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Prediction markets offer a variety of products designed to help the public forecast, plan for, hedge, and even harness perceptions of future events. The products traded on prediction markets are frequently referred to as event contracts, and they’ve existed in U.S. regulated markets for more than two decades.

Expand the items below to learn how event contracts work, the history of prediction markets, what sets regulated markets apart from other forecasting platforms, your rights and protections, and more.

Event Contracts Explained

Event contracts are typically structured as swaps.

They can be used to hedge economic risk or speculate on price movements and event outcomes. Like other derivatives (e.g., futures contracts or options on futures), swaps are financial contracts that derive their value from an underlying commodity. In the case of event contracts, this would be the outcome of an event.

Event contracts are often based on yes-no scenarios, allowing for only two possible outcomes. This framework also has a fixed payout (usually $1) and an expiration (either a specific time or the natural conclusion of the event).

For example, imagine there’s an event contract for “Will it rain tomorrow?” Traders can buy "yes" or "no" positions on the outcome of the event. The price of the contract at the time of purchase reflects the market’s expectation of the outcome (say, 70 cents for “yes” and 30 cents for “no”). Traders who correctly predict the outcome would receive the payout when the contract settles. Their profit is the difference between their initial investment and the payout. In this example, if you purchased a 70-cent “yes” position on a $1 “Will it rain tomorrow?” contract, and it rained the next day, you would earn a 30-cent profit when the contract settles. Traders who didn’t predict correctly would lose their investment. Taxes and fees may also affect a trader’s return on investment.

Other event contract frameworks combine multiple yes-no contracts into one, offer defined multiple-choice options, or even include outcome ranges that offer partial payouts instead of the traditional all-or-nothing payout structure. While more complex contracts may attract fewer participants, resulting in comparatively lower liquidity, their prices continue to reflect the market’s perceived likelihood of all possible outcomes.

How Event Contracts are Used

Event contracts can be used to hedge, to offset real-world risks. As one example, a citrus farmer might buy a weather event contract to hedge against losses that might be caused by a sudden freeze. Event contracts also provide a way for traders to seek profits by taking risks, or speculating.

As is the case in all kinds of markets, participating carries some financial risk. This is particularly true when attempting to predict the outcomes of future events. But some traders will predict accurately and receive payouts. And when everyone’s predictions and knowledge are combined, prediction markets can sometimes forecast event outcomes better than polling or other forms of forecasting. Accurate forecasts also have value, and forecasts based on prediction markets have been increasingly cited by the media, market analysts, economists, pollsters, and others.

Timeline of Prediction Markets

In the United States, prediction markets have been around since 1988 and regulated by the CFTC since 2004.

1988 - The Iowa Presidential Stock Market (now Iowa Electronic Market, IEM), the first modern prediction market is created as an “experimental and academic program” at the University of Iowa.
1992 - CFTC staff issues a no-action letter that allows the IEM to operate as a not-for-profit research and education tool and expand to include up to 20 other universities.
2004 - CFTC approves Hedge Street Inc. to be the first designated contract market (DCM) offering binary options. Hedge Street changed its name to North American Derivatives Exchange Inc. (Nadex) in 2009. In 2022, the company was purchased by Foris DAX Markets, Inc. and renamed Crypto.com.
2010 - Congress passes the Dodd-Frank Act, amending the CEA and providing the CFTC with the authority to prohibit trading in certain types of event contracts, as described in 7 USC § 7a-2 (5)(C).

Unique Features & Protections

Regulated and supervised markets ensure a level playing field that is both transparent and holds cheaters accountable.

Market Integrity: CFTC-regulated exchanges and intermediaries must clear a stringent application process to operate or provide access to U.S. markets and are subject to periodic examinations thereafter. Exchanges must comply with numerous core principles and rules designed to promote market integrity and prevent misconduct such as market manipulation and insider trading. Futures commission merchants that intermediate trades on behalf of customers are required to comply with customer protection rules, including regulations designed to protect customer funds.

Transparent Market-Driven Prices: A contract’s price reflects traders’ perceived probability of the event outcome. In most cases, order books show real-time customer bid and ask prices.

Markets Indifferent to Outcomes: CFTC-regulated exchanges, brokers, or other intermediaries that provide access to prediction markets do not take a side of the trade. They provide a platform for trading and are not competing against you.

Market Access Consistency: Prediction markets are federally regulated and under federal law can operate in all 50 states. CFTC-regulated exchanges and intermediaries are prohibited from arbitrarily banning qualified customers from participating in the markets.

Contract Liquidity: Rather than being locked in their position, customers can trade in and out of their position prior to settlement at the current market price to lock in gains or limit losses.

Layers of Oversight & Accountability: Each CFTC-regulated exchange is required to establish and enforce its own rules for trading and is responsible for monitoring its trading activity for anomalies and abuses, such as insider trading. The National Futures Association provides additional layers of rules and enforcement for brokers and other intermediaries in addition to the CFTC. The CFTC oversees the market landscape, conducts market surveillance and supervision, and enforces applicable laws and regulations.

Your Customer Rights

As a prediction market customer, you should look for clear and complete information about risks and obligations, commissions, fees, penalties, or other costs associated with any trade.

You are entitled to timely, transparent information about event contracts, including trading rules and contract terms (e.g., payout, prices, and how settlement determinations will be made, who decides, and how).

As a self-regulatory organization, designated contract markets establish and enforce rules to protect against fraud, manipulation, and unfair trading practices, including insider trading.

You should ensure you receive copies of account agreements and statements that are accurate, timely, and understandable. You are entitled to have access to your funds. You have the right to make choices without high-pressure or manipulative sales practices.

Finally, you have the right to submit a complaint to your broker, the designated contract market, the NFA, and the CFTC:

To submit a complaint, visit CFTC.gov/complaint.
Whistleblowers can receive incentives for reporting violations that lead to successful enforcement actions, as well as confidentiality and anti-retaliatory protections. Visit Whistleblower.gov.
The Office of Proceedings offers administrative complaint resolution services for matters involving certain regulated entities. See if your case is eligible.

Do's and Don'ts

All speculation involves risk. To help manage risk and potential losses, customers should:

Review market and contract-specific rules.
Understand the risks involved.
Monitor open positions closely or use stop-loss orders to minimize losses.
Understand how fees and other costs impact returns over time.
Only trade with risk capital, or money you can afford to risk after living expenses and other savings needs have been met. And be alert to gimmicks or enticements that encourage you to risk more than you think you should.
Only trade with registered entities. You may have little or no protections if you choose to trade with unregistered entities that operate outside the United States. If an unregistered entity solicits you, exercise extreme caution.
Be cautious of promises of big payoffs, free money, celebrity endorsements, glowing customer reviews, or recommendations from people you recently met online. These are all red flags of a scam trading website.
Ensure websites and mobile apps belong to CFTC-registered entities. App stores try their best, but sometimes fraudulent or counterfeit apps slip through. Verify apps are authentic by checking the trading website for links to official apps.

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