Prediction markets explained: how event contracts work, how the CFTC regulates them and why states object

A prediction market is an exchange where people trade event contracts: contracts on a yes-or-no question, such as whether it will rain tomorrow, that pay a fixed amount (usually $1) if the answer is yes and nothing if it is no. Because the payout is fixed, the price reads as the market’s estimate of how likely the event is. In the US the exchanges are regulated by the Commodity Futures Trading Commission (CFTC), and several states dispute that they can offer some contracts without a state gambling license.

This guide explains how the contracts work, how they are listed and where the litigation stands as of October 2026. It does not forecast any outcome, of an event or of a court case.

What an event contract is

The CFTC describes event contracts as derivatives, typically structured as swaps, whose underlying is the outcome of an event. Most have two possible outcomes, a fixed payout and an expiry, either a set time or the natural end of the event. Traders buy “yes” or “no”; if they are right they receive the payout at settlement, and if they are wrong they lose what they paid.

The CFTC says a contract’s price reflects traders’ perceived probability of the outcome. In its own example, “yes” on a $1 rain contract costs 70 cents and “no” costs 30 cents: the market expects rain, but not with certainty. Positions can also be sold before settlement at the current market price, to lock in a gain or limit a loss.

Example, with hypothetical numbers: a contract asks whether a city will record more than 2 inches of snow on a given day, and “yes” trades at 40 cents, an implied probability of about 40%. A trader buys 100 “yes” contracts for $40. If it snows more than 2 inches, each pays $1 and the trader receives $100, a gain of $60 before fees. If it doesn’t, the contracts expire worthless and the $40 is lost. With a fee of 2 cents a contract, the trader pays $2 more, so the gain would be $58 and the loss $42.

How CFTC-regulated exchanges list them

Event contracts are listed by exchanges the CFTC has designated as contract markets (DCMs). Most new contracts are self-certified under CFTC Rule 40.2: the exchange files the terms and certifies that the contract complies with the Commodity Exchange Act and CFTC rules, and the CFTC must receive the filing by the open of business on the business day before listing. The CFTC does not approve each contract in advance. In June 2026 it noted that the exchange carries the burden of assessing compliance and that, apart from one special rule, its power to stop a self-certified contract is limited.

That special rule is section 5c(c)(5)(C) of the Act. It lets the CFTC decide that an event contract is contrary to the public interest if it involves activity that is unlawful under federal or state law, terrorism, assassination, war, gaming, or similar activity the Commission defines by rule. Such a contract may not be listed or cleared.

CFTC Rule 40.11 puts the special rule into practice. It says a registered entity shall not list a contract on an event that involves, relates to or references those activities, and lets the CFTC open a 90-day review of a self-certified contract that may fall into those categories, during which it must ask the exchange to suspend listing or trading, and then approve or disapprove it by order.

How 40.11 fits with the rest of the Act is itself disputed. The Ninth Circuit relied on it in concluding that gaming-related contracts are barred from DCMs; the CFTC said in October 2026 that the rule gives no basis for concluding that event contracts are not swaps or that state gambling law applies to them. In June 2026 the CFTC proposed a framework for applying the special rule, defining “gaming” and “involve” and setting public-interest factors to weigh contract by contract. Comments closed on 27 July 2026, and no final rule had been published in the Federal Register by late October 2026.

The election-contract case

On 12 June 2023 KalshiEX, a DCM, self-certified contracts on which party would control each chamber of Congress. The CFTC opened a 40.11 review ten days later and on 22 September 2023 prohibited the contracts, finding that they involved gaming and activity unlawful under state law and were contrary to the public interest.

Kalshi sued. In September 2024 Judge Jia M. Cobb of the US District Court for the District of Columbia ruled that the contracts involved neither unlawful activity nor gaming, and vacated the order; the court did not reach the public-interest question. On 2 October 2024 the D.C. Circuit refused to pause that ruling during the CFTC’s appeal, finding the agency had not shown that it or the public would be irreparably harmed. In May 2025 the CFTC’s motion to dismiss its own appeal was granted.

Sports contracts and the states

The bigger fight is now over sport. According to the Third Circuit, one exchange began listing contracts on sports outcomes in December 2024, and Kalshi followed a month later. State gaming regulators responded with cease-and-desist letters and lawsuits, arguing that the contracts are sports betting that needs a state license. The exchanges argue that federal law gives the CFTC exclusive jurisdiction over swaps traded on a DCM and preempts state gambling law.

