Prediction Markets — Legitimate Trading or Gambling?
The past several years have witnessed widespread growth in online sports-betting sites like DraftKings, FanDuel, and others. While these services are being endorsed and promoted by professional sports leagues, nearly twenty states, including Texas, prohibit their use because they violate the states’ gambling laws. Does that mean that it is illegal in these states to offer online services that allow customers to make or lose money based on the customers’ predictions about the outcome of a game or other event? For the time being at least, the answer is “no” due to the rise of so-called “prediction markets.”
What are prediction markets?
Strictly speaking, “[p]rediction markets are marketplaces where participants buy and sell contracts tied to the outcome of future events.” (Fidelity Investments, What are prediction markets?, June 24, 2026) Leading prediction-market platforms include Kalshi, Polymarket, OG, and Robinhood. Each of these is implemented using different technologies and may be subject to differing regulatory structures, but fundamentally, they all involve the trading of contracts based on predictive outcomes of future events.
In a prediction market, the contracts are typically structured as the two possible outcomes in a binary “yes”/”no” scenario. A simple hypothetical example might be: Will the Dallas Cowboys defeat the New York Giants on September 13, 2026? There are two possible outcomes — “yes” and “no” — and a participant may purchase a contract on either outcome. Assuming that a correctly predicted contract will have a settlement price of $1.00, and an incorrectly predicted contract will have a settlement price of $0.00, the variable is the contract trading price. In our example, if the market believes that Dallas has a 65% chance of winning, a “yes” contract will have a contract trading price of $0.65, meaning that a participant holding a “yes” contract will make a net profit of $0.35 ($1.00–$0.65) if Dallas wins the game. If Dallas does not win (either New York wins or the game ends in a tie), a participant holding a “yes” contract will lose its entire $0.65 investment.
In this example, before the game, the contract trading price may fluctuate due to market sentiment or other factors. For example, if a star player on either team gets injured, the trading price may change as the market reacts to the varying expectations.
Of course, prediction markets are not limited just to sporting events. Theoretically, they can exist in any scenario where a market can be defined based on the outcome of a future event. Commonly, prediction markets may be used for election results, business announcements, inflation determinations, Federal Reserve Board interest-rate determinations, and other governmental actions. Prediction markets have been around since 1988 (Commodity Futures Trading Comm'n, Understanding Prediction Markets and Event Contracts), but they have seen rapid growth in recent years with the rise of consumer-directed online platforms.
From the consumer’s perspective, when it comes to wagering on sporting events, there is little difference between sports-betting platforms and prediction markets other than nomenclature use. If someone wants to put money on a particular team to win a game, a sports-betting platform will provide odds that will dictate the amount that the bettor will be paid if his team wins, while a prediction market will provide a market price for a contract that will settle for a given amount if that same team wins. The effect is the same for the consumer, but the prediction-market platforms dispute that their services are gambling.
The rise of sports gambling
Sports gambling has been regulated primarily under state law. In 1992, however, Congress passed the Professional and Amateur Sports Protection Act (“PASPA”), which in general terms, prohibited any state from authorizing sports gambling. Pub. L. 102–550. Under PASPA, Nevada was permitted to continue allowing casino sportsbook wagering and three states’ sports lotteries were “grandfathered,” but the law prohibited expansion of sports betting to other states.
For two decades, PAPSA was unchallenged, but in 2012, New Jersey sought to allow sports betting in Atlantic City casinos. After years of litigation, the NCAA’s suit relating to New Jersey’s authorization of sports betting arrived at the Supreme Court. And in 2018, the Court struck down PASPA as unconstitutional, ruling that whether and to what extent to allow gambling is primarily a policy matter left to the states unless Congress specifically regulates it, which PAPSA did not do. (Murphy v. Nat'l Collegiate Athletic Ass'n, 584 U.S. 453, 487 (2018) (holding that Congress could not direct states to take action, or refrain from taking action, relating to the states' gambling laws and regulations))
Following the Supreme Court’s ruling, an increasing number of states began allowing sports betting. As of now, only eleven states, including Texas, have an outright prohibition against all forms of sports gambling. Some states allow sports betting in casinos but not online. And while the online sports-betting platforms employ sophisticated technology to prohibit wagers being placed from jurisdictions where sports gaming is illegal, gamblers sometimes use techniques like geolocation fraud (e.g., using VPN technology or out-of-state networked computer terminals) or proxy betting (e.g., having an out-of-state agent place wagers) to circumvent local restrictions. These techniques, however, are generally illegal. (Ass'n of Certified Gaming Compliance Specialists, Geolocation Fraud and Proxy Betting: Challenges for Sportsbooks)
Sports gambling, especially through online platforms, has blossomed into a huge industry, but in states like Texas, efforts to repeal the prohibitions have faced opposition, including from the Lieutenant Governor, and have thus far failed. (Paul Cobler, Pro-gambling interests fail to gain ground in Texas primaries as legislative roadblocks remain, The Texas Tribune, Mar. 6, 2026)
Prediction Markets — A Legal Alternative?
