. The interplay of CFTC registration and state enforcement is a very real and practical issue that is giving rise to litigation in the United States right now.

Regulation 17 CFR § 40.11 and the public interest carveout

Regulation 17 CFR § 40.11 implements Section 5c(c)(5)(C) of the CEA, which provides that the Commission must not list for trading, and a DCM must not list, contracts involving certain excluded commodities unless the CFTC determines that such a contract is not contrary to the public interest.

Note: CFR = Code of Federal Regulations

Regulation 40.11 enables the Commission to request suspension and apply a 90-day statutory review for contracts that reference enumerated or similar activities (for example terrorism, assassination, war, gaming, or other activities the Commission finds contrary to public interest). The 90-day review is the tool that allows the Commission to step in and evaluate whether a listed contract should continue to trade. The rule’s language has been the subject of recent proposed revisions to clarify whether categorical exclusions (e.g., sports, political events) are permitted.

This is what regulation 17 CFR § 40.11 looks like right now, at the time of writing, in early 2026:

17 CFR § 40.11 – Review of event contracts based upon certain excluded commodities

(a) Prohibition. A registered entity shall not list for trading or accept for clearing on or through the registered entity any of the following:
(1) An agreement, contract, transaction, or swap based upon an excluded commodity, as defined in Section 1a(19)(iv) of the Act, that involves, relates to, or references terrorism, assassination, war, gaming, or an activity that is unlawful under any State or Federal law; or
(2) An agreement, contract, transaction, or swap based upon an excluded commodity, as defined in Section 1a(19)(iv) of the Act, which involves, relates to, or references an activity that is similar to an activity enumerated in § 40.11(a)(1) of this part, and that the Commission determines, by rule or regulation, to be contrary to the public interest.

(b) [Reserved]

(c) 90 day review and approval of certain event contracts. The Commission may determine, based upon a review of the terms or conditions of a submission under § 40.2 or § 40.3, that an agreement, contract, transaction, or swap based on an excluded commodity, as defined in Section 1a(19)(iv) of the Act, which may involve, relate to, or reference an activity enumerated in § 40.11(a)(1) or § 40.11(a)(2), be subject to a 90 day review. The 90 day review shall commence from the date the Commission notifies the registered entity of a potential violation of § 40.11(a).

(1) The Commission shall request that a registered entity suspend the listing or trading of any agreement, contract, transaction, or swap based on an excluded commodity, as defined in Section 1a(19)(iv) of the Act, which may involve, relate to, or reference an activity enumerated in § 40.11(a)(1) or § 40.11(a)(2), during the Commission’s 90 day review period. The Commission shall post on the Web site a notification of the intent to carry out a 90 day review.

(2) Final determination. The Commission shall issue an order approving or disapproving an agreement, contract, transaction, or swap that is subject to a 90 day review under § 40.11(c) not later than 90 days subsequent to the date that the Commission commences review, or if applicable, at the conclusion of such extended period agreed to or requested by the registered entity.

Self-certification and the “list it unless CFTC stops it” dynamic

Under current exchange practice, many DCMs can self-certify that new contract listings comply with the CEA and CFTC rules. In practice, that allows an exchange to list a contract and let trading begin unless the Commission initiates review. That dynamic supports product innovation but also creates political and legal pressure when controversial contracts are listed. The self-certification model is why a platform can list contracts (including sports and political contracts) and make them available without delay and without specific pre-approval from the CFTC.

What we now have is a situation where states or advocacy groups pay attention to event market platforms and challenge controversial contracts right away, hoping to trigger a CFTC review or litigation. If the CFTC decides to review a listed contract, it can order the exchange to pause trading while the review is ongoing. The pause will continue until the Commission makes a determination.

Recent CFTC posture and rulemaking activity

The CFTC’s position toward event contracts has evolved. The agency proposed amendments in 2024 intended to clarify Rule 40.11’s scope, creating substantial debate. As litigation and state actions proliferated, the CFTC issued a staff advisory in 2025 warning registrants about sports-related contracts. That advisory then became a point of contention. In late January 2026, new CFTC leadership directed staff to withdraw the 2024 proposal and the 2025 advisory, and to prepare a fresh rulemaking aimed at setting clearer standards for event contracts. That policy reversal signals the agency’s recognition that the present framework produces legal uncertainty and that a clearer, durable rule would reduce patchwork litigation. Traders should interpret this as an ongoing regulatory rewrite, not a settled field.

