The industry is no stranger to prediction markets, from early political wagers in the 1500s to the first modern prediction market widely recognised as the Iowa Electronic Markets (IEM). Now momentum is surging, with the conversation shifting from curiosity to conviction. Today, participants are no longer just watching, they’re beginning to actively buy into the future of these markets, driving the debate: where does institutional interest in prediction markets trading lie?
Specifically, these platforms offer event-based contracts – allowing investors to trade on the likelihood or outcome of real-world events, ranging from sports games to political elections, or even, as has become increasingly popular, when popstar Taylor Swift is likely to marry her NFL beau.
Proprietary trading firms, in particular, appear to be capitalising on this growth, due to the markets’ flexibility and fewer regulatory restrictions. Speaking to The TRADE, Matt Barrett, chief executive of Adaptive, highlighted how the past decade specifically has been subject to this period of change.
“We’ve seen a very interesting development of markets over the last 10 to 15 years. Fast forward through Covid, and institutional and proprietary market makers providing liquidity into crypto and novel digital assets, we find ourselves now with a brand new emerging asset class – event-based contracts.”
This growth has also been translated into recent headlines, with several firms making their push into prediction markets. Recently, for example, Tradeweb announced a partnership with Kalshi, integrating the prediction market’s real-time event probability data into Tradeweb’s electronic trading platform, making the datasets available across its rates and credit marketplaces via user interfaces, APIs and data-download tools used by institutional clients.
In a similar vein, exchanges are also jumping on this bandwagon, with Cboe’s recent Q4 earnings call revealing that the firm is planning to launch event prediction markets in Q2 2026.
With the industry appearing to ride the wave of the prediction markets boom, the question now is – ‘where do these markets add the most value?’ and ‘what challenges do they pose to those looking to trade on these platforms?’
All roads lead to the buy-side
While some market participants are beginning to try their hand at prediction markets trading, drivers for the buy-side to get involved are less clear.
Explaining this, Will Mitting, founder and managing director at Acuiti, said: “I think you are likely to see some firms enter prediction markets but limiting their activities to trading in certain sectors, however the lack of regulatory clarity is likely to slow adoption of prediction markets from banks and hedge funds.”
While some firms may be interested in testing the waters, it appears that the overarching buy-side view is to err on the side of caution, and even stay away completely from prediction markets. Buy-side participation in these markets is currently low, largely due to structural, regulatory and reputational hurdles.
In particular, overlaps of sports and gambling, as well as crypto exposure in prediction markets may be a key deterrent for buy-side firms, due to these contracts’ unsuitability for client capital, such as pensions. For example, almost 40% of Polymarket’s trading volume in early 2026 constituted sports-related betting, an area which is of limited interest for many buy-siders, as well as some institutional firms.
As Jesse Forster, head of equity market structure and technology at Coalition Greenwich, commented: “When I talk to people about prediction markets, if I put two and two together and look out in the room I don’t think there’s going to be institutional trading in these markets. This is not a unique thought – I don’t think it’s about hedge funds necessarily trading off this.”
However, despite potential resistance from buy-side participants to venture into these markets, several industry voices also highlighted the importance of prediction markets’ data and the ability to manage risk offered by these contracts, which may be beneficial to the buy-side, and wider industry.
Getting your foot in the door
For many, the driver for retail participants engaging in prediction markets is clear – the opportunity to take a position on macroeconomic, real-world events, and find a new way to speculate and hedge everyday risks, instead of traditionally buying stocks or bonds.
Through this, prediction markets, in essence, make trading more digestible for a retail investor, however behind this also lies significant benefits for institutional participants.
As previously mentioned, proprietary trading firms are beginning to interact in ways such as hedging macro uncertainty like monetary policy or election outcomes.
Explaining this trend, Flatley said: “[These firms] already trade event-driven risk in the form of options or credit default swaps, so they’re comfortable with imperfect liquidity and value real-time probability signals, not just P&L.”
Similar sentiment was also echoed by Mitting, who added that some proprietary trading firms are attracted to these markets due to the opportunity to trade significant retail flow, which may prove difficult in currently crowded markets.
He also added that this proprietary trading traction may be fuelling interest from other sectors of the industry.
“Our research has found that prop firms are the furthest ahead with regards to adoption of prediction markets. Prop firms tend to be early adopters of new markets as they can move quickly and test new ideas. The interest from prop firms is moving some sell-side firms that serve that market to explore offering access to prediction markets but that is at a nascent stage today.”
