Prediction Markets' Expansion into US Stocks Draws Regulatory Scrutiny

Prediction markets, which gained prominence by allowing users to bet on everything from elections to sporting events, are increasingly offering wagers on the performance of major U.S. companies like Tesla and Apple. This expansion is drawing significant concern from regulators and legal experts about the creation of a speculative venue for securities that operates outside of traditional market oversight and investor protection rules, according to a Reuters report citing independent data.

A New Venue for Equity Wagers

Since launching markets on individual stocks last October, traders on the international platform Polymarket have wagered over $220 million across approximately 31,000 equity-linked markets, according to an analysis by blockchain research firm Allium. Nearly 60% of that volume was tied to the price movements of individual stocks, with Nvidia, Alphabet, Apple, and Tesla proving to be the most popular.

These platforms allow traders to bet "yes" or "no" on whether a stock or index will reach a specific price by a certain date. While Polymarket offers direct stock wagers, the U.S.-based platform Kalshi provides around 2,500 markets on indexes and corporate "Key Performance Indicators" (KPIs), such as iPhone launch figures or Tesla delivery numbers. Though still small compared to the overall stock market, these platforms are marketing themselves to both retail and institutional investors as alternative hedging tools.

Investor Protection and Oversight Concerns

The growth of these equity-linked prediction markets raises alarms about a lack of regulatory oversight. Legal experts warn that these products do not offer the same protections as regulated exchanges and could potentially be used to influence trading in the underlying stocks. "This is a new frontier for market structure. It’s innovation on steroids," said Yesha Yadav, associate dean at Vanderbilt University Law School, to Reuters, adding that watchdogs should be "urgent and creative" in their response.

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Concerns are heightened by the offshore legal structure of platforms like Polymarket International, which places them largely beyond the direct reach of U.S. regulators. James Angel, a finance professor at Georgetown University, told Reuters this lack of transparency is "the kind of thing that our regulators should be having nightmares about." Both Polymarket and Kalshi stated they monitor for misconduct and cooperate with authorities.

The Regulatory Tug-of-War

A key question is which U.S. agency should have primary jurisdiction. The Commodity Futures Trading Commission (CFTC) has asserted oversight, viewing the products as derivatives. However, calls are growing for the Securities and Exchange Commission (SEC) to step in, particularly as contracts tied to a single stock are generally considered security-based swaps (SBS), which fall under the SEC's purview.

In June, the two agencies jointly sought public feedback on how to regulate these novel event contracts. Consumer groups and traditional financial firms argue the SEC is better equipped due to its expertise in policing securities markets. "You could envision insider trading taking place in these KPIs just as easily as you could in the stocks," Ben Schiffrin, a former SEC official now at the nonprofit Better Markets, told Reuters, adding that policing this is "the SEC’s job."