In recent months, online platforms where users can place bets on outcome of an endless variety of future events (from outcome of sports events, political election to geopolitical events) have gained enormous traction. Instead of trading an asset (like a stock or bond) on a financial market, a user participating in these so-called prediction markets, simply creates a position (places a bet) on whether a particular event will occur in the future or not.
The sector has managed to accumulate over USD 44 billion in annual volume in the last two years, as well as to come up with some new forms of prediction arrangements that involve predictions on the market movements for financial assets (like the direction of the S&P 500 index). This latest by-product of the prediction market sector could arguably lead platform operators to step into the financial services arena.
Prediction markets in a nutshell
In a nutshell, each contract (commonly known also as an “event contract”) is structured to have a binary outcome (Yes/No) and is priced between EUR 0.01 and EUR 0.99. The face value of the event contract implies the probability of the predicted event occurring (e.g. contract with market price of EUR 0.50 has 50% chances of the event materialising as predicted). Each event contract has an underlying event that is generally phrased as a clear question such as: “Will S&P 500 index exceed EUR 7.000,00 over the next two months”.
Where the predicted event occurs, the user who purchased “Yes” side of the event contract receives EUR 1.00 per contract thereby realising profit corresponding the difference between face value of the event contract and EUR 1.00 (e.g. in the case of an event contract with EUR 0.30 face value the user realises a profit of EUR 0.70 per contract purchased). Consequently, others who purchased the wrong side of the event contract (in this case “No”) receive nothing.
Two major prediction market platform operators that dominate the sector, operate based on two different operating models. One of them operates a centralised model, based on a central matching system which matches orders in a similar way stock exchanges do. The other, utilizes a hybrid model that combines blockchain based settlement with off-chain order matching process. This difference in operating model also has important regulatory implications that are discussed in further detail in subchapters below.
Questionable regulatory status
As transaction volumes on these platforms grows, so too does the interest of the regulators wo tend to be increasingly conscious of the possibility for manipulation in these unchartered waters of prediction markets sector.
There is a very high degree of regulatory ambiguity when it comes to defining the exact regulatory status of prediction market platforms. The same goes for the approach that different countries take to this matter spanning from countries that see them as commodity trading platforms or countries that see them as online gambling websites to countries that still cannot fit them into any category.
The first reaction in the EU to the rapid growth of prediction market platforms, came (as expected) from authorities responsible for overseeing online gambling industry. To that end, as of March 2026, authorities in several EU Member States (incl. the Netherlands, France and Spain) have already banned operation of major prediction market platforms in their jurisdictions by seeing their activities as illegal online gambling. Public warning statements geo-blocking and blacklisting measures followed.
While the debate between operators of prediction market platforms and the regulators as to whether prediction market related activities constitute online gambling is still ongoing, there is a growing interest among regulators and policymakers regarding the potential application of financial services regulations to these platforms. Whether and to what extent the business activities of prediction market platforms fall within the scope of financial services regulation depends largely on whether the contracts concluded between users are regarded as regulated financial instruments under the relevant law of the jurisdiction in question.
Event contracts as regulated instruments
To answer this question, one must first examine the inherent nature of the “event contract” that users enter into when placing a bet on prediction market platforms.
At first glance, these contracts appear to be very similar to well known binary options that have been a long-lasting headache for regulators around the globe who seek to protect retail investors from risks associated with this highly volatile trading practice.
Same as event contracts, binary options enable the parties to place their bet on the occurrence of a particular event within a specified timeframe (e.g. S&P 500 reaching specific threshold within the next 30 days). The underlying event of binary options is generally a financial asset like a stock, bond or a stock index. As such, binary options generally constitute derivative instruments and thus financial instruments within the meaning of Annex I Section C of the MiFID II Directive. Nonetheless, it’s important to emphasize that an instrument can likewise fall under the definition of a regulated derivative contract where the underlying event relates to market movements of a currency, interest rate, emission allowances, commodities or even climatic variables (i.e. weather prediction).