For Bob Fitzsimmons, executive vice president, co-head of multi-asset clearing and prime services at Wedbush Securities, the growing appetite for prediction markets among some institutional investors is positive, and opens up an exciting opportunity for diversification and growth across the industry.
He said: “We’re really seeing a democratisation of the financial space. Essentially, we’re building a liquidity pool of speculators, though within a framework of limited risk. Much of this activity resembles fully paid-for options – you put up only the money you can afford to lose. But fundamentally, futures markets have always been about risk transference.
“The blossoming marketplace emerging from this has enormous potential for the industry as a whole. Therefore, this reflects how much is happening in the space right now and the significant opportunity to leverage the infrastructure of today’s futures markets.”
Specifically, a key opportunity presented by trading in prediction markets is the possibility to gain access to early warning signals across the industry, and quickly and efficiently manage risk.
Highlighting this, Rob Flatley, chief executive of TS Imagine, said: “Prediction markets offer a glimpse into how institutional risk may be expressed in the future. For decades, traditional financial contracts have tracked risk continuously as prices shift, valuations update and exposure evolves. Event contracts are an entirely different proposition – either something happens or it does not.”
In particular, trading event-based contracts may offer valuable positions during periods of volatility. In addition, with recent examples such as the impact of the 2025 ‘Liberation Day’ tariffs on the markets, being able to navigate and ride the waves of market turbulence, is increasingly becoming a vital skillset for traders, with prediction markets offering a potential helping hand.
“Event contracts make risk explicit, rather than leaving it buried in volatility and correlation models,” Flatley added.
“Their probabilities and their velocity can be incorporated as forward-looking inputs to value-at-risk models and provide market-implied weights for stress test scenarios. In addition, event probability can be treated as a systematic risk factor in multi-factor models, alongside rates, credit, equity volumes, and macro indicators, while prediction market prices update continuously, providing a real-time sentiment indicator that is both incentive-aligned and transparent.
Sudden moves in prediction markets odds – especially on policy, regulatory, or geopolitical contracts – can serve as early warning signals for portfolio managers and risk committees.”
In addition, a further institutional attraction may lie in the makeup of event markets themselves – that they are already integrated into the financial system. Specifically, these contracts are derivatives, and so are already subject to existing custody models, settlement arrangements, and market infrastructure, therefore making it easier for interested participants to seamlessly transition into using these markets.
In data we trust
When trying to get to the bottom of where the most value-add lies for institutional players looking to participate, or leverage prediction markets, the answer appears to continuously route back to the benefits that the data provided from these markets can offer.
While the entire industry is not unanimous on how beneficial prediction markets may be to them, data is one section of this landscape that appears to have piqued the interest of many, including the buy-side. Specifically, prediction markets can quantify uncertainty around complex and rare events, providing real-time probabilities for geopolitical and economic outcomes, as well as price and behaviour shifts, which can act as early risk signals for traders, and the wider industry.
Taking this into account, murmurs across financial markets are recognising the invaluable nature of these signals, to act as market data services that can be used across many aspects of the industry, such as for navigating complex market dynamics, which could become a niche input for quantitative strategies.
Speaking about this interest, Forster said: “In the short term, data is the low hanging fruit of prediction markets. Unlike 24-hour trading, there’s demand from the institutional equities investment community – not necessarily for a marketplace for them to trade on, but for the data that will be generated.”
Building on this, in January 2026, Coalition Greenwich released its ‘Prediction markets: It’s all about the data’ report, detailing how 60% of respondents to the study – which included buy- and sell-side traders, market structure analysts, business heads, market data experts, fintech providers and other professionals – are looking at these markets as a new source of data for speculation, specifically to initially provide support traders by helping them to generate alpha through direct trading, or gather insights based off market outcomes.
In addition, the study also went further to highlight that 43% of respondents currently believe that prediction markets will offer a new source of alternative market data for hedging, while a third also built on this, to suggest that these platforms will provide new hedging approaches which differ from traditional markets.
As Forster puts it: “Data is the blood of the industry. With the data generated from prediction markets, the exchanges can then go and resell this. The key thing is not necessarily having new instruments to trade, speculate on, or to capture alpha, but it’s about absorbing and consuming these additional alternative data feeds.”
Despite this, the real advantage for institutional participants will depend on how easily this data can be integrated into existing workflows and operationalised. For many, including Barrett, this is not a quick fix for the industry, and is something that will likely take some time to be fully established.
