According to independent data and regulatory experts, prediction markets are rapidly becoming an alternative trading venue for traders to bet on US-listed companies such as Tesla Motors (TSLA.US) and Apple (AAPL.US), but this has also raised concerns about investor protection and market oversight.
This booming industry, pioneered by Polymarket and Kalshi, gained fame by allowing participants to bet on almost anything, covering sports events, elections, and even military actions. According to a review, over the past year, these platforms have continuously expanded into traditional Wall Street business areas, listing tens of thousands of trading instruments covering stock price fluctuations, corporate earnings data, and other company events that can significantly affect individual stock movements. This has also given more exposure to this high-growth niche segment of the industry.
Although still insignificant in scale compared to the native stock market, stock-linked prediction markets are creating a completely new venue for speculation in US securities, one that operates outside many of the investor protection and market oversight rules followed by regulated exchanges. Legal experts warn that if these products continue to grow rapidly, they could ultimately affect trading in the underlying stocks and weaken regulators' ability to control the market.
"This is a whole new frontier in market structure, financial innovation on steroids," said Yesha Yadav, Associate Dean of Vanderbilt Law School, adding that regulators should respond to these new types of products quickly and flexibly.
Polymarket and Kalshi said they closely monitor misconduct, regularly refer relevant cases to US regulators, and collaborate with regulatory agencies. "Market integrity is at the core of our operations," a Polymarket spokesperson said, adding that the company also strives to prevent US users from accessing its international platform. The US Securities and Exchange Commission (SEC) declined to comment, while the US Commodity Futures Trading Commission (CFTC) did not respond to requests for comment. Both agencies said they are reviewing the regulation of stock-linked prediction markets.
Nvidia, Alphabet Among Most Popular Stocks
According to an analysis prepared by blockchain research firm Allium, Polymarket International launched individual stock markets in October last year, and as of early September, traders had bet more than $220 million across approximately 31,000 stock-linked markets. Allium found that nearly 60% of the funds were bet on individual stock movements, with Nvidia (NVDA.US), Google parent Alphabet (GOOGL.US), Apple, and Tesla Motors being the most popular, while the rest were bet on markets based on ETFs or stock indices. These listed companies did not respond to requests for comment.
The typical trading model is: traders choose "yes" or "no" to bet on whether a certain stock or index can reach a specific price level on a specified date. One wallet identified by Allium generated $175,000 in trading volume through approximately 1,300 Apple-related trades, with a position structure designed to generate a small profit regardless of whether the "yes" or "no" contract pays out. A review of Kalshi's website and data it provides shows that Kalshi currently does not offer individual stock bets, but on any given day offers approximately 2,500 index and corporate "key performance indicator" (KPI) markets, such as iPhone launches and Tesla deliveries. Kalshi did not respond to requests for trading volume data.
Although prediction markets target retail investors, they are also courting institutional investors by promoting 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, while multiple studies show that the vast majority of traders are losing money. James Angel, a finance professor at Georgetown University, said that Polymarket International's offshore legal structure largely shields it from US regulatory jurisdiction, which also makes it difficult for authorities to understand what is happening in these markets. "This is clearly a type of risk that regulators should be highly vigilant about," he added.
It is understood that Polymarket's new CFTC-regulated US domestic exchange has not yet launched individual stock markets, but has introduced a small number of KPI-related contracts.
Dispute Over Regulatory Jurisdiction
The CFTC says prediction markets essentially trade derivative contracts and should be regulated by it; however, calls for the SEC to step in are growing. Under US law, contracts linked to a single stock are generally considered security-based swaps (SBS), a type of derivative regulated by the SEC and mostly limited to professional investors. Legal experts say some KPI contracts may also qualify as SBS, although a Kalshi spokesperson disputed this. A Polymarket spokesperson said the company is working with relevant agencies to study how swap and SBS definitions apply to new types of event contracts. The two regulatory agencies jointly sought public comment in June on these issues and whether one of them should become the primary regulator.
Traditional financial institutions and consumer groups want the SEC to take the lead, citing the SEC's corresponding expertise. "Insider trading is entirely possible in these KPI contract markets, just like insider trading in the stock market," said Ben Schiffrin, a former SEC official who now handles securities policy at the nonprofit Better Markets. "Regulating such conduct is inherently the SEC's responsibility."
Several lawmakers, including US Senator Adam Schiff, a California Democrat, have also raised concerns about prediction markets. In a statement, Schiff said Congress should not allow the industry to "package traditional financial products in the guise of prediction contracts to evade US securities laws."
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