Event Contract

An event contract is a type of derivative financial instrument whose payout depends on whether specific real-world events occur or not. These binary-structured contracts, regulated by the Commodity Futures Trading Commission (CFTC) in the United States, settle at $1.00 (or $100 for CME contracts) if the predicted outcome materializes, or $0.00 if it doesn't. Also known as prediction contracts or information contracts, event contracts are the fundamental financial instrument traded on prediction markets, where participants trade based on their forecasts of real-world events such as elections, sports results, economic indicators, weather patterns, or cultural outcomes.

Trading at $27.9 billion through October 2025 and projected to reach $95.5 billion by 2035, event contracts represent a rapidly growing sector at the intersection of financial derivatives and prediction markets. The market price of an event contract fluctuates between 0 and 100 cents (or percent), directly reflecting the market's collective assessment of the probability of the event happening. For example, a contract trading at $0.60 implies the market believes there is a 60% chance of the event occurring.

Unlike traditional derivatives that hedge price risks in underlying commodity markets, event contracts aggregate information about discrete future events. They enable crowdsourced forecasting by aggregating diverse opinions and information from traders, often outperforming traditional polling or expert predictions due to the financial incentives involved. The contracts occupy a contentious regulatory space, with ongoing debates about whether they serve legitimate economic purposes or constitute a form of prohibited "gaming."

#History and Evolution

#Early Origins

The concept of event contracts traces back centuries, with historical records indicating betting on events like papal successors as early as 1503, described as an "old practice." In the United States, organized betting on presidential elections dates back to George Washington's 1789 election, with Wall Street markets seeing turnover exceeding 50% of campaign spending per election cycle by 1884. These early informal markets for events existed for centuries but were often regarded as illicit gambling.

In the late 19th and early 20th century U.S., bucket shops allowed people to bet on stock prices without owning shares, essentially speculating on price movements as events. These were eventually outlawed due to fraud and manipulation concerns. Throughout the 20th century, outright betting on events (outside of regulated sports betting or lotteries) remained largely illegal in the United States, while countries like the United Kingdom long permitted betting on various events under their gambling laws.

#Theoretical Foundations

The modern framework for event contracts draws from economic theories, including Friedrich Hayek's 1945 essay "The Use of Knowledge in Society," which emphasized the role of markets in aggregating dispersed information, and Ludwig von Mises' 1920 work on economic calculation. The "wisdom of the crowds" principle, popularized by Francis Galton's 1907 observations and James Surowiecki's 2004 book The Wisdom of Crowds, underpins the idea that collective market judgments can surpass individual expertise.

#Modern Development Timeline

• 1988: Launch of the Iowa Electronic Markets (IEM) by the University of Iowa, using real-money event contracts to forecast U.S. presidential elections with superior accuracy to polls. The IEM operated under CFTC no-action relief as an academic experiment.

• 1990: Economist Robin Hanson implemented internal corporate prediction markets at Project Xanadu for events like cold fusion viability.

• 1991: Establishment of HedgeStreet (later NADEX), which would become a CFTC-regulated platform for event contracts on economic indicators.

• 1996: Introduction of the Hollywood Stock Exchange for entertainment-related event contracts, which would go on to accurately predict 32 of 39 Oscar nominees (82% accuracy) in 2006 studies.

• 2001: Launch of Intrade.com for real-money trading on diverse events; it ceased operations in 2013 amid regulatory issues.

• 2003: U.S. Department of Defense's short-lived Policy Analysis Market (dubbed the "terror futures market") was canceled after public and political backlash. CBS News reported it was criticized as a plan to "bet on terror attacks and assassinations."

• 2004: The CFTC designated HedgeStreet, Inc. as the first contract market dedicated to event contracts.

• 2005: Corporations including Eli Lilly, Google, HP, Microsoft, Hewlett-Packard, and Best Buy began using internal event contracts for forecasting drug trials, product launches, and strategic decisions.

