Prediction Markets Are, Suddenly, Everywhere. Wall Street Wants In

This story first ran in TLDR, Wealthsimple’s weekly, non-boring newsletter about money, markets, and crypto.

We assume by this point you have some familiarity with prediction markets — you know, those yes/no bets folks make on news events, like the one last year on whether Donald Trump would win the U.S. presidential election. That wager was many people’s first exposure to Polymarket, a leading prediction market. In the time since, prediction markets have not only gone mainstream; they’ve moved beyond news and are stealing turf from online sportsbooks, like DraftKings. Last week, the NHL announced a partnership with two top platforms — a seal of approval for the industry. Right now it’s unclear what Canada will do about prediction markets; they’re not available at the moment. But these fast-growing platforms have upturned sports betting, and they could do the same to finance, so it’s worth knowing what makes these platforms so potentially disruptive. Let’s dive in.

First, the basics: Prediction markets let users make bets on yes/no questions — like whether Elon Musk will post 960 to 999 tweets in December. Odds are expressed as a percentage, and that percentage is (usually) the cents it costs to buy a single share of a bet. Once the event happens (or doesn’t!), whoever was right gets $1 for every share they own. For instance, if the odds of Musk posting 960 tweets in December are 17%, $1,000 will buy you 5,882 “yes” shares at $0.17 each. If you’re right, you’ll get back $5,882 — a profit of $4,882, or a 488% return.

Why prediction markets are Uber and sportsbooks are taxis: That metaphor comes via a (now-deleted) tweet by a Polymarket employee. What he surely meant is that prediction markets represent a marked improvement over sportsbooks — in convenience, transparency, and availability. And he might have a point. Sportsbooks annoy gamblers by restricting sharp bettors, charging high fees (usually 4% to 10%), and sometimes refusing to pay out winnings. Prediction markets, as a rule, don’t do that sort of stuff, and their fees run about half that of sportsbooks.

The main difference is philosophical: with sportsbooks, the house takes the opposite side of every bet, so it sets odds to balance money on both sides and lock in profit. Prediction markets don’t put their thumbs on the scale; they’re truth-seeking mechanisms that let users set prices themselves through their bets, producing odds that reflect the crowd’s, not the house’s, best estimate. That’s why some news outlets quote Polymarket odds; they (probably) better reflect sentiment than Vegas odds.

Here’s the hitch: Prediction markets have sidestepped a lot of U.S. gambling regulations by arguing that they’re not betting platforms at all — they’re trading platforms that deal in futures contracts. (The Atlantic published an explainer last week.) And so far U.S. regulators haven’t stopped them from effectively making sports betting legal nationwide under this argument. In Canada, Polymarket operated without a license in Ontario for three years before authorities cracked down.

Prediction markets are rekindling some old debates about trading: The point of this story isn’t to inform you of exciting new ways to lose your shirt. What’s fascinating to us is that there has always been a fuzzy line between investing and gambling, and prediction markets are just making that line blurrier. Robinhood, the major U.S. brokerage, now runs prediction markets. CME, the operator of a giant futures exchange, is launching its own prediction market. And the New York Stock Exchange’s parent company invested US$2 billion in Polymarket. But perhaps the most striking example of how prediction markets are melding together traditional finance and gambling is that you can now bet on equity prices on Polymarket, like you would a futures exchange.

It’s not our place to tell you what to make of any of this stuff. What we can say is the debate over what everyday folks should or shouldn’t be allowed to bet on/invest in goes back decades. Prediction markets are just the latest development. Will people lose money on them? No doubt. But as Bloomberg Opinion’s Matt Levine noted, if you believe in the democratization of finance, as Robinhood certainly does, that means letting people do what they want with their money, even if they don’t always make the wisest decisions — like, say, betting on Elon Musk’s tweeting habits.

Written By

Brennan Doherty

Brennan Doherty is an education writer and researcher for Wealthsimple. His work has appeared in the Toronto Star, The Globe and Mail, TVO Today, MoneySense, BBC Business, and other publications.