The federal appeals courts have split, and the main cases were still open as of October 2026:

• Third Circuit (New Jersey). On 6 April 2026 a divided panel upheld a preliminary injunction stopping New Jersey from enforcing its gaming law against Kalshi’s sports contracts, finding Kalshi had a reasonable chance of showing preemption. New Jersey has asked the Supreme Court to hear the case (No. 26-299); Kalshi’s response is due on 9 November 2026.
• Ninth Circuit (Nevada). On 28 August 2026 a panel held that Kalshi had not shown that the Act likely preempts Nevada’s gaming rules for its sports contracts, which it found were likely not swaps. The CFTC reported that a petition for rehearing by the full court had been filed. “This is sports betting and needs to be properly regulated by the state,” said Mike Dreitzer, chairman of the Nevada Gaming Control Board.
• Sixth Circuit. In September 2026 a panel also held that sports event contracts are not swaps, for somewhat different reasons, according to the CFTC.

The CFTC also lists a Minnesota law making it a felony to offer such contracts, criminal charges in Arizona, and state court orders requiring one exchange to block sports contracts in Michigan, Washington and Nevada. On 26 October 2026 it sued Utah, whose attorney general had brought a state-court gambling case against Kalshi and others, and it says it has started proceedings against nine other states (our brief on the Utah suit). In that complaint the CFTC says preliminary injunctions against state enforcement have been granted in Arizona, Illinois and Minnesota.

On 19 October 2026 the CFTC also published an interim final rule, effective that day, confirming that sportsbook wagers and casino games offered under state or tribal licenses are not swaps, and a proposal stating expressly that event contracts on sports, politics, culture and weather are swaps. Comments on both close on 18 November 2026 (our brief).

Event contracts, sportsbooks and offshore platforms

The interim final rule sets out the differences the CFTC sees. A sportsbook takes bets as the “house”: the customer deals with it directly and accepts the price it sets. On a DCM, prices come from bids and offers on a central order book, the exchange earns transaction fees rather than profiting from either outcome, and a CFTC-registered clearing house stands between buyer and seller. Brokers that handle customer trades must follow the CFTC’s customer-protection rules. Utah, Nevada and other states counter that the contracts are, in substance, sports bets.

Platforms that are not registered with the CFTC are different again. The CFTC warns that customers may have little or no protection with unregistered entities, particularly those operating outside the US. In January 2022 it ordered the then New York-based operator of Polymarket.com to pay a $1.4 million penalty for offering blockchain-based event contracts without being designated as a contract market or registered as a swap execution facility, and to wind down non-compliant markets; that order concerned the firm’s conduct at the time.

Fees, prices and risks

Prices are set by trading, not by a bookmaker. The CFTC’s October proposal notes that market makers on prediction markets earn the gap between bid and ask prices, whereas sportsbooks build a margin into fixed odds. On top come the exchange’s transaction fees and any broker commission. The CFTC tells customers to look for clear information on fees and other costs, and notes that taxes and fees affect returns.

The main risks:

• Total loss. A losing contract pays nothing.
• Liquidity. The CFTC notes that more complex contracts may attract fewer participants, so they can be harder to sell before settlement.
• Settlement terms. Customers are entitled to know how settlement will be decided, by whom and how, the CFTC says. Read the contract rules.
• Manipulation and insider trading. CFTC staff have warned that contracts settling on what one person says or does carry a heightened risk of manipulation (our brief on mention markets), and the CFTC has brought insider-trading cases involving event contracts.
• Legal risk. Access can depend on the state you live in while the courts decide. The CFTC’s June proposal also notes that a contract later found contrary to the public interest might be delisted, with the purchase price and fees returned and any unrealized gain lost.

For exchange-traded derivatives more generally, see how futures contracts work.

Frequently asked questions

Are prediction markets legal in the US? Exchanges designated by the CFTC can list event contracts under federal law, and the CFTC says they can operate in all 50 states. Several states dispute that for sports and some other contracts, and federal appeals courts disagree. The question was unresolved as of October 2026.

Is buying an event contract the same as placing a bet? Legally, that is the point in dispute. The CFTC treats event contracts on a DCM as swaps, traded on an exchange and cleared centrally, and sportsbook wagers as gambling outside its jurisdiction. Nevada and other states say sports event contracts are sports betting.

Can the CFTC block an event contract? Yes, within limits. Under the special rule it can find that a contract involving gaming, war, terrorism, assassination or unlawful activity is contrary to the public interest, as it did with Kalshi’s election contracts in 2023. A court later vacated that order.