• 2007: Formation of the Prediction Market Industry Association (now defunct) and launch of the peer-reviewed Journal of Prediction Markets by the University of Buckingham Press.

• 2008: The CFTC issued a Concept Release titled "Appropriate Regulatory Treatment of Event Contracts" posing 24 questions about jurisdiction, exemptions, gaming aspects, and state law preemption. The agency received 31 comments but took no immediate action due to the intervening financial crisis.

#Regulatory Evolution

The Dodd-Frank Act passed on July 21, 2010, transformed the regulatory landscape. Section 745(b) added CEA Section 5c(c)(5)(C), explicitly granting the CFTC authority to prohibit event contracts involving terrorism, assassination, war, gaming, or unlawful activity if contrary to public interest. Legislative history from Senate colloquy suggests Congress intended to prevent "gambling through futures markets" and profiting from devastating events.

On July 27, 2011, the CFTC adopted Regulation 40.11, implementing this statutory authority. The regulation established a 90-day review process for potentially prohibited contracts, requiring the Commission to notify registered entities, post public notices, request trading suspensions, and issue approval or disapproval orders within 90 days. This resource-intensive process consumes approximately 625 staff hours per review, costing roughly $220,000 per evaluation.

The first substantive application arrived April 2, 2012, when the CFTC prohibited Nadex political event contracts on 2012 federal elections. The Commission cited three main objections that have since become guiding principles:

1. Gambling ("Gaming") Concerns: The CFTC viewed election contracts as a form of gambling under state laws.
2. No Economic Purpose: The contracts did not serve a bona fide hedging or price-discovery purpose.
3. Public Interest and Integrity: Fear that trading on elections could undermine democratic processes.

#Recent Developments (2018-2025)

• 2018: Debut of Augur, the first decentralized blockchain-based platform for event contracts.

• 2020: Polymarket launched as a decentralized prediction market built on blockchain technology.

• November 3, 2020: The CFTC designated Kalshi as the first regulated exchange dedicated specifically to event contracts since the Dodd-Frank framework's implementation.

• 2021: Kalshi launched operations in July, initially offering non-political event contracts.

• January 2022: The CFTC settled an enforcement action against Polymarket's operator for offering unregistered swaps, ordering a $1.4 million penalty and shutdown of non-compliant markets.

• September 2022: CME Group introduced event contracts with yes/no contracts on daily closing prices of major stock indexes, commodities, and cryptocurrencies.

• 2023: Kalshi sought approval to list U.S. election event contracts. The CFTC initially rejected this proposal, invoking Rule 40.11's public interest and gaming clauses.

• September 6, 2024: Judge Jia Cobb granted Kalshi summary judgment, vacating the CFTC's prohibition order. The court found that "gaming" means "playing games for stakes," and because elections are contests rather than games, the CFTC exceeded its statutory authority.

• October 2, 2024: The D.C. Circuit Court of Appeals unanimously denied the CFTC's emergency stay motion, allowing Kalshi to offer election contracts during the 2024 presidential election. Over $500 million traded on these markets through November 2024.

• 2024 Presidential Election: Prediction markets anticipated Trump victory while many traditional polls showed closer races, with final outcomes validating prediction market probabilities. Combined volume exceeded $3 billion across platforms.

• 2025: The market evolved dramatically with Polymarket's October acquisition of QCX for $112 million, ICE's $2 billion investment at $9 billion valuation, integration into Google Finance and Yahoo Finance, NHL partnerships, and traditional sports betting operators FanDuel and DraftKings entering the market.

#Technical Definition and Structure

#Legal Classification

Event contracts are legally classified as derivative contracts under the Commodity Exchange Act (CEA) Section 1a(19)(iv), specifically as "excluded commodities" based upon the occurrence, extent of an occurrence, or contingency other than changes in the price, rate, or value of traditional commodities. The CFTC defines them as contracts whose payoff is based on specified events, occurrences, or values such as economic indicators, corporate earnings, weather events, or political outcomes.