“At the moment, the data is useful for firms if they do a lot of manual curation and analysis, but I think it’s going to take a few years before you can just buy a market data feed from these sorts of markets and plug it into your business,” Barrett added.
Keeping a card up your sleeve
According to a recent Coalition Greenwich study, 19% of the US-based market structure specialists surveyed felt that prediction markets encourage gambling, and have the capacity to produce negative effects on the industry, such as introducing additional risk noise, rather than actionable signals.
Questions around the interplay between prediction market trading and gambling have frequently come coupled with rising debate around this growing industry sector, and have, as a result, also brought the topic of regulation, and whether this is needed, in to play.
As previously discussed, a lack of regulatory reckoning may be deterring some participants, particularly the buy-side, from venturing into prediction markets, and an absence of regulation appears to be causing a fog to descend on many who are uncertain of where the boundaries lie between trading and betting.
“What we’re seeing is a split between something akin to gambling and investing,” said Barrett. “It’s a different form of financial activity from investing into your pension for a payoff in 25 years’ time. But is it just gambling?”
Regulation has long existed around prediction markets, with the US Congress granting the Commodity Futures Trading Commission (CFTC) exclusive jurisdiction over all commodity derivatives markets, including prediction markets – an authority which the commission reaffirmed publicly in February this year, following several lawsuits filed to CFTC exchanges to regulate or restrict access to event-based contracts.
Debate around regulation has also sparked commentary from the US Securities and Exchange Commission (SEC), with commissioner Hester Peirce saying at the recent Equities Leaders Summit in Miami: “We’re not trying to regulate prediction markets generally, although there may be pieces of prediction markets that do fall within the SEC’s jurisdiction. Most of the action so far has been at the CFTC and state gaming regulators. But again, when it relates to issuers, there may be a case for us to regulate them.”
Pierce also addressed concerns around insider trading related to prediction markets, stating that these issues should be treated as employment policy matters rather than unique regulatory challenges.
“Prediction markets are really interesting and at a base level, they can be really good ways of drawing people’s knowledge in and putting it in a forum that the rest of us can use. That, however, also leads to the issue that maybe people are taking knowledge that they’re not supposed to be making public through their prediction market bets. Fundamentally, that’s an issue that relates to a person’s relationship with their employer. If that’s what they feel, employers should have rules saying you can’t trade on prediction markets.”
Similarly, the value of prediction markets in the eyes of regulators was also recognised in a recent paper published by the Federal Reserve, which evaluates the accuracy of prediction market-implied forecasts from Kalshi. As a result of the study, the paper concluded that “Kalshi markets provide a high-frequency, continuously updated, distributionally rich benchmark that is valuable to both researchers and policymakers,” indicating the regulatory backing garnered by prediction markets, amid uncertainties currently bouncing around the industry.
While questions remain around where the boundaries blur between trading and gambling, and what role regulation should assume within all this, growing institutional interest appears to be highlighting that prediction markets being recognised for the value they can provide to the markets. However, this trajectory may depend on whether regulators can strike the right balance between protecting market integrity and allowing the mechanisms that generate these forecasting signals to develop.
The wave of the future?
As interest around prediction markets continues to grow, the industry is now asking how market structure will evolve with this. Over the course of 2026, several events, such as the upcoming FIFA World Cup beginning in June this year are set to see interest in these markets growing even more, at least from a retail perspective.
However, as many industry experts have highlighted, ensuring the correct infrastructure is in place will be key to prediction markets’ success from an institutional standpoint.
As Flatley highlighted: “Institutions are participating today, albeit still in small size, through ring-fenced allocations, often via proxies or observation rather than direct balance-sheet risk. This is classic pre-infrastructure adoption. Institutional adoption will not be blocked by belief, regulation, or demand, but by the absence of institutional risk plumbing.
“We need purpose-built markets models for binary event contracts, cross-margining agreements with traditional CCPs, standardised market data integration, and operational infrastructure for event-driven settlement.
“Once event markets clear, margin, and fail gracefully like any other derivative, they will be treated as exactly that.”
For now, we appear to be at the early stages of this boom, and for many, 2026 will serve as the building block year for scaling these markets at a large institutional scale.
Reflecting on this, Barrett summarised: “Right now, we’re in the early stages of this whole space maturing. 2026 is going to be the year of building and 2027 is going to be the year of making these things work at scale and seeing what the institutional inflow will be.”