Small business owners grappling with unique, potentially costly risks are increasingly exploring prediction market platforms as a practical way to hedge exposures that conventional financial markets have not addressed.
Mark Murrell, founder of Get Maine Lobster in Portland, Maine, confronted a familiar dilemma: routine discounts are expensive and, in his words, "boring." For International Lobster Day on September 25, Murrell wanted a promotion that would stand out. Rather than relying on standard markdowns, he joined a small group of entrepreneurs experimenting with event-based contracts executed on prediction market platforms to shift the financial consequences of unusual outcomes away from their firms.
Traditionally, larger companies have relied on Wall Street instruments to manage a wide spectrum of risks - from interest-rate moves to crop shocks - while smaller enterprises have often been unable to access tailored hedges because their needs appear either too modest or too idiosyncratic. A number of firms are now attempting to bridge that gap by translating niche insurance problems into tradable market contracts.
"Hedging is not a well-known way to use event contracts yet, but my job is to build out one-off hedging solutions and hedge risks that would previously have been unhedgeable," said Eric Passmore, a senior trader at Susquehanna International Group. Susquehanna has been active in structuring bespoke arrangements, working with market operators and fintech startups to construct event contracts that deliver payouts when specified conditions are met.
One notable example involved a collaboration among Susquehanna, prediction market operator Kalshi, and Castle Technologies, a specialty finance startup founded by four Stanford University alumni. The three designed a tailored contract for Western Grazers, a goat herding firm concerned about a legislative gap in California labor law that could sharply raise labor costs for the companys eight full-time goat herders. The contract is structured to pay founder Tim Arrowsmith $500,000 if California legislators fail to address the regulatory gap.
Adapting markets to idiosyncratic exposures
Castle Technologies co-founder Lucas Cavalieri framed the effort as a translation of an insurance challenge into a market-based solution. "The world today is a much more volatile place for smaller businesses trying to cope with real world risks and existing products just havent caught up," he said. In common arrangements, a small-business owner pays a modest premium for a contract designed to offset the financial hit of an unexpected cost increase or a low-probability event that could undermine demand for goods or services.
For the hedging provider and market makers, these bespoke contracts create new revenue streams while allowing smaller firms to transfer specific risks they otherwise could not efficiently insure.
Regulatory debate over event contracts
The rise of event contracts has also sparked regulatory debate. The Commodity Futures Trading Commission has treated Kalshi, Polymarket and other prediction market platforms as venues for swaps and therefore subject to CFTC oversight. In contrast, some state regulators have argued these contracts resemble sports betting more closely than regulated financial instruments.
Critics worried about the gaming element include Ben Schiffrin, director of securities policy at Better Markets, who argued that "describing what is really a sports bet as a hedge is trying to pull the wool over peoples eyes." He suggested that, for many users, the underlying contracts will amount to gambling.
A spokeswoman for Kalshi contested that characterization, saying the firm operates differently than a sportsbook. "A hedge on sports is still a hedge - youre taking the other side of a trade to cover risk," she said. That distinction underpins the use of event contracts by several small businesses seeking to protect themselves from the financial consequences of event-linked promotions.
Use cases: promotions, shipping costs and targeted rebates
Some small companies have used prediction markets to immunize themselves from the payout obligations of promotional campaigns tied to sporting or other unpredictable outcomes. During this years NBA playoffs, a New York City bar offered patrons refunds on bills if the New York Knicks won, then used Kalshi to take the opposite position by betting on the Knicks loss. Returns from that trade were intended to offset the promotional cost that would otherwise have depressed the bars profits.
Angelo Ferro, founder of Playably, is building a business to help clients design these kinds of promotions. He is assisting Murrell with the lobster-day campaign, and is considering several event contract structures; one option would fully refund a group of customers who place orders on International Lobster Day if Maine lobstermen catch a cotton-candy-colored lobster before the end of the season.
Similarly, Jen Yu, co-founder of skincare company Jaxon Lane, is launching a U.S. Open-linked promotion offering customers a full rebate if either of the top-ranked U.S. male players, Taylor Fritz or Ben Shelton, reaches the final. The promotion is calibrated to appeal to the company's target demographic - adults in their 30s and 40s who play tennis - and to help drive engagement and repeat purchases without relying solely on advertising spend.
Commodity-linked hedges for operating costs
Not all contracts are tied to sports or promotions. James Fayal, founder of Zest Tea and a former venture investor, used Kalshi to build an event contract linked to the average index value of a key container-shipping-cost index. Facing elevated freight costs, he designed the contract so it would cover as much as half of a substantial surge in his shipping expenses. Fayal characterized those contracts as genuine hedges, not gambling, saying they address operational risks that could threaten small companies.
Outlook and limits
While the cohort of small businesses employing prediction market contracts remains small, the examples show multiple ways the tools can be applied - from underwriting promotional refunds to shielding firms from sudden cost shocks driven by shipping indices or regulatory change. Participants include market operators, trading firms and startup finance providers that together create bespoke event contracts aimed at outcomes highly specific to a given business.
At the same time, regulatory uncertainty continues to hang over the space. Whether such contracts are treated as regulated swaps or categorized as betting activity carries implications for how readily they can be offered and who will use them. For now, entrepreneurs and intermediaries are treating event contracts as practical instruments to translate narrowly defined exposures into tradable outcomes, while policymakers and critics debate the proper label and oversight for those instruments.
As small businesses test these market solutions, the range of available contracts and the appetite of firms to pay for protection will determine whether the practice remains a niche experiment or becomes a more widely used risk-management tool.