The regulatory status follows a specific legal chain:

1. "Event Contract" is Not a Legal Term: The term is an industry and marketing term, not formally defined in the CEA or CFTC regulations.

2. Classification as "Binary Option": The CFTC views these instruments as binary options - "a type of options contract in which the payout will depend entirely on the outcome of a yes/no proposition."

3. Classification as "Swap": The Dodd-Frank Act's broad definition of "swap" explicitly includes binary options, legally classifying event contracts as swaps under the CEA.

#Core Structure

Structurally, event contracts function as binary options with fixed, predetermined payouts. Each contract consists of complementary pairs:

• A YES contract that pays out if the event occurs
• A NO contract that pays out if it doesn't

The fundamental pricing relationship dictates that YES price plus NO price approximately equals $1.00 (plus the bid-ask spread). This pricing directly reflects market-implied probability—a 73-cent YES contract suggests the market assigns a 73% probability to the event occurring.

Key structural features include:

• Fully collateralized: Traders prepay the entire purchase price when entering a position
• No margin calls: Maximum loss never exceeds the initial investment
• Continuous trading: Contracts trade until expiration, allowing early exit at market prices
• Automatic settlement: Upon expiration, settlement occurs based on predetermined data sources

#Types of Event Contracts

#Binary Contracts

The most common structure, offering simple yes/no outcomes with fixed $1.00 payouts. These winner-take-all contracts pay either the full amount or nothing. Examples include:

• "Will the Federal Reserve cut interest rates at the next meeting?"
• "Will Candidate X win the election?"
• "Will the S&P 500 close above 5,000 on December 31?"

#Index Contracts

Provide payouts that vary continuously based on numerical outcomes rather than binary yes/no determinations. These contracts track percentages, sales figures, or other continuous variables. Example: "What percentage of the popular vote will the winning candidate receive?"

#Categorical Contracts

Address scenarios with multiple mutually exclusive outcomes for a single event. Several distinct contracts exist for different possibilities, but only one pays out. Example: Presidential elections with multiple candidates, where each candidate has a separate contract.

#Scalar or Range Contracts

A contract that resolves based on a numerical value within a specified, bounded range. Payouts are not "all-or-nothing" but proportional to where the final value falls. The contract might ask "What will be the U.S. unemployment rate? (Range: 3.0% to 5.0%)" with linear payout based on the actual result.

#Spread Betting Contracts

Allow traders to bid on cutoff levels that determine event occurrence. Combined with even-money bets, these contracts yield median outcome expectations.

#Combinatorial Contracts

Allow trading on combinations of outcomes, useful for complex scenarios but computationally intensive. These enable bets on multiple interrelated outcomes for more nuanced forecasts.

#Key Components of an Event Contract

For a prediction market to be viable, event contracts must include these objective, unambiguous components:

#1. Underlying Event

The specific, real-world proposition being traded, structured as a "yes or no" question. Categories include:

• Economics: Unemployment rate, CPI, Federal Reserve decisions
• Finance: Stock index values, commodity prices, cryptocurrency levels
• Politics: Election outcomes, legislative passage, policy decisions
• Climate/Weather: Temperature thresholds, rainfall totals, hurricane frequency
• Sports: Championship winners, game outcomes, player performance
• Entertainment: Award winners, box office results, album releases

#2. Resolution Criteria

The most critical component - "plain, concrete terms" that explicitly define what constitutes a "Yes" or "No" outcome. Must be verifiable with no subjective interpretation. Poor example: "Will City A have a 'bad' storm?" Good example: "Will City A receive more than 10 inches of snow on January 15?"

#3. Resolution Source

The trusted, authoritative entity responsible for verifying results:

• Bureau of Labor Statistics for unemployment contracts
• National Weather Service for weather events
• Official sports league websites for game outcomes
• Federal Reserve for monetary policy decisions
• Secretary of State offices for election results

#4. Expiration Date and Time

The specific moment when the event's outcome is measured and trading halts. Settlement begins based on data from the designated resolution source.

