Prediction Markets Topical Guide

HOW ARE THEY REGULATED?

The regulation of prediction markets is rapidly evolving and varies across states and internationally. In the U.S., the Commodity Futures Trading Commission is the main regulator of prediction markets, but that authority is disputed by states and the gambling industry. depending on what type of prediction market is being traded. Several states want to regulate prediction markets the same way they regulate sports betting.

The CFTC prohibits prediction markets from trading any contract "that involves, relates to, or references terrorism, assassination, war, gaming, or an activity that is unlawful under any state or federal law."

The prediction market companies can also ban people if they are suspected of cheating. People have been accused of using insider information and faced criminal charges.

HOW DO THEY WORK?

Sportsbooks and prediction markets offer a lot of similar options: Wagers on games, individual performances and other possibilities. But the format is different. Sportsbooks have in-house experts who set odds that dictate payouts for winning bets. It's the house versus the gamblers.

Prediction markets operate by allowing customers to buy and sell "yes" or "no" contracts tied to an event's probable outcome. Anyone can wager on everything from whether it will snow in Miami to if a world leader will say a certain word in a speech. If you buy a "yes" contract and you're right, you win a portion of the total contracts on that topic. If most of the market guessed "no," the payout is bigger.

Prediction markets don't use gambling terms because of the optics and regulatory ramifications and instead prefer to describe their users as trading on real-world events. Many, including several state and federal courts and critics of the industry, do say it is gambling or is like gambling. Be careful using the word "gambling" and make sure stories reflect that there is debate. It is acceptable to use terminology such as "bet" and "wager," which the AP also uses to describe trading activity in the stock and bond markets.

Questions reporters should ask:

How popular is this contract?

When looking at event contracts traded on Kalshi, Polymarket or any other platform, reporters and editors should check the trading activity of an individual contract. This is typically known as volume, or the amount of money being wagered on that contract. Thinly traded contracts compared to the most popular contracts can have rapid price movements or may not truly reflect the market's opinion of a particular event.

What are the definitions and rules of the contract?

Each platform will provide specific information on how a contract will resolve a "yes" or a "no." Read the rules of each contract, found on the platforms' websites, to understand how exactly that contract will resolve.

Is there evidence the markets are being swayed by insider information?

Has there been any unusual trading of the contract? Did a user step in to trade a contract shortly before the event happened, and bet correctly? Has that user been on the platform before?