Litigation and the state vs federal conflict: Cases, cease-and-desist actions and recent developments

Regulatory mechanics matter because enforcement follows. Over the last two years, the contested line between federally regulated derivatives and state-regulated wagering has been litigated in several venues. These disputes are the proximate cause of the headlines about cease-and-desist letters, preliminary injunctions, and split judicial rulings.

When a state issues a cease-and-desist, platforms commonly react in one of two ways: they either remove the offending contracts for accounts geographically located in the state or they sue the state asserting federal preemption and seek injunctive relief. Both responses are operationally complex. Geofencing markets reduces available liquidity and creates execution fragmentation, while litigation is expensive and uncertain. From a trading perspective, legal headline risk can cause large, abrupt price moves in affected contracts because the availability of markets in some states can materially change participation and depth.

The litigation path is long. Preliminary rulings, temporary restraining orders, and early injunctions are interim outcomes that can be reversed on appeal. The split between federal courts on the issue increases pressure on the CFTC to articulate a clear national rule so that exchanges and investors know which products are likely to survive. In at least one reported instance, the CFTC withdrew an appeal related to election contracts. The litigation docket will be active for some time and will materially affect the practical availability of certain contract categories.

The reported instance where the CFTC withdrew an appeal related to election contracts was in the litigation involving KalshiEx LLC’s political event contracts. KalshiEx, a regulated U.S. derivatives exchange, created “event contracts” tied to the outcomes of U.S. elections, such as which party would control Congress. The CFTC originally disapproved of these political event contracts, arguing they were contrary to the public interest and exceeded its authority under the Commodity Exchange Act. Kalshi challenged the CFTC’s decision in court and won in federal district court, which ruled that the CFTC had exceeded its statutory authority by banning those contracts. The CFTC then appealed that ruling to the U.S. Court of Appeals for the D.C. Circuit. In 2025, the CFTC voluntarily withdrew its appeal of that decision, effectively leaving the lower court ruling in place and allowing Kalshi to continue offering election outcome contracts. This was widely reported in media coverage of the prediction market regulatory landscape.

Kalshi’s 2020 DCM designation was an early test of whether event contracts could be regulated under the Commodity Exchange Act (CEA). Since listing event contracts more widely, particularly sports and political contracts, Kalshi has attracted state enforcement actions and litigation. The sequence of events shows how rapidly legal outcomes can vary by forum and state.

Representative state actions: Tennessee and Nevada

Multiple states have acted against event market venues offering sports or other event contracts without state gaming licenses. When it comes to sports betting, some states have an outright ban, while other states have legal and regulated sportsbetting for venues that hold a state-license.

Tennessee

Sports betting is legal in Tennessee, but only through online venues approved by the Tennessee Education Lottery, which regulates sports betting in the state. Tennessee’s sports betting regulator has issued cease-and-desist letters to several event market venues that are operating without a Tennessee license, including Kalshi and Polymarket, alleging unlicensed sports wagering and raising concerns about under-21 participation and consumer protection.

A federal judge temporarily restrained Tennessee from enforcing the ban against Kalshi in January 2026, concluding that Kalshi was likely to succeed on federal preemption and other claims at the preliminary stage. A hearing for a preliminary injunction followed.

Nevada

Nevada’s federal court has taken a different path than the federal court in Tennessee. In November 2025, a federal judge in Nevada ruled that Kalshi is subject to Nevada gaming rules, undermining Kalshi’s claim that federal derivatives jurisdiction displaces state gaming law. The Kalshi case in Nevada was heard in the U.S. District Court for the District of Nevada, and federal judge who issued the ruling was Chief Judge Andrew Gordon. The decision required careful statutory analysis and turned on how Nevada’s gambling statutes and the specific form of Kalshi’s sports contracts aligned with state law. The Nevada decision was widely reported and is one of several rulings that create a fractured judicial map.

To understand the background, and why this case got so much attention, we need to know that Nevada is one of the oldest and most well-established legal sports betting markets in the U.S. and it commonly serves as the benchmark for how legal sports wagering operates in the country. Nevada has allowed sports betting since 1949, long before the federal ban (PASPA) was overturned in 2018. It was the only state that had legal, full-scale sports betting during the federal ban, which is why it became a global hub for betting on professional and college sports. With that said, Nevada is not a laissez-faire state when it comes to sportsbetting, and sportsbooks must be licensed and heavily audited. The main authorities are the Nevada Gaming Control Board (NGCB) and the Nevada Gaming Commission (NGC). Nevada enforces strict rules on responsible gambling, including age limits (21+) and monitoring for problem gambling, and Nevada sportsbooks pay 6.75% tax on gross gaming revenue (GGR). Even though this is lower than most other states with licensed sportsbetting, the high volume means that sportsbetting still generate significant tax revenue for the state. In 2024, Nevada sportsbooks generated approximately $482 million in GGR, which at 6.75% produced roughly $32.5 million in state tax revenue from sports betting.

