Independent data and regulatory experts point out that prediction markets are rapidly becoming an alternative venue for traders to bet on U.S. companies such as Tesla Motors (TSLA.US) and Apple (AAPL.US), sparking concerns about investor protection and market oversight.
This booming industry, pioneered by Polymarket and Kalshi, gained fame by allowing speculators to wager on almost anything, spanning sports events, elections, and military actions. Over the past year, according to independent research and reviews—which further reveal this fast-growing niche segment of the industry—they have expanded into more traditional Wall Street turf, offering tens of thousands of markets on stock price movements, company data, and other corporate events that often drive share prices.
Although still tiny compared to the underlying stock market, equity-linked prediction markets are carving out a new venue that lets investors bet on U.S. securities outside many of the investor protection and market surveillance rules that apply on regulated exchanges. Legal experts warn that if these products continue to expand rapidly, they could eventually affect trading in the underlying stocks and undermine regulators' ability to oversee the market.
"This is a new frontier of market structure. This is innovation on steroids," said Yesha Yadav, associate dean of Vanderbilt University Law School, adding that regulators should respond to these new products "urgently and creatively."
Polymarket and Kalshi say they closely monitor misconduct, regularly refer cases to U.S. authorities, and cooperate with regulators. "Market integrity is at the core of our operations," a Polymarket spokesperson said, adding that the company also works to prevent U.S. users from accessing its international platform. The U.S. Securities and Exchange Commission (SEC) declined to comment, and the Commodity Futures Trading Commission (CFTC) did not respond to a request for comment. The agencies say they are reviewing the regulation of equity-linked prediction markets.
NVIDIA and Alphabet Among the Most Popular Underlyings
Polymarket International launched single-stock markets last October. According to an analysis prepared by blockchain research firm Allium, as of early September, traders had wagered more than $220 million across about 31,000 stock-linked markets. Allium found that nearly 60% of those bets were tied to individual stock movements, with NVIDIA, Google parent Alphabet, Apple, and Tesla Motors being the most popular, while the rest were bets on markets based on ETFs or stock indices. These listed companies did not respond to requests for comment.
Traders typically bet "yes" or "no" on whether a stock or index will reach a certain level by a specific date. One wallet identified by Allium generated $175,000 in trading volume through about 1,300 Apple trades, building positions designed to produce small profits whether the "yes" or "no" contract paid out. Kalshi currently does not offer single-stock bets, but according to a review of Kalshi's website and the data it provides, on a given day it offers about 2,500 markets on indices and company "key performance indicators" (KPIs), such as iPhone launches and Tesla deliveries. Kalshi did not respond to a request for volume data.
Although aimed at retail investors, prediction markets are also attracting institutional investors by marketing event contracts as an alternative way to hedge traditional economic and market risks. Unlike the stock market, prediction markets allow investors to trade around the clock and express multiple views on a company and its performance. But legal experts say they do not offer the same protections and rights, and multiple studies show that the vast majority of traders lose money. James Angel, a finance professor at Georgetown University, said Polymarket International's offshore legal structure makes it largely beyond the reach of U.S. regulators, which also makes it hard for authorities to know what is happening in these markets. "This is clearly the kind of thing our regulators should have nightmares about," he added. Polymarket's newer CFTC-regulated U.S. exchange does not offer single-stock markets but does offer a handful of KPI markets.
Dispute Over Regulatory Jurisdiction Intensifies
The CFTC says it should regulate prediction markets because they effectively trade derivatives contracts, but calls are growing for the SEC to get involved as well. Under U.S. law, contracts linked to a single stock are generally treated as security-based swaps (SBS), a category of derivatives overseen by the SEC and largely limited to professional investors. Legal experts say some KPI contracts may also qualify as SBS, although a Kalshi spokesperson disagreed. A Polymarket spokesperson said the company is working with both agencies to study how swap and SBS definitions apply to new types of event contracts. The two regulators jointly sought public comment in June on these issues and on whether one of them should become the primary regulator. Traditional financial firms and consumer groups want the SEC to take the lead because of its expertise.
"You can imagine insider trading happening in these KPIs just as easily as in stocks," said Ben Schiffrin, a former SEC official who is now director of securities policy at the nonprofit Better Markets. Regulating this is "the SEC's job," he said. Several lawmakers, including Democratic Senator Adam Schiff of California, have also raised concerns about prediction markets. In a statement, Schiff said Congress should not allow the industry to "package traditional financial products under the name of prediction contracts" in order to circumvent U.S. securities law.
Comments