#How Event Contracts Work

#Trading Process

Event contracts operate within prediction markets through several stages:

1. Market Creation: Platforms identify events with clear, verifiable binary outcomes and designate authoritative sources for settlement data. CFTC-regulated platforms undergo self-certification or voluntary approval processes.

2. Initial Pricing: Markets typically open at 50 cents reflecting uncertainty or based on comparable historical events.

3. Order Matching: Using either continuous double auctions or automated market makers, buy and sell orders are matched. Traders can submit:

   • Market Orders: Execute immediately at best available price
   • Limit Orders: Specify maximum/minimum acceptable prices

4. Dynamic Trading: Prices fluctuate based on supply and demand as information emerges. Traders can buy YES or NO contracts at any time before expiration.

5. Position Management: Unlike static bets, traders can sell positions before expiration. For example, buying at $0.30 and selling at $0.60 locks in profit without waiting for final resolution.

#Settlement Process

1. Market Close: Trading ceases at predetermined expiration
2. Outcome Determination: Exchange accesses designated source data (typically 1-12 hours after close)
3. Verification: Compare actual outcomes against contract criteria
4. Settlement Execution: Automated systems resolve all positions:
   • YES holders receive $1.00 per contract if event occurred
   • NO holders receive $1.00 per contract if it didn't
   • Losers receive nothing
5. Post-Settlement: Funds available for withdrawal within two business days

#Market Mechanics and Pricing Theory

#Continuous Double Auction (CDA)

The traditional exchange model enabling peer-to-peer trading through limit orders:

• Buy orders (bids) and sell orders (asks) recorded in order books
• Automatic execution when highest bid matches lowest ask
• Spreads typically 1-5 cents for liquid markets
• Prices reflect pure market sentiment without intermediary influence

#Automated Market Makers (AMM)

Solve thin market problems by providing continuous liquidity:

Logarithmic Market Scoring Rule (LMSR) - The most developed AMM for prediction markets:

• Core formula: C(q) = b × log(Σ exp(qᵢ/b))
• Parameter b controls liquidity sensitivity
• Bounded loss for market operator
• Always-on liquidity regardless of volume

Liquidity-Sensitive LMSR (LS-LMSR) adapts liquidity based on trading volume, used by corporate prediction markets at Google and HP.

#Pricing as Probability

A 70-cent YES contract implies 70% market probability, but prices systematically deviate from true probabilities due to:

• Risk-free rate opportunity cost: Capital could earn interest elsewhere
• Transaction costs: Bid-ask spreads and fees
• Risk preferences: Varying trader risk tolerance
• Favorite-longshot bias: Systematic overvaluation of unlikely outcomes
• Anchoring effects: Prices remain too stable, insufficiently responsive to news
• Herd behavior: Traders follow crowd sentiment

#Regulatory Framework and Legal Status

#United States Framework

The regulatory framework evolved significantly following the 2010 Dodd-Frank Act. Section 745(b) added CEA Section 5c(c)(5)(C), granting the CFTC explicit authority to prohibit event contracts involving five enumerated activities:

1. Terrorism
2. Assassination
3. War
4. Gaming
5. Unlawful activity

The CFTC must determine contracts are "contrary to the public interest" before prohibition.

#CFTC Regulation 40.11

Adopted July 27, 2011, establishing:

• 90-day review process for potentially prohibited contracts
• Notification and suspension procedures
• Public comment periods
• Approval or disapproval orders

Each review consumes approximately 625 staff hours at $220,000 cost.

