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Interest among U.S. financial institutions in contracts that allow them to bet on future events is growing, spurring new growth in a market known for regulatory battles over the legality of political gambling.
Interactive Brokers, founded by electronic trading pioneer Thomas Peterffy, is on Monday launching its own platform, ForecastEx, which offers contracts based on the release of key economic data.
In April, Susquehanna International Group, a trading firm co-founded by billionaire Jeff Yass, launched a dedicated team to make markets on Karsi, a platform that gives users the opportunity to speculate on a range of events, from whether the Federal Reserve will cut interest rates this year to critics’ reviews of new movies.
Event contracts are usually structured as yes or no bets that pay out $1 per contract if correct and $0 if incorrect, and before they expire, the price changes to reflect the change in odds.
ForecastEx launches contracts tied to widely watched economic data such as the weekly jobless claims report and the monthly consumer confidence index.
Steve Sanders, head of marketing and product development at Interactive Brokers, said he expects interest from a wide range of clients.
“Hedge funds will find ForecastEx useful in providing insurance for their portfolios, and individuals will find it useful not only as insurance but also in helping them anticipate where these indices are going to go,” he added.
SIG’s involvement with Qarshi has so far focused on financial services: Founder Tarek Mansour told the Financial Times that monthly trading volumes have grown 227% in the past year, and 88% in the three months since SIG joined. Qarshi is in talks with several brokers about offering their clients connections to its platform.
“A firm with an institutional market maker position like SIG has a lot to bring to a growing market like ours,” Mansoor said, welcoming Interactive Brokers’ move. “This will bring more credibility, education and interest to the market, which we’re excited to see.”
John Aristotle Phillips, founder of PredictIt, the only U.S. site offering contracts on the outcome of the U.S. presidential election under a 2014 contract that regulators are trying to invalidate, said many of his company’s users are from the financial industry.
“They have to be paying attention in their day-to-day jobs to, say, who’s going to control Congress or who’s going to be the next Supreme Court justice. These people are going to be following events,” he said. “Investors are very concerned about political risk, and that’s evident in the people who are betting on the odds.”
The growing involvement of financial companies comes as regulators consider new restrictions on the events that can be traded. Because these are essentially futures contracts, the market is overseen by the Commodity Futures Trading Commission.
PredictIt operates as a non-profit organization in partnership with a New Zealand university and is currently fighting the company in court after the CFTC revoked a 2014 “no action” letter in 2022 that essentially allowed it to provide data for academic research.
In 2023, Karsi sued the CFTC after the watchdog barred him from offering election-related contracts. Both cases are pending.
However, the CFTC launched a new policy in May, proposing rules to specifically ban contracts based on political contests, award ceremonies and sports competitions, saying they are “contrary to the public interest.”
CFTC Chairman Rostin Behnam has argued that regulating futures trading on these particular topics would go far beyond the commission’s authority. He singled out political contracts in particular, arguing that they risk undermining Americans’ “unique experience of democracy” and turning the watchdog into “election police.”
In its proposal, the CFTC noted the rapid growth of prediction markets, noting that the number of new contracts being signed each year since 2021 has exceeded the number signed over the past 15 years combined.
“I’m hopeful that (the CFTC) will take as light a step as possible and give people a chance to try to innovate and see what happens,” said Eric Zitzewitz, an economics professor at Dartmouth College who studies the markets.
“Prediction markets are a very useful way of aggregating people’s opinions on a particular subject, and are probably more meaningful than taking the average of what everyone is saying. It’s like an average, but weighted by how much people are willing to back their opinions with money.”
