Prediction markets are scaling fast — yet mainstream, institutional status hinges on one thing: regulatory compliance infrastructure catching up to demand. According to Pew Research, trading volume on Kalshi and Polymarket — the two leading prediction market platforms — has expanded dramatically since mid-2025. Combined monthly global trading volume across these venues escalated from under $5 billion in September 2025 to approximately $24 billion in April 2026.
Although retail engagement has fueled initial growth, the real test now is whether financial institutions and regulators come to treat prediction markets (or event contracts) as a temporary speculative trend or the foundation of a new institutional asset class. Answering that means looking at three things: who’s actually showing up on their platforms, what “mainstream” really demands, and what’s still standing in the way.
Who’s in the Market
The Current Catalyst: Retail Volume and Cross-Asset Parallels
To date, trading activity on major prediction platforms has been heavily concentrated in sports, politics, and cryptocurrency. These three categories accounted for 91% of global trading volume on Kalshi and 90% on Polymarket since July 2024, with sports-related contracts leading the volume.
For context, prediction market volume now rivals the roughly $14 billion wagered monthly through licensed U.S. sportsbooks — a clear sign that this has moved well past niche.
Wall Street’s Interest: From Retail Bets to Macro Forecasting
As volumes scale, interest is coming from beyond retail speculators. Institutional trading desks, quantitative trading firms, and market makers increasingly treat prediction markets as real-time forecasting and risk-mitigation tools for macro trading strategies.
According to Kalshi spokesperson Elisabeth Diana, the exchange is already observing billions of dollars in trading volume generated by institutional investors in macro-oriented categories such as climate/weather and science/technology.
In October 2025, Intercontinental Exchange, Inc., which owns the New York Stock Exchange, invested $1 billion in Polymarket.
Quantitative trading firms and market-making desks are weighing institutional opportunities in prediction markets. As Asaf Meir, CEO of trade surveillance software vendor Solidus Labs, noted: “Hedge funds need a more nuanced and surgical way to express their views in other derivative markets that they can’t access in traditional financial venues. A lot of hedge funds and institutional investors are looking closely at opportunities to execute trades on prediction markets.”
What the Market Requires
Defining “Mainstream”: Embedded Financial Infrastructure
Becoming a “mainstream” asset class means more than retail investors holding event contracts in standard brokerage accounts. Instead, mainstream status will be defined by deep integration into institutional capital market workflows, including:
- Retail & Institutional Brokerage Platforms: Order routing alongside traditional equities and options.
- Institutional Trading & Execution Desks: Algorithmic execution and block-trading capabilities.
- Corporate Risk Management & Hedging: Expressing views on macro, policy, or event risks without liquid outlets in traditional OTC markets.
- Market-Making & Liquidity Provision: Multi-asset market makers quoting continuous bid-ask spreads.
- Financial Data & Index Distribution: Live probability metrics feeding real-time financial news and market data terminals.
- Derivatives Infrastructure: Standardized clearing, settlement, and cross-margining mechanisms.
- Registration Readiness: Evaluating optimal regulatory registration paths and combinations — including Broker-Dealer (B/D), Futures Commission Merchant (FCM), Introducing Broker (IB), Designated Contract Market (DCM), or Derivatives Clearing Organization (DCO) — and constructing clear compliance roadmaps.
- Regulatory Gap Assessments: Reviewing existing operational, compliance, and technological frameworks against CFTC and SEC expectations to resolve gaps in governance, trade surveillance, KYC/AML, custody, and risk management.
- Market Structure Advisory: Guiding prediction markets and digital-asset platforms transitioning into regulated financial entities and assisting traditional institutions entering event-contract markets.
- Licensing & Regulatory Strategy: Drafting exchange rulebooks, regulatory applications, compliance manuals, and examination-readiness frameworks.
- Managed Compliance Services: Providing post-registration compliance monitoring, reporting, and operational support to enable scalable growth.
Structural Friction: Liquidity Constraints and Margining
Despite institutional interest, prediction markets face operational and market structure hurdles that limit large-scale capital deployment.
A primary one is market depth. Larger institutional orders frequently overwhelm shallow order books, causing substantial price impact and slippage. The as-yet-limited rollout of margining on major platforms also obligates institutional traders to fully collateralize positions upfront, reducing capital efficiency compared to established futures and options exchanges.
What’s Standing in the Way
Regulatory and Integrity Challenges
Beyond capital efficiency, market integrity and regulatory uncertainty add friction to institutional allocation.
A recent CFTC press release highlighted two instances of illicit trading on Kalshi involving the potential misuse of material non-public information (MNPI) — one involving a political candidate trading on his own candidacy, and another involving an employee trading on a YouTube channel’s content predictions. In both instances, Kalshi’s compliance organization ordered disgorgement of profits, levied fines, and suspended the traders from exchange access.