#Gaming Definition Controversy

The definition of "gaming" has generated the most significant regulatory controversy. The CFTC initially interpreted gaming as "staking something of value on a contest of others." This interpretation faced direct legal challenge in the landmark Kalshi case:

• September 22, 2023: CFTC prohibited Kalshi's congressional control contracts
• November 1, 2023: Kalshi sued in federal court
• September 6, 2024: Judge Cobb ruled elections are "contests" not "games"
• October 2, 2024: D.C. Circuit denied CFTC emergency stay
• 2024-2025: Over $500 million traded on election markets

#Designated Contract Market Requirements

Platforms must register as DCMs under CEA Section 5, complying with 23 Core Principles covering:

• Manipulation prevention
• Financial integrity
• Market transparency
• Governance standards
• Market surveillance
• Position limits
• Dispute resolution

#State vs. Federal Jurisdiction

Multiple states issued cease-and-desist orders in 2024-2025, arguing event contracts constitute gambling under state law. Federal courts have generally upheld CFTC jurisdiction, though tensions remain unresolved. The American Gaming Association argues sports event contracts are "indistinguishable from sports wagering" and should fall under state regulation.

#International Perspectives

• United Kingdom: Regulated under gambling laws rather than financial regulation
• European Union: Varies by member state
• Decentralized Platforms: Operate in legal gray areas across borders

#Major Platforms and Market Participants

#Kalshi

• Founded: 2020 by Tarek Mansour and Luana Lopes Lara
• CFTC License: November 3, 2020 (first dedicated prediction market DCM)
• Launch: July 2021
• Valuation: Over $10 billion (November 2025)
• Volume: $4.4 billion in October 2025 (62% market share)
• Markets: Politics, economics, sports, entertainment, weather, climate
• Position Limits: Up to $25,000 per contract (some up to $7 million)
• Fees: Up to 5% of profits, capped at $0.85 per contract
• Key Partnerships: NHL, Robinhood, Coinbase Custody, Google Finance

#Polymarket

• Founded: 2020
• Platform: Decentralized on Polygon blockchain using USDC
• Volume: $3.02 billion monthly (October 2025), $18.4+ billion all-time
• Users: 478,000 active traders (October 2025)
• Markets Created: 38,270 in October 2025 alone
• Fees: None (revenue from spreads)
• Notable: ICE $2 billion investment, acquired QCX for $112 million
• Innovation: 15-minute cryptocurrency prediction markets using Chainlink oracles

#PredictIt

• Founded: November 3, 2014
• Operator: Victoria University of Wellington (academic research)
• Focus: Political prediction markets
• Limits: $850 maximum per user per market, 5,000 traders per contract
• Users: 400,000 active
• Accuracy: Claims 70-80% across markets
• Fees: 10% on profits plus 5% withdrawal fee
• Status: Full CFTC approval September 2025 after legal battles

#CME Group

• Launch: September 2022
• Products: Daily expiries on 11 financial markets
• Settlement: $20 for correct predictions ($1-$99 entry based on probability)
• Growth: 41% year-over-year (October 2025)
• Partnership: FanDuel Predicts launching December 2025

#Robinhood Prediction Markets

• Launch: March 2025
• Infrastructure: Powered by Kalshi
• Volume: 4 billion contracts (2 billion in Q3 2025)
• Markets: Economics, NBA, NHL, NFL, college football
• Fees: $0.01 commission plus $0.01 exchange fee per contract
• User Interest: 78% of active users expressed interest

#Interactive Brokers (ForecastTrader)

• Platform: ForecastEx registration
• Markets: Economic data, political events, climate indicators
• Access: Nearly 24/7 Sunday through Friday
• Expansion: Extended to Europe October 2025

#Emerging Competitors

• FanDuel Predicts: Launching December 2025 via CME
• DraftKings Predictions: Acquired Railbird, launching early 2026
• Crypto.com: Sports prediction markets accepting 350+ cryptocurrencies
• PrizePicks: Partnered with Kalshi and Polymarket
• Opinion Labs: $190.6 million volume since October 2025 launch

#Settlement Mechanisms and Market Resolution

#Five-Stage Lifecycle

1. Market Creation

   • Identify events with clear binary outcomes
   • Designate authoritative source agencies
   • Self-certification (Regulation 40.2) or voluntary approval (40.3)
   • Potential 90-day CFTC review for controversial contracts

2. Trading Period

   • Initial pricing (often 50 cents or based on historical comparables)
   • Order book activation with continuous double auction
   • Real-time price adjustments as information emerges
   • Exchange surveillance for manipulation

