I Predict You'll Bet

I’ve been vaguely aware of the prediction markets for a while, but I didn’t give them much thought. If people want to speculate on who’ll win a Presidential election, well, it’s their money. It’s probably harmless that people tried to have some fun with this weekend’s extraordinarily bad weather by trying to predict snowfall totals in various cities. If some people want to wager about the outcome of the Russia-Ukraine war, I think it’s in bad taste but, hey, it’s a free country, mostly.

Betters can be fickle

What got my attention was a Wall Street Journal article This NFL Season’s Fiercest Rivalry Is Sports Betting vs. Prediction Markets. My first thought was, huh, I didn’t know prediction markets did sports betting. My second thought was, how very stupid of me to have not realized that. My third thought was: the sports betting industry is in trouble.

Now, sports betting I’m aware of. Honestly, you can’t watch TV without seeing Kevin Hart hawking DraftKings. You can’t watch any sporting event without seeing not just ads for DraftKings and FanDuel but ongoing odds displayed (and discussed) prominently. Sports betting is impossible to miss. Since the Supreme Court allowed sports betting in 2018, it has taken off like wildfire. Thirty nine states, plus the District of Columbia and Puerto Rico, allow it.  

How many states allow prediction markets? That’s the thing of it: none of them do, because the industry claims it is federally regulated. Its nominal regulator, the Commodity Futures Trading Commission (CFTC), had originally expressed some concerns, but under the current Administration seems to be all-in.

It is perhaps noting that Donald Trump Jr. is an advisor to both Kalshi and Polymarket. Draw your own conclusions.

Sports betting is big business. The American Gaming Association estimates it is a $150 billion industry. FanDuel (which is owned by Flutter) and DraftKings are the dominant sports betting companies, while Kalshi and Polymarket are the biggest prediction markets platforms. If you can’t beat them join them; both FanDuel and DraftKings have launched their own prediction markets. FanDuel Chief Executive Amy Howe told WSJ: “The aspiration is still to legalize as much of the United States as we can—that is the North Star.”

And the prediction markets are now big players in sports betting. Yahoo Finance reports that Kalshi gets 90% of its bets from sports betting – and took in $720 million in NFL betting last week. As much as it has made its bed with sports betting, the NFL isn’t yet comfortable with prediction markets. In testimony before Congress in December, NFL Executive Vice President Jeff Miller said: “In each of these state-regulated markets, regulators and state legislators closely monitor betting activity and, with input from professional sports leagues, can determine which bets and wager levels are acceptable. Those guardrails do not exist in prediction markets.”

Similarly, the NCAA has expressed concerns to the CFTC, wanting it to suspect college sports prediction markets until there were better safeguards. NCAA President Jeff Miller told WSJ: “Let’s face it—college sports prediction markets are sports betting, and targeting states that haven’t legalized sports betting is creating a massive risk to the integrity of the game and to student-athletes.”

Methinks they both protest too much. We’ve seen betting scandals in the NCAA, NFL, NBA, MLB, so you can either argue that the uncovering of the scandals proves the oversight is working, or that the problem is far worse than we really. I know what I’d bet – or predict.

Meanwhile, the NHL and MLS have signed prediction market deals. Keith Wachtel, who oversees the NHL’s business operations, explained: “If you’re part of it, then you have the ability to control and monitor more effectively.”  Uh-huh.

And oh-by-the-way, Dow Jones (which owns WSJ, whose article started me down this rabbit hole) recently announced a deal with Polymarket. So have CNN and CNBC, if you’re counting.

Tarek Mansour, Kalshi's cofounder, rationalizes: “If we are gambling, then I think you're basically calling the entire financial market gambling.” A spokesperson for the newly formed Coalition for Prediction Markets (referencing the concerns raised by the NFL’s Mr. Miller) told ESPN:

The CFTC's regulations on abusive or manipulative trading apply to prediction markets just like the SEC's regulations apply to the stock market. This activity is strictly prohibited by both the CFTC and prediction markets, and we use a variety of tools before, during, and after people trade to prevent illegal trading and bring enforcement action when violations happen.

Of course, the CFTC is no SEC, and the required disclosures are not at all the same, but we get your point – caveat emptor.

Former New Jersey Governor Chris Christie, who is helping advise the American Gaming Association on prediction markets, sees it differently: “Calling it predictive markets never fooled me. It’s a bet. That’s what it is, and it doesn’t look or feel any different than that.”

As they say, if it looks like a duck, quacks like a duck, and walks like a duck, it’s a duck.

States are not just sitting back. In Massachusetts, Suffolk County Superior Court Judge Christopher Barry-Smith ruled last week that he will issue a preliminary injunction barring Kalshi from taking action on sport-related events. He wrote: “There can be little question that Kalshi well understood that its business model -- especially once it began offering bets on sporting events -- came into direct conflict state enforcement regimes; Kalshi chose to take that risk head-on."

New York and Tennessee are also taking legal action. This is all going to end up in the Supreme Court again.   

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The truth of the matter is that (some) people are always going to gamble. It is often sports but, really, people will bet on almost anything. Once states figured out that they could tax gambling, legalized lotteries, casinos and sports betting were inevitable. People are probably better off if gambling is regulated, but tell that to the problem gamblers, to whom making it easier is anything but better off.

I’m not a gambler and I don’t have a dog in this fight, so what interests me in the sports betting versus prediction markets face-off is that here we have an industry that grew from nothing to being hugely successful in less than ten years, which now is being threatened by competitors who approach their market in an entirely different way, while largely evading regulatory constraints. It’s not exactly Uber versus the taxi industry, but there are parallels.

I’m not rooting for the prediction markets, but I’ve aways got an eye out for disruptive innovation.