Prediction Markets: How They Work and Where They Are Legal

The two biggest prediction markets traded more than $45 billion in August 2026. For traders, their prices are useful even without placing a bet: they turn expectations about rate decisions, elections and economic data into probabilities that anyone can read for free. At the same time, US states and federal courts are fighting over whether some of these contracts are gambling.

This guide explains how prediction markets work, where they are legal and where their limits lie. I rely on CFTC releases and filings, court rulings, platform documents and research, plus my own checks of market data on October 6, 2026. The legal status was checked on October 7, 2026. How we research and write is described on our editorial policy page.

Prediction markets in 30 seconds

• What they are: markets where people trade contracts whose payout depends on an event. Most are yes or no contracts, and the price reads roughly as a probability.
• Other names: event contracts, betting markets, information markets, event derivatives.
• In the US: the big platforms operate CFTC-regulated exchanges. States fight over sports contracts, and the federal appeals courts are split.
• In the UK: Kalshi and the international Polymarket site both restrict UK residents, and the Gambling Commission sees most such products as licensable betting.
• The main platforms: Kalshi, Polymarket and Polymarket US, plus broker access, for example through Interactive Brokers.
• For traders: the public prices are an extra data source, for example on Fed decisions next to the CME FedWatch Tool.

What are prediction markets?

Prediction markets collect expectations about future events by letting people trade contracts that pay out depending on the result. In the most common form, a contract pays a fixed amount if the event happens and nothing if it does not, so its price shows roughly how likely the market thinks the event is.

The words used for them show the dispute. The platforms speak of event contracts and see themselves as exchanges. Several US states and many critics speak of betting. Academics use terms such as information markets or event derivatives.

The idea is not new. In 1988 the University of Iowa launched the Iowa Electronic Markets, a research market with real money where participants put small stakes on election results. In 2004 the economists Justin Wolfers and Eric Zitzewitz summed up the research in the Journal of Economic Perspectives: market-based forecasts were generally fairly accurate and beat most moderately sophisticated benchmarks. That is the promise today’s platforms are measured against.

The 2024 US election brought prediction markets to a wide audience. Since then the media quote the prices of the big platforms as a probability measure. Unlike a poll, a price does not measure a representative opinion, but what participants are willing to put money on.

How do prediction markets work?

Each market asks a yes or no question with a fixed date. For example: will the Fed leave rates unchanged at its next meeting? If you expect yes, you buy the yes contract; if you expect no, the no contract. On the settlement date the right contract pays $1, the wrong one expires worthless.

The price reads roughly as a probability. 82 cents for a possible payout of $1 means about 82 percent. Fees, thin trading and the spread can distort that reading. The spread is the gap between the highest bid and the lowest offer: if yes is quoted at 80 cents bid and 82 cents ask, it is two cents.

You trade against other participants, not against a bookmaker. Buyers and sellers meet in an order book like on an exchange. Before the settlement date you can sell a position if someone takes the other side. The operator earns fees on trades, not on the outcome.

At the end, someone decides the result, and that is a weak spot. At Kalshi and Polymarket US the exchange decides according to written market rules; on the international Polymarket site a token vote can settle disputes. If the wording leaves room, a market can end differently from what most traders expected. If you skip the rules, you trade the question you think you understand, not the one that is actually asked.

Are prediction markets legal in the US?

The big US platforms operate exchanges regulated by the CFTC. Kalshi has been a designated contract market since 2020, Polymarket US since its purchase of QCX in 2025, and ForecastEx, the exchange of Interactive Brokers, is registered as well. The open question is how far state gambling law reaches.

The states and the platforms are fighting over sports contracts. The platforms argue that federal law preempts state gambling rules for contracts on CFTC exchanges. Several states say a contract on a game is a sports bet. The federal appeals courts have split: the Third Circuit sided with Kalshi in New Jersey in April 2026, while the Ninth Circuit (Nevada, August 2026) and the Sixth Circuit (Ohio and Tennessee, September 2026) ruled against it.

The Supreme Court may have the last word. New Jersey has asked it to review the Third Circuit ruling (No. 26-299); on October 7, 2026 the Court had not decided whether to take the case. In Nevada a state court has blocked Kalshi’s sports, election and entertainment contracts since May 18, 2026. Our Kalshi review lists the rulings with sources.

