As prediction markets gain scale, mainstream financial institutions are also taking a closer look. In a recent editorial, the Financial Times highlighted growing concerns around insider trading, regulatory uncertainty, and thin liquidity as key barriers to wider adoption.
Regulatory Risk: Fragmented Landscape in the US
One of the main challenges facing prediction markets is regulatory fragmentation, particularly in the United States. Under federal law, the Commodity Futures Trading Commission (CFTC) treats certain prediction contracts as derivatives, subjecting them to the Commodity Exchange Act.
At the same time, state gambling regulators argue that many sports- or politics-related contracts resemble unlicensed betting activity. This has left platforms navigating a narrow legal space.
While some platforms, like Kalshi, secure approvals for specific contracts, many platforms operate offshore or in legal grey areas, limiting regulated institutional participation. The lack of unified oversight creates uncertainty, especially for contracts involving sensitive events or those that resemble wagers.
- Kalshi CEO: Prediction Markets Could Spawn New Job Category Like Instagram Creators and Uber Drivers
- Prediction Markets Hit $2.7M Fee Record While Kalshi Faces Court Ban
- From Experiment to Core Feature: Prediction Markets Move Toward B2B Infrastructure
Market Risks: Insider Information and Liquidity Gaps
As trading activity has grown, prediction markets have also come under scrutiny for risks of insider trading and manipulation. Contracts tied to political decisions, regulatory actions, or corporate events are especially vulnerable to information asymmetry, where a small number of participants may have early or privileged access to outcomes.
Liquidity remains a pressing constraint. Despite higher volumes, order books are typically thin relative to those in traditional markets, leading to sharp price swings and limited position sizes. This limits the usefulness of prediction markets for hedging, especially for larger participants.
At the same time, these inefficiencies have begun to attract professional traders. Major quantitative firms and market makers — including DRW, Susquehanna International Group, and Jump Trading — are building dedicated desks focused on prediction markets, applying arbitrage and market-making strategies to exploit fragmented pricing and liquidity gaps.
These concerns echo warnings recently raised by the Financial Times, which described prediction markets as vulnerable to insider information and manipulation until regulatory oversight and liquidity improve.
Why Institutions Are Still Paying Attention
Despite the risks, prediction markets offer something traditional derivatives often do not: clean exposure to discrete outcomes. Contracts linked to inflation prints, interest-rate decisions, election results, or policy announcements provide direct, event-specific hedges that can complement macro strategies.
For institutional investors, these markets function less as betting venues and more as probability-weighted instruments, allowing them to express views on policy risk, political uncertainty, or economic data releases without constructing complex options structures.
What This Means for Brokers and Fintech Platforms
For brokers and fintech firms, the evolution of prediction markets opens several strategic avenues. Rather than competing directly with standalone platforms, regulated brokers may explore cross-integration, structured products, or white-label exposure to event-based indicators.
Prediction-style contracts could also be embedded into CFD offerings tied to macro data, policy decisions, or benchmark outcomes, allowing brokers to capture client demand for event-driven trading within existing regulatory frameworks.
However, any such expansion would require careful handling of compliance, market abuse controls, and liquidity sourcing. As prediction markets mature, the opportunity for brokers lies not in retail hype, but in adapting the underlying concept — event-linked pricing — into regulated, scalable financial products.
