The commercial and legal anatomy of a prediction market

Answer

‘Prediction markets’ are online platforms that let users trade on the outcome of future events, from elections and sport to interest rates, product launches and acquisitions. They usually operate through binary ‘yes/no’ event contracts, where prices reflect the market’s implied probability and winning contracts typically pay out at $1. The UK Gambling Commission has said prediction markets offered to British consumers would likely need a licence under the Gambling Act 2005, most likely as a betting intermediary, while binary-option-style products linked to financial variables may also raise Financial Conduct Authority (FCA) issues.

During the 2024 US presidential election, social media feeds filled with screenshots of what looked like a live scoreboard. It was the interface of Polymarket, showing candidates Donald Trump and Kamala Harris at 62% and 38%, respectively, then adjusting after debates, campaign rumours and breaking news. Memes followed, Elon Musk tweeted about it and prediction markets have entered the cultural conversation.

In the same election cycle, a pseudonymous French trader nicknamed ‘Théo’ reportedly staked more than $30 million of his own money on a Trump victory, despite polls appearing more favourable to Harris. Using 11 anonymous accounts, Théo reportedly made an estimated $85 million overnight after Trump won.

Since then, Polymarket has crossed $10 billion in monthly trading volume. Its competitor, Kalshi, has also grown aggressively: just this month, in May 2026, it was valued at $22 billion. But behind the viral moments sits a harder question: what’s this product, legally and commercially? Is it gambling, a derivatives exchange or something else entirely? And how should governments respond?

Anatomy of a prediction market

Prediction markets: what they are and who’s leading the race

‘Prediction markets’ are online platforms that let users trade on real-life future events. The range is limitless: political regime change in Venezuela, pop culture outcomes, niche weather events and even whether a major cryptocurrency will be named after a sandwich by year-end. Corporate outcomes are also becoming popular: layoffs, earnings, acquisitions, product launches and initial public offerings (IPO). Users trade on questions such as whether Tesla and SpaceX will announce a merger, whether Apple will release a foldable iPhone, whether tech layoffs will rise or fall and which companies will be acquired before 2027.

The main players are Polymarket and Kalshi, but they represent two different models. Polymarket is the crypto-native platform: global, internet-facing and known for fast-moving political, cultural and corporate markets. Kalshi is the regulated US model: it’s supervised by the Commodity Futures Trading Commission, trades in ordinary US dollars and is positioning event contracts as a legitimate financial product. Traditional finance is now moving in too, with brokers and exchanges (eg, Interactive Brokers, CME Group and ForecastEx) entering the space.

A shift from sports betting to trading the news cycle: what’s the impact on the market?

The prediction market has boomed since 2024. In 2025, its total trading volume reportedly reached $44 billion – which was driven by the sector’s two giants: Polymarket (around $21.5 billion), and Kalshi (around $17.1 billion). By January 2026, the market's monthly volume had already passed $21 billion – which is almost half of the previous year’s total. Approximately, there are more than 840,000 unique wallets participating each month.

This new model is setting up to become a clear disruptor to traditional gambling. Unsurprisingly, sports remain its highest-activity category, making up around 85% of Kalshi’s volume and 39% of Polymarket’s volume. That puts prediction markets in direct competition with sportsbooks because they target the same sports calendar, the same trading appetite and, often, the same users. Although a threat, they’re also an inspiration: established operators such as FanDuel and DraftKings have reportedly surrendered certain gambling licences in some jurisdictions to make a move into prediction markets.

Prediction markets are also changing what people trade on. On Polymarket, politics has become bigger than sport: daily political trading has outpaced sports by more than 400%, with political and election markets rising 217% to $5.7 billion. Other categories are also growing quickly. Economics markets increased sevenfold to around $800 million, while social and technology markets rose sixfold to around $700 million. This trajectory is expanding the very concept of what can be turned into a tradable event.

How does it work? Legal framework and commercial and operational model

Prediction markets look like betting, but structurally they work more like exchanges. In a traditional betting model, ‘the house’ (usually a bookmaker) sets the odds and takes the other side of the bet. Prediction markets instead use a peer-to-peer model. Users buy and sell event contracts against other users, while the platform provides the marketplace, settlement rules and trading infrastructure.

The key instrument is an event contract, which functions in some ways like a futures contract for real-world outcomes. These contracts are usually binary: they resolve to either ‘yes’ or ‘no’. Each contract is tied to a clear underlying question tied to a defined time period, such as: “Will the Bank of England cut interest rates before its September meeting?” If a user thinks the event will happen, they buy ‘yes’ contracts; if they think it won’t, they buy ‘no’ contracts.

Contracts are usually priced between $0.01 and $0.99. The price reflects the market’s implied probability: a ‘yes’ contract priced at $0.80 suggests the market sees an 80% chance of the event occurring, while a price of $0.20 suggests a 20% chance.

Once the event occurs, or deadline passes, each market has resolution rules setting out how the outcome will be decided. On Polymarket, disputed outcomes can be resolved through UMA’s Optimistic Oracle, meaning tokenholders may vote on the correct result. On Kalshi, outcomes are resolved by applying the market’s written rules to specified sources and the platform makes the official settlement decision rather than letting users vote.

After the outcome is determined, payout takes place through the account or crypto infrastructure, depending on the platform. If the event occurs, users who bought the ‘yes’ side receive $1 per contract. Their profit is the difference between the contract purchase price and $1, minus any fees. Users who bought the wrong side receive nothing. If the event doesn’t occur, the position reverses: ‘no’ holders receive $1 per contract and ‘yes’ holders lose their stake.

For example, imagine a market asks: “Will OpenAI announce an IPO before 2027?” A user buys 100 ‘yes’ contracts at $0.35 each, spending $35. If the IPO is announced before the deadline, the contracts settle at $1 each, so the user receives $100 and makes $65 profit, minus fees. If approval isn’t announced by the deadline, the contracts settle at $0 and the user loses the $35 stake.

The legal and regulatory picture of prediction markets

The difficulty is classification

The global legal position on prediction markets remains unsettled. The question is in the classification: is a prediction market a gambling product, a financial instrument or something in between? The answer matters because it determines the regulator, the licence required, the conduct rules and the protections available to users.

Regulatory status in the UK: gambling first

In the UK, the Gambling Commission has taken a clear view. In February 2026, it released guidance confirming that prediction markets offered to British consumers would likely fall within its remit under the Gambling Act 2005, rather than being treated simply as non-gambling forecasting products. Any operator serving British consumers would therefore need a Gambling Commission licence, most likely as a betting intermediary, which is the same broad category used for betting exchanges such as Betfair.

The commission’s approach focuses on substance over form. Its view is that, whatever the underlying mechanism, core aspects of prediction markets are akin to betting exchange. The UK government has consequently taken the same stance: in a written answer published on 16 February 2026, Baroness Twycross stated that any prediction market seeking to operate in Great Britain would require a Gambling Commission licence and, if approved, would be classified as a ‘Betting Intermediary’.

There’s also an FCA angle. Since 2 April 2019, the FCA has permanently banned firms acting in or from the UK from selling, marketing or distributing binary options to retail consumers. The FCA has described ‘binary options’ in precisely the terms that apply to many event contracts: as "gambling products dressed up as financial instruments". Therefore, a prediction market operator whose product falls within the binary options definition risks falling within that prohibition.

The practical result is that the UK is unlikely to be an easy launch market. At present, neither Polymarket nor Kalshi legally serves UK users, and Polymarket geoblocks UK IP addresses. Any operator targeting British consumers without the correct licence risks committing a criminal offence under the Gambling Act 2005.

Ramina Krivich is a trainee solicitor at RPC.