The CFTC is writing new rules at the same time. In March 2026 it asked for public comment on prediction markets (release 9194-26), and in June 2026 it proposed rules for event contracts that involve gaming and other listed activities (release 9249-26). By early October 2026 we found no final rule. This article is not legal advice.

Prediction markets in the UK, Canada and the EU

UK residents are shut out of the two biggest platforms. Kalshi’s member agreement lists the United Kingdom as a restricted jurisdiction, and the terms of the international Polymarket site bar trading from the UK as well. Interactive Brokers U.K. is not among the IBKR companies that IBKR names for event contracts.

In Great Britain, the Gambling Commission treats most prediction markets as betting. In a blog post of February 4, 2026, it said many current products would count as a betting intermediary, the licence type for betting exchanges. Products regulated as financial products, such as spread betting, fall under the FCA instead.

Canada allows a narrow, broker-based route. Through Wealthsimple Predict, Canadians can trade Kalshi contracts in three categories: financial metrics, economic data and climate. Sports and election markets are view-only there. Interactive Brokers names IB Canada among its eligible companies.

In the EU, three layers decide. First, the platforms’ own lists: France, Italy and Germany, among others, appear on Kalshi’s or Polymarket’s restricted lists. Second, national gambling law. Third, where event contracts are financial instruments, the European markets authority ESMA reminded firms on July 3, 2026 that the national measures against binary options apply; IB Ireland offers them only to professional clients.

The best-known prediction markets compared

Kalshi and Polymarket are the biggest commercial prediction markets. According to The Block, Kalshi, Polymarket and Polymarket US traded $45.33 billion together in August 2026, 14.5 percent less than in July. Kalshi alone made up $37.17 billion. Brokers also offer access of their own.

Platform	Setup	Open to
Kalshi	US exchange, CFTC, dollars	US, 18+; not 55 countries
Polymarket US	US exchange, CFTC, dollars	US residents
Polymarket intl.	blockchain, USDC	not the US, UK and others
IBKR	broker for Kalshi, CME, ForecastEx	eligible clients, 21+

Status October 7, 2026. Sources: platform terms and help pages, IBKR prediction markets FAQ.

Kalshi: the regulated US exchange

Kalshi is the largest prediction market by volume. The CFTC approved it in November 2020, and it settles in US dollars. Its Fed, inflation and jobs markets are the most useful ones for traders. Fees, legal status and a Fed comparison are in our Kalshi review.

Polymarket: crypto origins, regulated in the US

Polymarket runs an international crypto site and a regulated US exchange. The international site settles in the stablecoin USDC on a blockchain and excludes US and UK residents. Polymarket US has been a CFTC-regulated exchange since 2025. How both versions work is explained in our Polymarket review.

Prediction markets at brokers

Classic brokers are joining in. Since May 2026 Interactive Brokers has bundled Kalshi, CME Group and its own exchange ForecastEx in one screen, with orders routed to the best net price. Eligibility depends on the IBKR company and the client’s age. Details are in our guide to IBKR Prediction Markets.

What traders can read from prediction markets

For me, prediction markets are above all a data source. The prices are public, current and expressed in percent. If you follow rate decisions, inflation data or elections, you get a second opinion on the expectations that are priced into bonds, currencies and indices.

The method is a comparison with established sources. For rate decisions, that is the CME FedWatch Tool, which derives probabilities from the prices of Fed Funds futures. When both sources are close, two different markets show similar probabilities. When they drift apart, look for the cause: thin trading, new information or different methods. Our Kalshi review documents such a comparison for the Fed meeting of October 2026.

The limits matter as much as the benefits. Away from the big topics, many markets are thinly traded, and one large order can move the price. The wording of the question decides the result, and it can differ from the obvious reading. And a price is an expectation, not a prediction: an event at 18 percent still happens regularly.

Then there is the insider problem. If you know the outcome in advance, a prediction market lets you profit directly. The CFTC now pursues such cases: in May 2026 it sued a Google employee who allegedly made about $1.2 million on Polymarket with confidential knowledge, and in August 2026 it ordered a White House teleprompter operator to pay $172,000 for insider trading in Kalshi contracts. Sudden price jumps are not always the wisdom of the crowd; sometimes they are the knowledge of a few.