Prediction markets in the U.S. register as Designated Contract Markets (DCMs) — a formal board of trade or exchange that is registered and regulated by the CFTC to offer derivatives trading. Under the Commodity Exchange Act (CEA), while the CFTC maintains statutory authority to regulate manipulative and deceptive practices occurring on DCMs, the CEA also deputizes DCMs as self-regulatory organizations responsible for maintaining market integrity on their own platforms. As the CFTC emphasized: “DCMs have an independent duty pursuant to the core principles of the Act to maintain audit trails, conduct surveillance, and enforce rules against prohibited practices. See Section 5(d) of the Act (Core Principles for Contract Markets). In appropriate cases, the Division will investigate and prosecute violations, as it always has with respect to conduct occurring on DCMs.”
In July 2026, the CFTC settled its first-ever enforcement action alleging market manipulation in a prediction market. The CFTC found that former Congressman George Santos traded an event contract based on his own attendance at the 2026 State of the Union address while making misleading public statements designed to move the contract’s price in favor of his trading positions. The CFTC investigation came after DCM charges: Kalshi had initially flagged Santos’s trades and referred the matter to the CFTC. Kalshi noted that it “will also pursue its own enforcement action for violating exchange rules, and if monetary penalties are recovered, we’ll work to reimburse affected traders.” Santos agreed to a $35,000 settlement, which included returning his profits and paying a fine, in addition to a three-year trading ban on the platform.
Surveillance requirements are rapidly expanding. During 2026, Kalshi flagged and investigated more than 400 suspicious trades — more than double the total number investigated during all of 2025, according to Reuters.
The Regulatory Framework: Federal Oversight vs. State Jurisdiction
The CFTC is the primary federal regulator of prediction markets in the United States, created in 1974 to regulate all commodity futures markets. In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act expanded the CFTC’s authority to regulate swaps and other derivatives. The CFTC acts as both a rulemaking and an enforcement body.
The precedent for federal authorization of event contracts was established in November 2020, when the CFTC approved Kalshi as a Designated Contract Market (DCM). The organization determined that the event contracts on Kalshi were binary options, which fall under the Dodd-Frank Act's definition of a swap. Under the current Trump administration, federal regulators have expanded this supportive stance, creating regulatory pathways and encouraging offshore platforms to register domestically under federal CFTC oversight rather than facing fragmented state-level enforcement.
However, long-term regulatory certainty remains elusive. Significant ambiguity persists regarding how current or future presidential administrations will treat prediction platforms that choose not to bring their operations onshore — or those that fail to meet stringent federal DCM and swap execution facility compliance standards.
The CFTC entered into a settlement in 2022 with Polymarket, which agreed to wind down U.S. operations after being accused of running an illegal exchange. In November 2024, the FBI raided the apartment of Shayne Coplan, Polymarket’s founder, looking for evidence of illegal betting. However, the current Trump administration pulled back on enforcement of Polymarket, and in July 2025, the CFTC and Department of Justice ended the investigation into Polymarket.
Although platforms are deploying automated surveillance and rulebook updates — such as prohibiting campaign staff from trading on political races they work on — prediction markets remain at the center of a jurisdictional fight between the CFTC, which asserts exclusive federal jurisdiction over event contracts as derivatives, and state regulators seeking to apply state gaming laws.
Twenty states are challenging the legal authority of the CFTC to regulate prediction markets such as Kalshi or Polymarket. The state gaming commissions contend that the activity on these markets constitutes gambling and thus falls under their jurisdiction. The CFTC, under the Trump administration, argues that prediction markets are strictly within federal regulatory purview.
On June 10, 2026, the CFTC issued a Notice of Proposed Rulemaking (NPRM) to clarify the regulatory treatment of event contracts under the CEA. The proposed rule establishes a formal framework defining “gaming,” while proposing specific exclusions for election, award, and political contest contracts. Under this framework, sports contracts based on objective aggregate metrics (e.g., final scores or season standings) would generally be permissible, whereas contracts tied to individual player injuries, referee calls, or micro-level in-game actions would be restricted.
However, any finalized rule will almost certainly face similar legal challenges to those ongoing between states, the CFTC, and various prediction market platforms. As legal analysts at JD Supra note: “The Proposed Rule’s broad definition of ‘gaming’ brings the question of state regulatory authority into sharp focus. Depending on the outcome of current litigation, which will likely be resolved by the Supreme Court, event contracts based on ‘gaming’ could potentially be subject to concurrent state and federal regulation.”
Conclusion: Compliance as the Foundation for Mainstream Scale
The next evolution of prediction markets will differ significantly from their first phase. While retail speculation validated consumer demand, institutional adoption will determine whether event contracts mature into durable financial infrastructure. Achieving institutional scale requires market participants, exchanges, and technology providers to meet rigorous compliance, surveillance, and risk-management standards.
Navigating the transition from an early-stage exchange or crypto-native venue to a fully regulated financial entity demands strategic execution. At Tölt Strategies, we assist market participants in navigating regulatory requirements and building robust operational frameworks:
By establishing robust regulatory foundations early, market participants can convert compliance requirements into a sustainable competitive advantage.
To learn how Tölt Strategies can guide your institution through registration readiness and regulatory alignment, reach out to our team today at info@toltstrategies.com.
The CFTC’s Vision for Prediction Markets with Dorothy DeWitt