3. Market Close

   • Predetermined expiration times
   • Trading cessation types:
     • Time-based (e.g., election day 11:59 PM)
     • Event-based (e.g., bill passage)
     • Conditional (prerequisite conditions met)

4. Outcome Determination

   • Access designated source data (1-12+ hours post-close)
   • Verification against predefined criteria
   • Quality assurance checks
   • Dispute resolution if needed

5. Settlement Execution

   • Automated resolution (~3 hours after determination)
   • Fund transfers to winners
   • Settlement at $1.00 or $0.00 per contract
   • Only net positions settled after internal offsetting

#Technical Infrastructure

• FIX protocol messages for institutional reporting
• Matching engines for order book management
• Risk management systems tracking exposures
• Clearing systems automating fund movements
• Market surveillance tools detecting manipulation
• Some platforms maintain separate Derivatives Clearing Organizations (e.g., Kalshi Klear LLC)

#Real-World Examples and Notable Contracts

#Political Events (Highest Volume)

• 2024 Presidential Election: Over $3 billion combined volume
• Congressional Control: "Will Republicans control the Senate?" (landmark litigation subject)
• NYC Mayoral 2025: $365 million (Polymarket), $71 million (Kalshi)
• State/Local Races: Gubernatorial, mayoral, legislative outcomes
• Policy Decisions: "Will President Biden pardon Hunter Biden?"

#Economic Indicators

• Federal Reserve: "Will the Fed cut rates at the next FOMC meeting?"
• Employment: "Will June Non-Farm Payrolls be ≥ 110,000?"
• GDP Growth: "Will GDP exceed 2.5% in Q3 2025?"
• Recession: "Will the U.S. enter a recession in 2025?"
• Inflation: "What will CPI inflation be for [month]?"

#Technology and Business

• IPO Predictions (launched July 2025):
  • Databricks IPO by year-end: 21% probability
  • OpenAI IPO by year-end: 5% probability
  • Klarna IPO by year-end: 72% probability
  • Stripe IPO by year-end: 6% probability
• Cryptocurrency: "Will Bitcoin reach $1,000,000 in 2025?"

#Sports (70% of Kalshi volume)

• Championships: Super Bowl, NBA Finals, World Series winners
• Individual Games: NHL, NFL, NBA game outcomes
• Notable: Nathan's Hot Dog Contest (cited by CFTC critics as gambling)
• Golf: Masters Tournament winners

#Entertainment and Culture

• Academy Awards: 82% accuracy predicting nominees (2006 study)
• Music: Festival cancellations, album sales milestones
• Box Office: Film performance predictions
• Streaming: Achievement milestones

#Weather and Climate

• Regional snowfall totals
• Hurricane frequency and intensity
• Temperature thresholds
• Agricultural yield predictions

#Ultra-Short Duration

• 15-minute crypto markets (Polymarket, October 2025)
• Daily financial expiries (CME Group)

#Advantages and Benefits

#For Traders

• Low capital requirements: $1-$100 per contract enables broad participation
• Simple structure: Yes/no format easier than complex derivatives
• Predefined maximum risk: Cannot lose more than initial investment
• No margin calls: Fully prepaid structure eliminates debt risk
• 24/7 electronic trading: Constant market access
• Exit flexibility: Can sell positions before expiration

#For Information Aggregation

• Superior forecasting: Often outperforms polls and expert predictions
• Real-time updates: Prices adjust immediately to new information
• Financial incentives: Money at stake encourages accurate predictions
• Wisdom of crowds: Aggregates dispersed information efficiently
• Corporate applications: 24 of 26 milestones accurately predicted in studies

#For Platform Operations

• Standardized contracts: Enable rapid scaling
• Automated settlement: Based on verifiable outcomes
• Lower operational costs: Compared to traditional futures exchanges
• No counterparty risk: Fully collateralized prepaid structure

