What does the lesson “Prediction Markets: Bet or Derivative?” cover?

By Vadym Zelinskyi·Practitioner·10 min read·verified 2026-11-04

Prediction Markets: Bet or Derivative?

A prediction market lets you trade contracts that pay a fixed amount if an event happens and nothing if it does not. This lesson shows how to read the price, what a fee does to your break-even, how an exchange differs from a bookmaker, and where the US fight over whether sports contracts are bets or derivatives stood on 4 November 2026. It is for adults (18+), takes no side in that fight, and does not promote gambling or suggest it is a way to make money.

Key takeaways

An event contract pays a fixed amount, usually $1, if an event happens and nothing if it does not, so a 70-cent price implies that traders see a 70% chance.
Fees move your break-even. On Kalshi's general formula, 100 contracts at 70 cents cost $71.47, so the event has to happen 71.47% of the time for you to break even on average.
As of 4 November 2026 US federal appeals courts are split on sports contracts: the Third Circuit for Kalshi, the Ninth and Sixth for the states. The Supreme Court has not said whether it will hear the case.
The answer changes by country. Great Britain's regulator compares these products to betting exchanges, France's treats them as illegal gambling, and Canadian securities staff say sports and entertainment contracts should not sit under securities and derivatives law.
A state self-exclusion list and an exchange's own tool are separate things, and we found no primary source showing that one feeds the other.

By the end you can

Explain what an event contract is and read its price as an implied probability.
Work out the cost, payout and break-even of a contract, including an exchange's trading fee.
Describe how an exchange differs from a bookmaker and where that difference is disputed.
Summarise the US legal fight as of 4 November 2026, what regulators elsewhere say, and why it matters for protections such as self-exclusion.

What an event contract is

An event contract pays a fixed amount if a stated event happens and nothing if it does not. The US Commodity Futures Trading Commission (CFTC), the federal derivatives regulator, says these are often yes-or-no questions with a fixed payout, usually $1, and an expiry. A derivative is a contract whose value depends on something else, here an outcome. A prediction market is a platform for trading them. The CFTC's example is 'Will it rain tomorrow?', with 'yes' at 70 cents and 'no' at 30 cents. It says a contract's price 'reflects traders' perceived probability', so 70 cents on a $1 contract implies a 70% chance. That is the crowd's current estimate, and it moves with trading. You can also sell before the result at the current market price. In the US, federally regulated contracts trade on designated contract markets, exchanges approved by the CFTC; KalshiEX (Kalshi) was designated in November 2020. The CFTC warns that with unregistered entities outside the US you 'may have little or no protections'.

Reading the price: a worked example with the fee

As an illustration, take the rain contract at 70 cents and suppose you buy 100 'yes' contracts at the price on offer. Kalshi publishes a general formula for orders that match immediately (schedule effective 7 July 2026): fee = 0.07 × contracts × price × (1 − price). That is 0.07 × 100 × 0.70 × 0.30 = $1.47, so you pay $70 + $1.47 = $71.47. If it rains you receive $100, with no settlement fee, and finish $28.53 ahead. If it stays dry you lose $71.47. Your break-even chance is 71.47%, above the 70% the price implies. If the true chance is exactly 70%, the average result is 0.70 × $28.53 − 0.30 × $71.47 = −$1.47, which is the fee. The fee peaks at $1.75 per 100 contracts at 50 cents and is about $0.07 at 1 or 99 cents. Orders left waiting on the order book pay no fee by default, some series use other multipliers, and a card deposit can cost up to 2%.

Quick check

On the same formula, you buy 100 'yes' contracts at 40 cents. What is your break-even chance?

Exchange or bookmaker: who is on the other side

A bookmaker names a price and takes your bet itself, so its margin sits inside the odds. If both sides of a two-way market are priced at decimal odds of 1.91, each implies 1 ÷ 1.91 = 52.36% and together they add up to 104.71%. On an exchange, customers' orders are matched with each other: 'yes' at 70 cents and 'no' at 30 cents add up to exactly $1, and the platform charges fees. The CFTC says regulated exchanges 'do not take a side of the trade'. Kalshi told the Ninth Circuit, a US federal appeals court, that unlike a casino or 'house' its exchange does not set odds or profit when customers lose. The court called these 'distinctions without differences' for the legal test and noted that a Kalshi affiliate acts largely as a market maker, which keeps offering to buy and sell. In October 2026 the CFTC said wagers at sportsbooks and casinos are not swaps, a type of derivative it regulates, and proposed that event contracts are.

