Are Prediction Markets Too Manipulable To Be Gambling?

How Prediction Markets Work

Prediction markets are platforms through which users can trade what’s known as event contracts, a contract that allows you to make trades based on the predicted outcome of real future events. These contracts are typically formatted with a yes or no outcome, where payouts occur if a specific event happens but expire if it doesn’t. 

Kalshi and Polymarket help popularize prediction markets by making them more accessible to retail users. However, this growth has led to concerns about regulation, fairness, and classification. 

Are Prediction Markets Regulated Like Gambling?

Gambling is classed as the process of staking money on an uncertain outcome for entertainment purposes. On the other hand, financial speculation is defined as risk-taking for informational or economic reasons. So, are prediction markets considered gambling legally?

Aspect	Gambling	Financial Speculation
Core purpose	Entertainment-driven risk	Informational, economic risk
Basis of outcome	Uncertain events	Market expectations and data
Regulation	Gambling laws and consumer safeguards	Financial and derivatives regulation
Regulatory stance	Common in sportsbooks and casinos	Applied by the CFTC to some prediction markets
Key issue	Player protection	Market integrity and compliance

The US CFTC classifies certain prediction markets as derivatives, placing them under financial speculation laws rather than gambling regulation. This means the platforms can offer event-based contracts as long as they comply with the requirements.

However, the FCA tends to be more cautious, viewing event-based contracts as gambling or unregulated speculation. This is a great example of how interpretation can differ even among regulatory bodies.

Iowa Electronic Markets, on the other hand, has an academic exemption that allows real-money forecasting for research purposes. 

Uncertainty appears to be rife regarding how exactly to categorize prediction markets and the mandate they are expected to fall under, and it’s unclear when this might change.

The Potential for Prediction Market Manipulation

One of the biggest concerns people have about prediction markets is the prevalence of asymmetric information, increasing the chances of manipulation. In layman’s terms, asymmetric information refers to when certain people are privy to knowledge that other participants are not, which gives them an unfair advantage when it comes to betting or trading.

Risk Factor	How it Enables Manipulation
Asymmetric information	Insiders trade before public disclosure
Limited event scope	Small groups control vital information
Weak enforcement	Less governance in financial markets
Insider trading	Unfairly impacts prices
Low transparency	Damages trust and user confidence

This is an extremely prevalent risk in prediction markets because contracts often relate to events with a limited sphere of influence, such as political elections, regulatory decisions, and sporting injuries.

The issue arises when these individuals choose to trade on the information via prediction markets, which can cause a shift in market prices. Naturally, this raises ethical concerns about fairness and transparency.

As prediction markets grow in size, concerns over issues such as insider trading persist. The imbalance reduces user confidence and casts doubts over whether these platforms can be classed in the same bracket as gambling.

Arguments Against Prediction Markets Gambling Classification

Those in support of prediction markets argue that they should not be classified as gambling, but rather as a means of making informed predictions. Unlike traditional gambling and betting, prediction markets work by aggregating information, and prices reflect the collective intelligence of users. 

Research from sources such as Yale Insights has found that prediction markets have strong levels of accuracy and can often outperform opinion polls and expert forecasts. This is particularly true in political and economic markets, and suggests that prediction markets are more than simply entertainment-driven.

Prediction markets can also be utilized for risk management, allowing organizations to offset exposure to uncertain events. This is a way to utilize the markets to manage uncertainty, as opposed to simply betting for entertainment. 

From this perspective, it could be argued that prediction markets are more like financial speculation than gambling. As such, gambling regulations don’t feel like an appropriate fit for these markets. 

Arguments Supporting Classification as Gambling

On the other hand, detractors of prediction markets argue that they should be classified as gambling due to their speculative betting nature and associated financial risk. People stake money on uncertain outcomes, which mirrors traditional gambling and sports wagering bets. 

While many argue that prediction markets can serve as forecasting tools, there is an entertainment element that closely resembles gambling. The simplicity of contracts, as well as rapid price fluctuations, may encourage repeated participation and increase the risk of addiction.

Consumer protection is a concern as prediction markets become increasingly accessible to general retail players. The issue is that these platforms aren’t anchored by features like responsible gambling safeguards, which can lead to long-term problems. 

As prediction markets become more prevalent in sports and real-time events, their impact has come under closer scrutiny. Being able to apply gambling-style regulation could be crucial in addressing consumer risk and enhancing integrity. 

Case Studies: Kalshi, Polymarket, and Manipulation Incidents 

Leading prediction market platforms, such as Kalshi and Polymarket, illustrate the rapid growth and popularity of prediction markets, as well as the challenges they present. 

Polymarket has been embroiled in controversy in recent years, including a refusal to pay out tens of millions of US dollars after claiming the US did not actually invade Venezuela. They determined that the ‘mission’ did not meet contract terms. 

Kalshi has also not been far from controversy, having faced state-level lawsuits from multiple US states over markets that resemble unlicensed sports wagering, as well as potential manipulation in prediction markets. 

Prediction Market Regulation – International Perspectives

International approaches to prediction markets vary considerably because global regulation also differs. In the US, prediction markets fall under a financial umbrella, whereas in the UK and EU, they are likely to be viewed as more akin to gambling or speculation. 

Crypto prediction markets also add another dimension to this, because crypto markets blur regulatory lines, operating across borders and outside typical licensing, often relying on tribal sovereignty and jurisdictional gray areas. These kinds of inconsistencies can cause legal divergence and raise concerns about consumer protection and transparency.  

Conclusion: Should Prediction Markets Be Redefined?

Prediction markets are a complex issue, and whether they can be reformed or redefined is unclear at this point. While they offer powerful forecasting potential, there are also risks of fairness and manipulation. Regulators will need to address issues of transparency, enforcement, and consumer protection if they are to reach a consensus surrounding prediction markets. 

Frequently Asked Questions

References

1. To Improve the Accuracy of Prediction Markets, Just Ask (Yale Insights)
2. What’s an invasion? Gambling site’s definition costs gamblers millions (SAN)