#Portfolio Benefits

• Diversification: Event outcomes often uncorrelated with traditional markets
• Non-correlated returns: Geopolitical events independent of stock movements
• Unique exposure: Access to otherwise untradeable events
• Hedging opportunities: For specific event-driven risks

#Limitations and Disadvantages

#Fundamental Structural Issues

• Poor hedging characteristics: Binary payouts don't distinguish magnitude of losses
• Basis risk: Same payout whether events barely meet or far exceed thresholds
• Short-term focus: Predominantly daily/weekly expiries limit long-term hedging
• Zero-sum nature: Every winner requires a loser
• Negative expected value: Transaction fees guarantee overall losses

#Market Quality Problems

• Liquidity challenges: Only top 3-5 markets generate sufficient volume
• Wide spreads: Thin markets create high transaction costs
• Manipulation vulnerability: Limited liquidity enables price distortion
• Market concentration: Interest focuses on major events, long-tail markets struggle
• Comparative profitability: Event contracts show gambling-like returns vs. investment returns

#Behavioral Biases

• Overconfidence bias: Participants overestimate prediction accuracy
• Anchoring effects: Prices insufficiently responsive to new information
• Herd behavior: Traders follow crowd sentiment
• Favorite-longshot bias: Systematic mispricing of extreme probabilities

#Predictive Failures

• 2019 Australian election: Markets gave Coalition only 8% probability (won decisively)
• 2025 Dutch elections: Both Kalshi and Polymarket significantly mispriced
• Specialized knowledge gaps: Crowds fail when expertise required
• Echo chamber effects: Homogeneous participant pools

#Regulatory and Ethical Concerns

• Gaming classification: 85% view sports contracts as gambling
• Addiction risks: Gambling-like nature raises compulsive trading concerns
• Insider information: Vulnerable to exploitation by those with advance knowledge
• Public interest concerns: Election integrity, democratic process impacts
• Moral hazards: Perverse incentives from assassination/disaster markets

#Economic Purpose Debate

• Columbia Law analysis: "Largely useless for insuring against losses"
• University of Chicago: Event contracts are "a step too far" in derivatives regulation
• CFTC concerns: Lack bona fide hedging or price discovery purpose
• No underlying asset: Pure speculation without productive economic function

#Differences from Other Financial Instruments

#vs. Traditional Futures and Options

#vs. Binary Options

While structurally similar, key differences exist:

• Regulation: CFTC-supervised exchanges vs. banned OTC products
• Settlement: Transparent market/government data vs. broker-determined
• Trading: Exchange-based peer-to-peer vs. against the house
• Surveillance: Comprehensive manipulation monitoring vs. limited oversight

#vs. Sports Betting

• Pricing: Market-determined vs. bookmaker-set odds
• Trading: Peer-to-peer exchange vs. house betting
• Regulation: Federal CFTC vs. state gaming commissions
• Scope: Diverse events vs. sports-only
• Exit options: Can sell positions vs. locked-in bets

#vs. Traditional Prediction Markets

Event contracts represent the formalization of prediction market concepts within regulated derivatives infrastructure, adding:

• Standardized contract specifications
• Regulatory oversight and compliance
• Clearing and settlement infrastructure
• Legal enforceability
• Market surveillance

#Risk Management Considerations

#For Traders

Advantages:

• Maximum loss always equals purchase price
• No leverage risk or forced liquidations
• No margin maintenance requirements
• Simple position sizing calculations

Strategies:

• Diversification across uncorrelated markets
• Position sizing (typically 1-5% per contract)
• Early exit to lock profits
• Opposite position hedging for spread capture

#For Platform Operators

Key Risks:

• Settlement disputes requiring clear contract definitions
• Data integrity dependencies on source agencies
• Market surveillance obligations under CFTC Core Principles
• Regulatory compliance amid federal-state jurisdictional disputes
• Reputational risk from controversial markets

Risk Mitigation:

• Multiple redundant data feeds
• Comprehensive audit trails
• Sophisticated monitoring systems
• Editorial judgment in market selection
• Segregated customer funds

