While prediction markets have existed for many years, they exploded in popularity in 2024 thanks to the introduction of contracts that allowed people to bet on elections. In the space of only a few weeks, millions of people used these contracts to bet on whether Donald Trump or Kamala Harris would win the US presidential election. That success demonstrated that these contracts could become a new asset class for both retail and institutional investors.
At FIA Boca in March, four leaders from companies in the prediction markets ecosystem discussed how this new asset class has evolved and where it is headed.
Understanding prediction markets
Luana Lopes Lara opened the discussion with a primer on understanding this relatively new marketplace. As the co-founder and chief operating officer at Kalshi, the first fully regulated financial exchange in the US specifically for event contracts, she brings a unique perspective.
“Prediction markets are markets where you can answer any question about the future,” she said. “Because you're trading on the outcome of an event, that price becomes the best forecast of that event happening.”
These event contracts offer a direct method to trade on specific events without searching for appropriate proxies.
Graham Deese, the chief regulatory officer of ForecastEx, added that event contracts and prediction markets are synonymous, and he noted the different structure these products have compared to more traditional derivatives products.
“This is a completely new market, completely new type of derivative. [Event contracts] have, typically, two buyers with a yes and no as the two sides, as opposed to a seller. They typically also have different prices. You have people agreeing on a probability distribution, as opposed to agreeing on a single price.”
How exchanges choose which contracts to list
While ForecastEx has focused on economic, climate-related and election contracts, Deese shared the exchange’s approach to deciding on what contracts to list.
“Typically, our management determines what areas we want to list contracts in. What sort of risks do we see that can't be easily hedged with traditional derivatives? Where do people have exposures that potentially these products can step in and provide benefit?”
He added they listen to market participants who may request specific types of events. “We let the participants drive where they want to see new products and what sorts of things they want to trade.”
Lopes Lara shared that Kalshi primarily listens to its participants for suggestions. “There are two main ways that our contracts are created. The first one, similar to [ForecastEx], is coming from user suggestions. We have a portal on our app and website where users can come and talk to us and explain which markets they want to trade on and why. We also have a very developed process internally to go through the news and trending topics and create markets that way.”
Self-certification and technology play a critical role in Kalshi listing a high volume of new contracts in a timely fashion. “Self-certification is a very core part of what we do. We take it extremely seriously. The reason we can [list] so many and so fast is because of three-and-a-half to four years of work internally to streamline all these operations and automate the right parts.”
In practical terms, she described Kalshi’s internal teams responsible for writing the rules, making sure a particular contract complies with all the core principles and undergoes the appropriate legal reviews. Kalshi then sends it to the Commodity Futures Trading Commission for the one-day self-certification before taking it live to market participants.
Institutional traders build their teams
Jeremy Maletz, head of macro trading with Susquehanna International Group, provided an institutional trading perspective on these new products. Susquehanna is a primary market maker that also owns a sports betting company.
Maletz shared how Susquehanna went about building its teams for this new asset class.
“We absolutely think of it as a new and transformative asset class. That means we really do need to build a new team to do it, but we also need to figure out how to find all the information from other parts of Susquehanna,” Maletz said.
“There are certain key attributes that you need as a team member. Someone might be more quantitative and might move towards the types of markets that require more quantitative skills. Someone might be better at following the news or digging into a research aspect. Ultimately, you have to be involved in all of it. Because if we don't know what's fair, we're just going to lose money in these markets.”
The team has had to navigate the new environment of hundreds of new contracts coming online each week. Maletz said the two main reasons for engaging with a specific contract come down to demand and information value, with the latter having more weight.
“These markets are really telling you what's going to happen in the world. Sometimes we might not actually think that there's going to be this massive amount of volume and a lot of market making dollars to be made. But there might be a lot of value to being involved because it helps us to understand important things that are going to happen in the world, and that might inform some of our other businesses.”
Explosive growth
As anyone reading the news in the run-up to the US presidential election knows, prediction markets have attracted significantly more attention in the last year.
JB Mackenzie, vice president and general manager of futures and international at Robinhood Markets, suggested technology and the ease of opening a new account as factors in this growth trend. Combine that with a general increase in retail investors and their collective willingness to trade across asset classes.
“Whether it's equities, it's options, it's [foreign exchange], this is just another area where they can come in and show what their opinion is. And I also think it's a different client base. I think it's a new wave of investors coming through it. It’s younger investors,” Mackenzie said. “This is a gateway for them to learn how to trade. Because if you can understand the importance of an economic number and what [effect] it has on your portfolio, or you have an opinion that you want to take, you're now putting little bits of money to work that really lets you see the outcome of the output of it.”
ForecastEx’s Deese credits the contracts on the US election for the significant growth. Lopes Lara agreed about the impact of the election contracts, and she expects retail trading to explode because predictions markets are “the simplest, the most intuitive asset class.”
Gambling vs. hedging
Answering an often-asked question, Maletz from Susquehanna offered a concise explanation of how prediction markets differ from gambling, particularly related to sports.
“My host of DraftKings doesn't pick up my calls anymore. It turns out, the goal of the sports book is to kick the people who are good off. They want to get the people who don't know what they're doing and just make money off of them. Whereas, the goal of the [designated contract market] listed prediction market is to keep the people who are good. They want the information value. No one gets kicked off if you're good at it. You make money on it, and you help the market to become better. This is a real market,” he said.
“You're going to have tighter spreads, because you have competition driving the spreads down, and you also have the ability to close out a position. If it's a sports book, they might offer you some cash out offer, maybe. But in these markets, you know what trade you put on. You know where it's fair now. You know where you can get out, if you want to get out of it. And that's a real value to people. [Prediction markets] offer a lot more flexibility and fairness.”
Final predictions
Looking ahead, all the panellists took a bullish view on the new asset class. Deese from ForecastEx anticipates a lot more adoption from institutional investors. Kalshi’s Lopes Lara see the markets becoming more mainstream, in the same camp as crypto and stocks.
Robinhood’s Mackenzie expects “a tremendous increase” of participants and a lot of competitors coming into the marketplace. On the institutional side, Maletz predicts these markets will turn into “something that feels more like an insurance product for large institutions, where they can lay off some large risks.”