Regulated futures markets price expectations as well. Rate expectations sit in the prices of Fed Funds futures, event risks in the prices of options, and both trade on licensed exchanges. How they work and what they risk differs clearly from event contracts. Access and suitability depend on your broker and your own situation.

Pros and cons of prediction markets

The strengths lie in the information, the weaknesses in the trading. Here are the main points in brief, from a trader’s point of view.

Pros

• Probability at a glance: the price shows what the market expects.
• Public and current: prices can be read without an account and react to news at once.
• Backed by research: market-based forecasts have been studied for decades and are generally fairly accurate.
• Extra data source: a second reading of expectations next to futures markets and polls.

Cons

• Legal fight in the US: sports contracts are contested in several states, and the courts are split.
• Closed to many countries: UK residents and most EU retail clients cannot trade on the big platforms.
• Wording decides: unclear questions can lead to unexpected results.
• Thin markets: away from big topics, one order can move the price.
• Insider trading possible: an information edge turns directly into profit.
• Total loss: if a market settles against you, your stake is gone.

How big is the prediction market industry?

In two years the market has grown from a niche into a business worth billions. Kalshi and Polymarket alone traded more than $45 billion in August 2026. The exchange operator ICE, parent of the New York Stock Exchange, announced in October 2025 that it would invest up to $2 billion in Polymarket. For Kalshi, CoinDesk reported funding talks in August 2026 at a valuation of about $40 billion.

With size comes pushback. States are suing and being sued, the CFTC has opened a rulemaking, and the Supreme Court may decide whether states can regulate sports contracts on federal exchanges. Where this leads is open. We will update this guide when the legal situation changes.

Conclusion: read prediction markets, trade them with care

Prediction markets make expectations visible, and that is their real value. The idea has been studied since the Iowa Electronic Markets of 1988, and today the big platforms deliver probabilities on rates, data and elections in real time.

For US readers, the legal picture is clear at the federal level and unsettled at the state level. The big platforms are CFTC-regulated exchanges, but sports contracts are tied up in court. Readers in the UK and most of the EU cannot trade on the big platforms as retail clients.

My verdict: useful as an extra data source, risky as a place to trade. The public prices complement the picture of expectations that the regulated futures markets draw, and they work well as a cross-check. If you trade them, treat it as speculation with total loss risk.

Event contracts carry a high risk of loss. This guide describes how prediction markets work; it is not investment advice and not legal advice.

Frequently asked questions about prediction markets

What is a prediction market?

A market for trading contracts on future events. Participants buy yes or no contracts that pay a fixed amount if they are right. The price shows how likely the market thinks the event is. Other names are event contracts or betting markets.

Are prediction markets legal in the US?

They run on CFTC-regulated exchanges such as Kalshi and Polymarket US. Several states dispute sports contracts, and the federal appeals courts are split. In Nevada a state court has blocked Kalshi’s sports, election and entertainment contracts, and New Jersey has asked the Supreme Court to decide.

What are the best prediction markets?

The biggest by volume are Kalshi and Polymarket. Kalshi is a CFTC-regulated exchange that settles in US dollars. Polymarket runs Polymarket US for US residents and an international crypto site. Interactive Brokers bundles Kalshi, CME and ForecastEx for eligible clients. Which one suits you depends mainly on where you live.

What is the difference between a prediction market and a sportsbook?

The main difference is the counterparty. At a sportsbook, the bookmaker sets the odds and takes the other side. On a prediction market, participants trade against each other in an order book, and the operator earns fees. Several US states still treat sports contracts on prediction markets as sports betting.

How accurate are prediction markets?

Often fairly accurate, but not infallible. Wolfers and Zitzewitz concluded in 2004 that market-based forecasts are generally fairly accurate and beat most moderately sophisticated benchmarks. Thin markets, unclear questions and insider trading can distort the prices.

Can you make money on prediction markets?

Gains are possible, and so are losses up to the full stake. Before fees, the gains and losses of all participants cancel out, and fees make the total negative. The most reliable benefit is the public prices as a data source.