#For Market Makers

• Model event probabilities
• Manage YES/NO inventory
• Provide continuous two-sided quotes
• Portfolio diversification (no traditional delta hedging available)
• Navigate binary discontinuities in pricing

#Recent Market Evolution (2024-2025)

#Volume and Growth Metrics

• Combined market activity: $27.9 billion (January-October 2025)
• Weekly all-time high: $2.3 billion (October 2025)
• Kalshi monthly record: $4.4 billion (October 2025, 62% market share)
• Projected market size: $95.5 billion by 2035 (46.8% CAGR)

#Institutional Validation

• ICE $2 billion investment in Polymarket ($9 billion valuation)
• Kalshi valuation trajectory: $2B (June) → $5B (October) → $10B+ (November 2025)
• Susquehanna as first institutional market maker (April 2024)

#Mainstream Integration

• Google Finance integration (November 7, 2025)
• Yahoo Finance exclusive partnership with Polymarket (November 12, 2025)
• NHL partnerships with Kalshi and Polymarket (October 22, 2025)
• Robinhood processing 4 billion event contracts

#Regulatory Developments

• Kalshi appeal pending in D.C. Circuit (oral arguments January 2025)
• CFTC proposed rulemaking unfinalized (May 2024)
• Acting Chairman Pham signaling regulatory reconsideration
• Seven states issuing cease-and-desist orders
• FanDuel and DraftKings surrendering Nevada licenses to avoid conflicts

#Product Innovation

• 15-minute cryptocurrency markets (Polymarket)
• IPO prediction markets (Kalshi)
• Integration with traditional brokerages
• 38,270 new markets launched monthly (Polymarket)

#Future Outlook

Event contracts stand at a critical juncture between mainstream acceptance and ongoing regulatory uncertainty. Key factors shaping the future include:

Growth Drivers:

• Wall Street institutional backing
• Integration with major financial platforms
• Demonstrated forecasting accuracy
• Expanding market categories
• Blockchain innovation enabling global access

Challenges:

• Unresolved federal-state jurisdictional conflicts
• Gaming vs. derivatives classification debate
• Limited economic hedging utility
• Liquidity concentration in major events
• Public perception as gambling

Critical Questions:

• Will regulatory clarity emerge from pending litigation?
• Can platforms demonstrate genuine economic purpose beyond speculation?
• Will institutional adoption increase beyond current levels?
• How will traditional financial markets integrate prediction market data?

The next 12-24 months will likely determine whether event contracts establish permanent status as a recognized derivatives class or face renewed regulatory constraints. The evolution from niche academic experiments to multi-billion-dollar markets with NYSE backing demonstrates significant progress, yet fundamental questions about their economic utility and appropriate regulation remain unresolved.

#See Also

• Prediction Market
• Binary Option
• Kalshi
• Polymarket
• PredictIt
• Commodity Futures Trading Commission
• Designated Contract Market
• Automated Market Maker
• Continuous Double Auction
• Logarithmic Market Scoring Rule
• Market Maker
• Liquidity
• Time Decay
• Sports Betting
• Betting Exchange

#References

1. Federal Register. "Event Contracts." June 10, 2024. https://www.federalregister.gov/documents/2024/06/10/2024-12125/event-contracts

2. Commodity Futures Trading Commission. "Contracts & Products." https://www.cftc.gov/IndustryOversight/ContractsProducts/index.htm

3. Investopedia. "Event Contracts: What They Are and How They Are Used." November 7, 2023. https://www.investopedia.com/events-contracts-8601422

4. Holland & Knight. "Election Contracts and Sports Event Contracts: The Future of Regulated Event-Based Trading." February 6, 2025. https://www.hklaw.com/en/insights/publications/2025/02/election-contracts-and-sports-event-contracts-the-future

5. CBS News. "Terror Betting Torpedoed." July 29, 2003. https://www.cbsnews.com/news/terror-betting-torpedoed-29-07-2003/

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