Even in states that prohibit sports betting, consumers have access to prediction-market platforms where they can “wager” based on a prediction of the outcome of a defined event such as a sporting event. The platforms, of course, are careful not to use words associated with gambling to describe their services. Instead, they describe the services using language akin to futures trading, and they insist that their platforms do not provide or authorize gambling of any type.
Differences that prediction markets point to as distinguishing them from gambling sites include (1) the party against whom the customer is “wagering”; (2) who sets the price; (3) whether the platform receives an advantage; and (4) the ability to exit before the event. (Kyle Collis, Prediction Markets vs. Sports Betting: Key Differences Explained, Sports Illustrated, July 29, 2026) First, in prediction markets, the contract is placed through the platform, but the participant is not actually wagering against the platform itself, but rather, the platform facilitates peer-to-peer contracts with other traders predicting a different outcome. This differs from a typical sportsbook, where a wager is directly against the house. Second, in this way, unlike a sportsbook, which sets the odds, the trading price of a prediction market will fluctuate depending on traditional market forces. So if the quantity demanded of a particular prediction increases, the trading price of a prediction contract for that outcome increases. The prediction-market platforms argue that allowing the trading price to vary with market forces aligns their services directly with traditional futures-trading markets.
Third, in traditional sportsbook gambling, the house always retains an advantage because the odds set by the provider do not correspond strictly to the relative amounts wagered on the outcome of a sporting event. Prediction-market platforms maintain that they do not have any advantage, but rather, collect a standard fee for every contract that is not dependent on the outcome. And finally, unlike for most sportsbook wagers, prediction-market contracts generally may be closed before the event.¹
Are these distinctions enough to avoid state regulation under gaming laws? So far, the answer appears to be “yes,” but there are numerous challenges to that conclusion. Prediction-market platforms like Kalshi argue that they are futures-trading platforms regulated under federal law, and thus, are not subject to state regulations relating to gambling. Facially, this position is correct, as the Commodities Futures Trading Commission, or CFTC, has had regulatory oversight for prediction markets since 2004. (Commodity Futures Trading Comm'n, Understanding Prediction Markets and Event Contracts) Still, the CFTC is struggling to adopt regulations specific to sports-related prediction markets, which have grown exponentially in recent years.
State officials universally oppose exclusive CFTC regulation of sports prediction markets, and 44 state attorneys general sent a letter to the CFTC asserting that sports prediction markets are subject to state gambling laws. (Davis Diangiulio, 44 states are aligned on one thing in their fight against prediction markets. It's about sports wagering, CNBC, July 28, 2026) The states’ concerns include not only potential encroachment on states’ regulatory authority, and for states that allow sports gambling, the associated tax revenue, but also the potential risks associated with insider trading through the use of nonpublic information. ²
There are several lawsuits pending relating to various aspects of prediction markets. In Kentucky, the state attorney general filed lawsuits against Kalshi (along with its “affiliate” Coinbase) and Polymarket, asserting that these businesses were providing sports-gambling services without a Kentucky gaming license or following state regulations. (Press Release, Attorney General Coleman Launches Three Lawsuits Against Illegal Gambling Companies, Kentucky Att'y Gen. Office, June 17, 2026) And on July 31, 2026, New York similarly sued Kalshi for allegedly “running an illegal gambling operation in New York through its prediction market platform.” (Press Release, Governor Hochul and Attorney General James Announce New York Has Sued Kalshi for Running Illegal Operation, New York Att'y Gen. Office, July 31, 2026) These are just recent examples of enforcement actions taken by states. More than twenty actions have been instituted by state governments against prediction-market platforms (A.J.S. Dhaliwal et al., CFTC Sues Minnesota, Bringing Prediction Market Fight to Six States, Sheppard Mullin Consumer Fin. and Fintech Blog, May 28, 2026).
At the same time, the CFTC has taken action to confirm its exclusive jurisdiction over prediction-market regulation. The CFTC has sued at least six states for taking action against prediction-market platforms for allegedly offering unlicensed or illegal gambling services. (id)
Conclusion
The legal landscape remains uncertain, as there have been inconsistent rulings in the courts, with some courts ruling that states lack jurisdiction to regulate prediction markets while others have ruled in favor of the states (id). At least for now, prediction markets remain available, including in Texas, as an alternative to traditional sports betting.
1. ↩ When a contract is closed before the predicted event, the closing price will be the then-current trading price, and the participant will receive a profit of the difference between the contract price and the closing price if the trading price is higher than the contract price and will lose the difference if the trading price is lower.
2. ↩ In one recent example, the CFTC fined disgraced former congressman George Santos for entering into contracts on whether he would attend the 2026 State of the Union Address and using social-media posts to manipulate the market price. Press Release, "CFTC Orders George Santos to Pay $35,000 for Manipulative Trading of State-of-the-Union Event Contract," Commodity Futures Trading Comm'n (July 31, 2026).
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