If you watch much cable news, you can’t avoid the barrage of commercials that promote “trading” on the new prediction marketplaces. Nothing on these platforms is being traded. Almost nothing is being exchanged, except dollars passing from one user to another, with the house collecting its “rake” the way high-roller card houses and poker rooms operate. As Casablanca’s slippery Captain Renault put it, you might be “shocked — shocked! — to find that gambling is going on in here.”
The dominant prediction marketplaces are looking to cash in on huge stock price appreciation when these companies go public. To prepare for lucrative initial public offerings, their leaders seek a safe-haven regulatory environment with as little taxation as possible. That’s why they are targeting the federal Commodity Futures Trading Commission (CFTC) as their regulatory home, and that agency is now suing states to grab turf.
State leaders need to move quickly to fight this campaign, for the protection of their residents as well as their treasuries. This activity is not investing or financial risk management; it’s just zero-sum gambling. So, just like pari-mutuel betting at the racetrack, the prediction marketplaces should be regulated by the states and not exempted from their control by the industry’s camouflaging maneuvers to find a cozy federal home. The public deserves better, and the revenue implications are significant given the explosion of profits being captured by the owners of these digital platforms.
This fad got started during the COVID-19 pandemic, when Robinhood and other laptop- and smartphone-based stock-trading platforms learned that they could lure new clients by “gamifying” the stodgy investment world, injecting silly cost-free visual rewards like showering confetti when orders are placed. They learned from social media wizards that younger males in particular can be lured into loyalty with psychological reinforcements that have nothing to do with capitalism or portfolio management. Suddenly, “trading” on these platforms seemed a way to get rich quick, in the vain psyches of their users. In their minds, gamblers are feckless losers, but traders are hotshot winners.
The cryptocurrency frenzy and so-called meme stocks also pulled a new generation of gamblers into the financial markets. Smelling new fresh blood to suck, Wall Street has jumped in. The options market now has one-day contracts that are modern knock-offs of the “bucket shops” of the late 19th and early 20th centuries, where day-traders placed their bets on the session’s closing price or direction of a stock. Nowadays, scores of naive “traders” in the options and prediction markets fancy themselves to be the reincarnation of the legendary bucket-shop speculator Jesse Livermore, as fictionalized in Edwin Lefèvre’s classic Reminiscences of a Stock Operator. The bucket shops were eventually outlawed, but gambling fever is eternal, and prediction markets are its latest incarnation.
They really caught fire last year. Their mainstay has been sports betting, but we’ve now seen an increasing level of activity in other realms, including election outcomes and, lately, military operations in Iran. It was bad enough to see how the sports bettors — now magically promoted to the sexier status of “traders” — could include shadowy players who throw the game or chisel the spread to profit. Now we have a mounting number of news reports about insider information in the Iran conflict being manipulated for profit on these gambling platforms. Soon there will be a betting “contract” on the outcome of every bill in Congress if somebody doesn’t put a stop to this — and that obviously won’t come from Washington, D.C.
The insider-betting issue is where the prediction-market lobbyists lately struggle the most to find a way to disclaim responsibility while posturing that their clients are “not casinos,” where the house sets the odds. That’s a clever subterfuge. These platforms don’t want to put their own money at risk of insider betting, because the house eventually loses when smarter money (like card-counters in blackjack) games the system. So they’ve built their business models to instead take a house cut from the transactions themselves, risk-free. But their not-a-casino lobbying smokescreen fails to absolve them of the point that this is all gambling and not trading. Casinos don’t own a monopoly on gambling.
Why the Industry Wants What It Wants
The inevitability of insider profiteering on these platforms is just one reason this industry desperately wants to be regulated by the CFTC, where the ground rules tolerate insider trading by the large commodity houses with proprietary information: They can legitimately take positions to buy and sell futures contracts in raw commodities as long as they follow a few rules on fiduciary information. The rationale for those exemptions has always been that the trading houses themselves do not grow the corn or mine the gold or mill the lumber; they have no ability to quickly create new product for delivery on their contracts, and there are explicit rules about “cornering” those markets.
Contrast that with political and military insiders, their cronies or relatives, who have a clear ability to put their thumbs on the scales on a multitude of prediction-market bets, or know the inevitable outcome ahead of the suckers on the other side. That’s not trading — it’s shooting fish in a barrel. To make matters worse, it’s been reported that suspected insiders are using pseudonyms and crypto wallets to abscond anonymously with their winnings. Talk about something rotten in Denmark.
A second reason, of course, is that the industry clearly wants to avoid dealing with 50 state attorneys general and gambling commissions, not to mention the prospect of state taxation of its profits. Already they are facing legal challenges or regulatory moves in at least 11 states. With the CFTC filing its own pre-emption lawsuit, these are cases that the states should litigate all the way to the Supreme Court on the basis of federal regulatory over-reach — a topic of keen interest to several justices.
Beyond the regulatory issues, the states have a clear interest in tapping into this popular craze as it expands its reach into the pocketbooks of mainstream America. Gambling taxes are a growing source of revenues for the states, and their financial self-interest should lead governors and legislatures to vigorously protect their states’ rights to levy taxes on this action. New York state, for example, could potentially tax these platforms as much as half of their rake.
For a good overview of the various states’ tax practices in this realm, see this Forbes table that clearly illustrates the megabillions of revenue now in play. With the two leading prediction betting platforms, Kalshi and Polymarket, grossing $17.9 billion in February alone, it won’t be long before the states’ revenues at stake will reach that order of magnitude on an annual basis.
Getting Ahead of the Brainwashers
No doubt, there are justifiable applications of prediction markets for hedging in the insurance industry and many other businesses — think hurricanes, earthquakes, electricity consumption rates and corn-belt crop yields. Those commercial contracts could properly be regulated by the CFTC as financial futures. Notably, the Chicago Board Options Exchange has taken exactly this posture, focusing its new products on financial and economic outcomes with commercial and institutional rationale. But that’s a fraction of the prediction markets’ business opportunity as they claim it to be.
So before the industry lobbyists and PR teams brainwash the unwitting American populace and politicians that these platforms somehow involve trading and not betting, state leaders need to mount a strong and highly visible national campaign to counter this gaslighting before they are pre-empted politically and it’s too late.
State legislation cannot prevent people from making speculative or foolhardy bets, and wagering has attracted humans since the early days of civilization. But let’s not mythologize and glorify prediction “contracts” that are nothing more than digitized bets processed through online gambling platforms.
Governing‘s opinion columns reflect the views of their authors and not necessarily those of Governing‘s editors or management.