Policy and market-integrity objections: Consumer harm, manipulation, insider incentives and political risk

Arguments against particular event contracts fall into policy categories where trading intersects social harm and governance concerns. These objections are commonly advanced by state regulators, some members of Congress, and advocacy groups, and they can impact the public interest analysis that appears explicitly in Regulation 40.11.

Consumer harm and problem gambling concerns

Critics argue that event markets, especially when they cover sports and politics, function as a kind of gambling wrapped in financial jargon. Platforms that facilitate continuous trading, low minimum stakes, and accessible mobile experiences can encourage high-frequency speculative behavior. Even though each contract’s maximum loss is bounded, repeated trading can produce significant cumulative losses. Regulators point to how problem gambling protection standards included in state wagering regimes (e.g. age restrictions, advertising controls, customer suitability checks, and responsible-gaming programs) are not uniformly required in federal derivatives frameworks. These differences are a frequent basis for state enforcement actions. Coverage of cease-and-desist efforts highlights concerns that platforms allow users under age thresholds required by state gambling law to participate.

Market integrity: manipulation and insider trading

Event markets raise novel market-integrity concerns because the underlying events are often influenceable and resolvable by a small set of actors. Examples include political outcomes, corporate actions, and sports outcomes where participants or officials can affect the result. Thin markets and anonymous or pseudonymous trading compound the risk. A person with material non-public information can trade on that information and profit, and detecting abusive trading is harder when turnover is fragmented across platforms. High-profile suspicious trades (such as late bets on dramatic political events) have attracted press attention and regulatory scrutiny. These episodes prompt calls for enhanced surveillance and information-sharing protocols.

Political and governance objections

Political event markets attract additional objections, and the arguments here are not purely economic. Allowing open financial markets on election or coup outcomes may create perverse incentives. Opponents worry that monetizing political events could encourage interference, distort public perception by lending markets a veneer of authority, or encourage actors to act in ways that alter outcomes for profit. The “public interest” language in Regulation 40.11 reflects this concern. Even when labeled a derivative, certain contracts may can still create incentives that a regulator may judge inconsistent with public welfare.

Moral-hazard objections and influenceability

Several event categories are susceptible to influence. Awards voting, internal corporate decisions, or small-scale governmental actions can be influenced by the same actors who have the capacity to trade or cause trades to be placed. This creates a dual risk; both actual manipulation and the reputational or political risk that public perception of manipulability creates even if manipulation is rare.

Practical implications for traders and investors: How to price legal, regulatory and operational risk

If you trade in event markets, the product is a financial instrument plus legal exposure. The legal exposure is not an externality; it is a tradeable risk factor that can dominate market movements. Traders should fold legal/regulatory risk explicitly into valuation and position sizing.

Model the regulatory risk

For any event contract that is controversial (sports, political, or otherwise contestable), assume a regulatory probability that the contract will be delisted, limited in certain jurisdictions, or face forced refunds. That probability should be backed out of market liquidity and recent enforcement actions. Use scenario analysis: if a given contract is geofenced in several large states, what is the impact on bid-ask and terminal liquidity? If an injunction prevents trading for 30 days, how will open positions be handled? Model the cost of forced liquidation, refund, or litigation explicitly.

Treat headline risk as a primary factor

Legal and regulatory headlines can wipe out markets quickly. A cease-and-desist or a court order dissolving trading in a mid-volume contract can turn a $0.20 position into zero by closing the door to buyers. If you operate intraday, build event monitoring into your desk’s watchlist. If you hold positions overnight or across political windows, size down for the increased legal tail.

Check the contract rulebook before trading size

Read the contract specification. Who is the resolution source? Is there an appeals window? What happens if the source revises data? Is the contract explicitly geofenced in certain US states? What are the platform’s rules on collateral and margin? Often the settlement rules contain the operational answer to the scenarios that most worry traders.

