Prediction markets - a rapidly growing U.S. asset class over the past year - require tighter, more explicit rules to separate legitimate outcome-based financial contracts from outright wagers, the chief executive of a major exchange operator said in an interview.
CME Group Chief Executive Terry Duffy warned that the boundary between swaps, which allow investors to hedge risks, and products that are effectively bets has become unclear. He argued that regulators need to draw clearer lines so that contracts with economic hedging rationale are distinguishable from contracts that amount to gambling.
Regulatory and legal tensions have mounted over platforms that offer event-driven contracts. Polymarket and Kalshi - both under oversight of the U.S. Commodity Futures Trading Commission - have increasingly run into opposition from state gaming authorities. In Massachusetts, state regulators contend that some event contracts violate local gambling laws. The dispute over whether such contracts constitute legal financial instruments or illegal wagers has produced mixed judicial outcomes.
"The courts have gone both ways here, as we’ve seen - some in favor and some opposed to the prediction markets. The states are all over the map on this. I don’t see how it doesn’t go to the Supreme Court for a definition of what is a prediction market on sports, and if that is the same as gambling," said Duffy.
Kalshi recently lost a procedural bid in Massachusetts when a judge denied its request to continue offering sports-related contracts in the state while it pursues an appeal. The ruling leaves Kalshi facing an injunction that would bar it from operating without a state gaming license in 30 days. Separately, Nevada regulators have filed suit to stop Kalshi from offering contracts that would permit residents to bet on sports including football and basketball.
Congressional interest has also risen. Democratic Representative Mike Levin and Senator Chris Murphy are crafting legislation aimed at curbing certain prediction-market practices after well-timed bets placed ahead of U.S.-Israeli airstrikes in Iran raised new questions about the legality and ethics of some trades.
Duffy illustrated his concern by questioning the economic rationale behind highly granular event bets. "If you would have said that the outcome of a game has an economic impact to the vendor who sells beer because he’s going to sell more beer if it’s a good game, or less if it’s a bad game, you could actually make an economic cause for putting a swap on their contract," he said. "But to say that a player is going to get four rebounds and not five, I’d have to ask, what’s the economic sense in that?"
The legal and regulatory frictions come as CME itself has entered the events-trading space. Last year the exchange launched a product in partnership with sports-betting firm FanDuel, named "FanDuel Predicts." That outcome-based offering allows customers to trade contracts tied to global benchmarks such as the S&P 500 and the Nasdaq-100, commodities like oil and gas, and major economic indicators.
As states and courts continue to reach divergent conclusions on how to treat prediction markets, industry participants and regulators face pressure to clarify the rules. Duffy suggested that a definitive legal ruling may be necessary to establish what qualifies as a prediction market for sports and whether that should be treated the same as gambling.
Investment tools and services have noted the interest in exchange-listed firms involved in these markets. One AI-driven research product mentioned CME when assessing companies across financial metrics and highlighting past stock winners, while inviting readers to consider whether CME features in current suggested strategies.
With ongoing litigation, state-level challenges, and potential federal legislation, market participants and policymakers are confronting fundamental questions about the appropriate scope and oversight of outcome-based contracts. The debate now spans courts, state gaming authorities, federal regulators, and lawmakers as they weigh where to draw the line between hedging instruments and wagers.