Consequently, binary options fall under the scope of the financial services regulation in the EU, and their trading is subject to compliance with the securities trading regulations in the EU (most importantly the MiFID II Directive and conduct wise the EU Market Abuse Regulation “MAR”).
The position in the United Kingdom is fairly similar: the Financial Conduct Authority generally treats binary options with underlying events related to financial assets (incl. stocks, bonds but also interest rates, emission allowances and commodities) as specified investments within the meaning of the Regulated Activities Order (“RAO”). Therefore, all activities related to these instruments are subject to compliance with the regulatory framework based on the Financial Services and Markets Act (FSMA) 2000.
On the other hand, the underlying events of event contracts traded on prediction markets cover a much broader spectrum that may encompass events that are not related to economics or finance (like outcome of a sports match or political elections). Consequently, these contracts generally fall outside the scope of the financial services regulation in the EU due to the lack of proximity to the financial services sector. Nonetheless, given the increasing regulatory scrutiny of prediction markets as well as recent regulatory enforcement actions across the EU, it’s fair to conclude that the closest alternative regulatory framework that these instruments would fall under are applicable gambling regulations.
Market manipulation
The rapid growth of prediction markets and increasing transaction volumes have also opened the space for misuse especially given the widespread regulatory uncertainty in this sector. It was therefore unsurprising to many once enforcement authorities in several countries have started arresting several individuals (from members of sports teams to members of armed forces) on suspicion of using non-public information to enter event contracts on major prediction market platforms.
But what was the legal basis for this? The answer to this question depends on the regulatory qualification of the event contract at hand.
Where an event contract falls within the scope of the applicable securities trading regulations in the relevant jurisdiction (like the MiFID II framework in the EU), entering into such event contract based on a non-public information related to the underlying event can constitute insider trading which is a criminal offence punishable by imprisonment and/or monetary fine. The same applies to trades in event contracts that constitute market manipulation, for instance when a user enters an event contract with the aim of driving up or down the price of the contract in question. The example for this would be a user buying a large position (e.g. no position) in an event contract, thereby driving down the price of the event contract, with the aim of shortly thereafter purchasing the opposite position at significantly lower cost (and later, achieving greater profit once the event materialises).
Where the event contract does not constitute a regulated financial instrument and therefore falls outside the regulatory perimeter of MiFID II and MAR the situation is much more complex, since in such cases there is hardly any directly applicable conduct regulation that would treat this as a regulatory breach. Nonetheless, this does not protect perpetrators from facing potential criminal proceedings for fraud under the applicable law or civil proceedings that the platform operator can commence for breach of the applicable terms and conditions of the platform.
The way ahead
The rising public interest in prediction markets and the number of active users of these platforms shows no signs of slowing down. On the contrary: some established trading venues have started expressing interest in introducing stock options that would enable financial market participants to place yes/no bets on the market direction of financial assets such as S&P 500 index.
Whilst the regulatory status of the envisaged activities of established trading venues is largely predictable, the regulatory qualification of the evolving business models of unregulated prediction market platform operators remains far less clear. Sitting at the intersection of online gambling and derivatives trading, prediction market participants are faced with a high level of regulatory ambiguity especially when it comes to dealing with market manipulation and insider trading that depending on the regulatory qualification of the event contract at hand, may be subject to securities related market abuse laws and regulations like the EU MAR. Operators of prediction market platforms are arguably faced with an even higher degree of regulatory ambiguity especially when expanding into new territories where the regulatory qualification of their business activities may not be the same as in their home jurisdiction.
It remains to be seen whether policymakers in key jurisdictions will indeed follow the advice of some voices in the industry and try to create a separate category of regulated instruments designed to capture event contracts that follow outside the scope of the existing securities trading regulations. In the meantime, effectively navigating complex and sometimes conflicting regulatory frameworks remains essential for entities operating within the prediction market sector.