The US legal fight as of 4 November 2026

US law gives the CFTC 'exclusive jurisdiction' over swaps traded on designated markets, and a swap can be a payment that depends on an event 'associated with a potential financial, economic, or commercial consequence'. Exchanges argue that sports contracts fit, so federal law pre-empts (overrides) state gambling law. States argue that they are sports bets needing a state licence. As of 4 November 2026 three federal appeals courts have ruled, all on preliminary injunctions, early decisions on who is likely to win. The Third Circuit (New Jersey, 6 April, 2-1) sided with Kalshi. The Ninth (Nevada, 28 August) and the Sixth (Ohio and Tennessee, 25 September) sided with the states. New Jersey has asked the Supreme Court to hear its case (No. 26-299). Kalshi's response is due on 7 December and the Court has neither agreed nor refused. The CFTC takes the federal side: its proposal would define swaps to include event contracts (comments close 18 November), and it has taken legal action against Utah and nine other states.

Quick check

As of 4 November 2026, what has the US Supreme Court done in No. 26-299, New Jersey's case against Kalshi?

What regulators outside the US say

Great Britain's Gambling Act 2005 defines betting to include a bet on 'the outcome of a race, competition or other event or process'. The Gambling Commission said on 4 February 2026 that current products 'would appear' to fall within the definition of a betting intermediary, that they are akin to the betting exchanges the UK has had since 2000, and that it does not believe an operator launching in Great Britain could classify itself as non-gambling. France's regulator, the ANJ, treats prediction sites as illegal gambling and on 16 July 2026 ordered internet providers to block Polymarket. It lists Germany, Belgium, the Netherlands and Italy among European countries that have restricted or blocked these markets. In Canada, securities regulators' staff said on 27 August 2026 that contracts on sports and entertainment 'should not be regulated within securities and derivatives legislation'. Dealers may offer only certain contracts on economic, environmental or financial indicators. In April 2025 Ontario's securities regulator settled with Polymarket's operators over its ban on short-term binary options.

Why it matters to a player

Which regulator applies decides which protections you get. A US state's self-exclusion list bars you from the gambling that state licenses. Connecticut's consumer protection department said on 3 December 2025 that prediction platforms offer wagers to people on its Voluntary Self-Exclusion List and to under-21s. Massachusetts' attorney general alleges that Kalshi's responsible gambling tools 'fall far short' of what licensed operators must provide. These are allegations in a live dispute. Kalshi says it offers voluntary self-exclusion, trading breaks and deposit limits, and that its self-exclusion does not limit access through a futures broker. The CFTC's customer page on prediction markets does not mention self-exclusion. A June 2026 CFTC proposal says self-exclusion mechanisms 'might' reduce harm, and we found no final rule requiring them. We also found no primary source showing that a state list feeds into an exchange's tool, or the reverse, so joining one may not cover the other. In Great Britain, licensed online operators must take part in GAMSTOP, the national scheme.

Quick check

What limit does Kalshi's own help page state about its Voluntary Self-Exclusion?

Key terms

Prediction Market Betting Exchange Sportsbook Overround Self-Exclusion Self-Exclusion Register Licence & Jurisdiction

Check yourself

Check yourself · 1/4

A $1 'yes' contract trades at 25 cents. What does that price tell you, on the CFTC's description?

Check yourself · 2/4

Using Kalshi's general formula, what is the total cost of buying 100 contracts at 50 cents?

Check yourself · 3/4

Which statement matches the lesson's comparison of an exchange and a bookmaker?

Check yourself · 4/4

What did Great Britain's Gambling Commission say about prediction markets on 4 February 2026?

Next → Another model that argues it is not gambling: take “Sweepstakes and Social Casinos: Gambling Without the Name?”.

Go deeper

Sources (22)

Verified 2026-11-04 · next review 2027-11-04 · high confidence

Fact-checks (13)

