RPT-BREAKINGVIEWS-Prediction hubs make for pricey Wall Street wager

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Pranav Kiran

TORONTO, Jan 29 (Reuters Breakingviews) - Predictions are hard, except about the predictions market. Venues enticing punters to wager on their prognosticative prowess, like Kalshi and Polymarket, are enjoying surging momentum. As they grow, titans of old finance, including NYSE owner Intercontinental Exchange ICE.N, will be tempted to roll the dice on M&A. Underlying it all is event-probability data and frenzied retail trading, catnip for Wall Street.

Kalshi and Polymarket’s popularity exploded after the 2024 U.S. presidential election when, contrary to averages of public opinion polls, their real-time probabilities favored eventual winner Donald Trump. The following year, in 2025, predictions markets saw $47 billion in global trading volume, according to analysts at brokerage Clear Street. CNN broadcasts and The Wall Street Journal now regularly cite their data.

Predictions are structured as binary yes-or-no contracts, asking anything from “will it rain in New York City today?” to “will Rick Rieder be nominated to chair the Federal Reserve?” The price of a contract fluctuates between 0 and 100 cents depending on order flow, corresponding to the percentage probability the market ascribes to an event happening. When an outcome is confirmed, “yes” or “no” pays out.

Venture capital firms see this oddball take on futures-contracts-for-everything as a winner. Between just October and December, Kalshi’s valuation more than doubled to $11 billion. Polymarket, too, is in talks to raise funds at a valuation between $12 billion and $15 billion, according to Bloomberg.

There are differences between the two: Clear Street foresees Kalshi’s take rate, or the fees and commissions that it collects from trades through its own platform and brokerages, coming in at about 2% of volume. At Polymarket, analysts estimate the rate could eventually settle at 0.5%. Given an estimated $96 billion and $84 billion in anticipated trading volume in 2026, their valuations would work out to 6 times some $1.9 billion in revenue for Kalshi, but a much richer 32 times Polymarket’s potential $420 million. Traditional exchange operators like ICE and CME trade at about 11 and 15 times expected sales over the next 12 months, according to Visible Alpha.

The divergence comes down to Polymarket’s unique structure, which is based on the blockchain technology powering cryptocurrencies. It says it charges no fees on a "vast majority" of contracts. Nonetheless, the valuation differential perhaps reflects expectations of convergence.

Certainly, the platforms resemble each other in one crucial way. Much of today’s action is driven by a familiar craze: sports gambling. About 90% of predictions trading volume is sports-related, the Financial Times reported. An independent analysis of Kalshi by Jonathan Becker puts the share at 73%. It wouldn’t be a surprise if Kalshi and Polymarket are major advertisers at this year’s Super Bowl and FIFA World Cup.

That pressures traditional sports books, which juggle a 50-state regulatory patchwork, punitive local and federal taxes, and charge hefty commissions of 5% or more to offset house risk. Predictions markets, conversely, are overseen by the Commodity Futures Trading Commission and match users’ bets against each other, rather than taking on the dangers of a wager themselves.

Legal troubles for predictions markets may yet slow them down: multiple U.S. states and Native American tribes are suing Kalshi, claiming it violates gaming regulations. Even if the company prevails, though, Morgan Stanley MS.N analysts see sports-betting incumbent DraftKings DKNG.O only losing maybe $145 million in EBITDA in the markets in which it currently operates to the upstarts, about 14% of next year’s anticipated total. Analysts expect even that might be offset by the up to $200 million the company could earn from large lucrative states like California, Texas, and Florida opening up, assuming a 30% share.

Just ending up as a new venue for sports wagers would be a disappointing end. The utility of truly flexible, comprehensive predictions contracts would be far larger. Much as futures markets help, say, manufacturers hedge wild swings in the prices of steel or lumber or coal, or airlines avoid a sudden increase in fuel costs, a truly liquid predictions market could, in theory, offer protection against any number of outcomes. In the most optimistic case, these markets could be a kind of hive-mind crystal ball, their data valuable to Wall Street traders and analysts trying to scry the future.

The platforms are nowhere near this point yet. Aside from anything else, a crucial problem is liquidity. Kalshi and Polymarket effectively mimic exchanges, and need brokers such as Robinhood Markets to drum up traders and market makers to provide volume, especially for niche contracts. Without it, contract pricing - and with it, any predictive value - will be hopelessly inefficient.

Kalshi has already signed up Jeff Yass-run quantitative trading giant Susquehanna International, which in turn is staffing up predictions trading desks. Market-makers enjoy a lucrative trade taking the opposite side of over-excitable retail punters, and research shows that traders regularly overpay for long-shot bets.

Traditional exchange operators like ICE and CME have both the experience and motivation to muscle in here. The NYSE-owner, for instance, already pays about $1 billion annually in liquidity rebates to the likes of Citadel Securities and Virtu Financial. That secures a valuable service, improving pricing and tightening spreads between buyers and sellers, thereby strengthening their exchanges. That operational nous could be put to use defending their enviable operating profit margins, which may face pressure if clients just move to trading on financial outcomes through predictions markets.

These exchange veterans also suffer key weaknesses. Their traditional, institutional clients usually trade products through prime brokers, not retail-style platforms. They are, in a sense, out of their depth in the retail-first predictions game. Partnering makes more sense than building their own platforms. This explains some early deals: NYSE’s parent has backed Polymarket, while CME struck a deal with FanDuel, which has launched its own market.

Any straightforward acquisition may have to wait for lawsuits to clear. If the result is favorable, though, it could spur traditional exchange operators to make an M&A wager.

CONTEXT NEWS

Kalshi said on December 2, that it had raised $1 billion in a financing round, more than doubling its valuation to $11 billion in about two months.

Polymarket is in early discussions with investors and looking to raise funds at a valuation between $12 billion and $15 billion, Bloomberg reported on October 22, citing people familiar with the matter. Intercontinental Exchange said on October 7 that it would invest up to $2 billion in Polymarket.

(Editing by Jonathan Guilford; Production by Maya Nandhini)

((For previous columns by the author, Reuters customers can click on KIRAN/pranavkiran.t@thomsonreuters.com))