Prefer venues with robust surveillance and clear dispute mechanics

Use DCMs or venues that publish clearinghouse rules and surveillance protocols. Central clearing reduces counterparty default risk and typically implies higher operational maturity. Being a DCM does not immunize the venue from state legal action, but it reduces counterparty credit risk and adds regulatory reporting and monitoring that helps identify abusive trades.

Liquidity and legal fragility

When comparing prices across platforms, require a liquidity and legal premium. A thin market that trades at $0.50 on a lightweight platform is not the same as $0.50 on a well-cleared DCM with global liquidity. Apply an explicit “platform risk discount” if the contract is likely to face state regulatory pressure.

Hedging and portfolio construction

If you use event contracts for hedging, will the hedge be legally enforceable? Will counterparties honor settlement even if a platform is embroiled in litigation? Consider trading the same view across multiple, legally distinct venues when possible, to reduce single-platform legal risk.

Examples of three well-known prediction market venues

Kalshi

Kalshi is a U.S.-based prediction market platform where traders can buy and sell contracts on the outcomes of real world events, from politics and economic data to weather and sports outcomes. To better distribute prediction data, the platform has struck media partnerships with major news outlets, including CNN and CNBC.

Kalshi users can trade on outcomes like election results, inflation figures, or even whether a company will IPO by year end. Kalshi offers yes/no contracts that settle at $1 if the event happens and $0 if it doesn’t. Prices between $0 and $1 reflect the market’s implied probability of the event occurring.

Kalshi is registered with the U.S. Commodity Futures Trading Commission (CFTC) as a Designated Contract Market (DCM) and is fully regulated under the Commodity Exchange Act. This federal status enables it to offer event contracts legally in the U.S., though it faces ongoing state level legal challenges, including lawsuits claiming its sports betting contracts are illegal.

PredictIt

PredictIt is a political prediction market that lets users trade contracts on political outcomes, especially U.S. elections and government related questions.

PredictIt uses binary “Yes” and “No” contracts for each event, and each contract is priced between $0.01 and $0.99, where the current price reflects the market’s implied probability of an outcome.

If the event happens, “Yes” contracts settle at $1.00 and “No” contracts go to $0.00. If the event doesn’t happen, “No” contracts settle at $1.00 and “Yes” go to $0.00. This means a correct prediction yields $1 per share and an incorrect one yields nothing.

Historically, PredictIt operated under a special CFTC “academic use” exemption, allowing small scale markets mainly for research and forecasting. That exemption was restructured in 2025, and PredictIt won approval to expand operations and launch as a fully regulated market with higher position limits and more flexible political trading. PredictIt now operates with CFTC approved regulatory status, putting it on a more stable legal foundation than before.

Polymarket

Polymarket began as a crypto native, blockchain based prediction market where users speculate on outcomes ranging from politics and sports to economic or social events. After facing U.S. enforcement actions and a 2022 ban for operating without registration, Polymarket acquired a CFTC licensed exchange and received regulatory clearance to re-enter the U.S. market legally. It also received a CFTC no action letter, which relaxes some reporting and recordkeeping requirements under certain conditions.

In order to be able to operate legally in the U.S., Polymarket acquired the CFTC licensed exchange and clearinghouse QCEX and secured regulatory approval. Polymarket completed the acquisition of QCEX in July 2025, and the CFTC then granted Polymarket clearance, including an amended designation and a no action letter. Under this new U.S. regulatory structure, U.S. users cannot trade directly with crypto wallets as before. Instead, trading happens through regulated intermediaries such as futures commission merchants or brokers. Access rules, compliance, and settlement follow CFTC regulated derivatives standards, rather than exclusively on chain smart contracts.

Polymarket now operates as two distinct entities: a global crypto-native platform and a U.S.-regulated market. The dual structure allows Polymarket to maintain its global crypto audience while simultaneously offering a U.S. compliant venue for U.S. participants, balancing innovation with regulatory adherence. The U.S. entity operates through intermediaries, requiring fiat accounts or approved brokers rather than direct crypto wallet interactions. The range of events is narrower.

The global branch is the continuation of Polymarket’s original model, built on blockchain technology and allowing users worldwide to trade prediction contracts using cryptocurrency, primarily USDC, on the Polygon network. This version offers a wide array of markets, including politics, sports, finance, entertainment, and other global events. Settlement occurs automatically through smart contracts, and participation is largely unrestricted outside the United States, enabling exotic or niche markets that would be impermissible under U.S. law.