Event contracts and prices: the CFTC page 'Understanding Prediction Markets and Event Contracts' (accessed 4 November 2026) describes yes-no contracts with 'a fixed payout (usually $1)', the 70-cent and 30-cent rain example, a price that 'reflects traders' perceived probability', exchanges that 'do not take a side of the trade', and the warning about unregistered entities outside the United States. It does not mention self-exclusion.
KalshiEX's designation: CFTC release 8302-20 (4 November 2020) announces the order granting designated contract market status. A later CFTC order (11 August 2026) dates the designation to 3 November 2020.
Fee: Kalshi's Fee Schedule ('Last updated and effective: July 7, 2026') gives fees = round up(M x 0.07 x C x P x (1-P)), M defaulting to 1 for taker orders and 0 for resting orders, no settlement fee, and a maximum 2% fee on card deposits. Kalshi's fee page (read 4 November 2026) shows a range of $0.07 to $1.75 per 100 contracts for most markets and lists series with other multipliers. Calculated: 0.07 × 100 × 0.70 × 0.30 = $1.47; $70 + $1.47 = $71.47; $100 − $71.47 = $28.53; 0.70 × 28.53 − 0.30 × 71.47 = −1.47.
Bookmakers: Levitt, 'How Do Markets Function?', NBER Working Paper 9422, says bookmakers 'announce a price' and 'take large positions with respect to the outcome of game' instead of mainly matching buyers and sellers. Overround calculated: 1 ÷ 1.91 = 52.36%; twice that is 104.71%.
Third Circuit: KalshiEX LLC v. Flaherty, No. 25-1922 (6 April 2026), affirmed a preliminary injunction against New Jersey because Kalshi 'has demonstrated a reasonable chance of success' on pre-emption. Judge Roth dissented.
Ninth Circuit: KalshiEX LLC v. Assad, No. 25-7516 (28 August 2026), concluded that the sports contracts 'are likely not swaps' and that the Act 'likely does not preempt' Nevada's law. It recorded Kalshi's argument about not being a 'house', answered that 'These are distinctions without differences', and described Kalshi Trading as an affiliate acting 'largely as a market maker'.
Sixth Circuit: KalshiEX LLC v. Schuler, Nos. 26-3196/5235 (25 September 2026), held that Kalshi 'has not shown' its sports contracts are swaps and, in the alternative, that the Act does not pre-empt Ohio's or Tennessee's gambling laws. It records the Fourth Circuit appeal from Maryland (No. 25-1892, argued 7 May 2026) as pending; we found no ruling in it by 4 November 2026.
Supreme Court: docket No. 26-299, Flaherty v. KalshiEX LLC, read on 4 November 2026, shows the petition filed on 2 September 2026 and, on 30 October 2026, the response time extended to 7 December 2026, with no order granting or denying the petition. A separate petition from the Ninth Circuit side, No. 26-338, Robinhood Derivatives v. Dreitzer, was filed on 10 September 2026 with a response due on 13 November 2026.
CFTC rulemaking: the proposal on the further definition of 'swap' (Federal Register, 19 October 2026, RIN 3038-AF82) would define swaps to include event contracts based on sports, politics, culture and weather, with comments due by 18 November 2026. It says that under a separate Interim Final Rule the swap definition does not cover casino-style gambling wagers, sports or otherwise. That rule took effect on 19 October 2026.
CFTC against the states: US and CFTC v. Utah (D. Utah, complaint of 26 October 2026) and CFTC release 9315-26 (27 October 2026) report legal proceedings against Utah and nine other states. Nevada's Gaming Control Board said in Notice 2025-90 (12 November 2025) that 'Wagering occurs whether the contract is listed on an exchange regulated by the Commodity Futures Trading Commission (CFTC) or elsewhere.'
Great Britain: Gambling Act 2005, section 9 defines betting and section 13 defines a betting intermediary. The Gambling Commission blog of 4 February 2026 by its Director of Strategy gives the Commission's view on prediction markets. The Commission announced on 14 January 2020 that online operators must take part in GAMSTOP from 31 March 2020.
France: the ANJ release of 17 July 2026 reports the blocking order of 16 July 2026 and restates that prediction sites 'are considered illegal gambling sites'. Canada: Joint CSA and CIRO Staff Notice 91-307 (27 August 2026) gives the staff view on sports and entertainment contracts and the limits on dealers. The Ontario Securities Commission's release of 17 April 2025 reports the Capital Markets Tribunal's approval of its settlement with Blockratize Inc. and Adventure One QSS Inc. for breaching the ban on short-term binary options.
Protections: Connecticut Department of Consumer Protection release of 3 December 2025, and the Governor's release of 10 September 2026, make the statements about self-excluded people and under-21s. The Massachusetts Attorney General's release of 12 September 2025 makes the allegation about responsible gambling tools. Kalshi's help page 'Voluntary Self-Exclusion' and its responsible trading page (both read 4 November 2026) describe its own tools. The CFTC's advance notice of 16 March 2026 (91 FR 12516) asked what aspects of responsible gaming standards, 'such as self-exclusion programs', it should consider, and its proposal 'Prediction Markets; Public Interest Determinations' (Federal Register, 12 June 2026) contains the sentence on self-exclusion mechanisms. Neither is a final rule; we found none on this point by 4 November 2026.

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