Prediction Markets, Explained: How They Work and Who Regulates Them
A plain-language guide to event contracts, how prices become probabilities, and what US rules look like in 2026.
What a prediction market is
A prediction market lets people buy and sell contracts tied to the outcome of a future event: an election, an interest-rate decision, a football match. Each contract pays a fixed amount, usually $1, if the event happens and nothing if it doesn't.
Example. A "Yes" contract trading at $0.63 means the market puts the chance of that outcome at roughly 63%.
How prices form
Prices move as traders buy and sell. Most large platforms use an order book that matches buyers and sellers directly. Some use an automated market maker that quotes prices from a formula. Liquidity, the amount available to trade at each price, decides how easily you can enter or exit without moving the price.
How markets resolve
Every market names a resolution source in advance: an official result, a data provider or a public announcement. When the event ends, the market settles against that source. Some platforms use oracles and dispute windows, others resolve centrally. Reading a market's rules before you trade is the most useful habit you can build.
Regulation in the US
In the US, event contracts fall under the Commodity Futures Trading Commission (CFTC). A platform that offers them to the public has to register as a designated contract market or reach customers through a registered broker. Access to some contracts, especially sports, still varies by state, because several states challenge federal oversight.
Primary sources: the CFTC's March 2026 notice on event contracts and its staff advisory on prediction markets.
Prediction markets vs sportsbooks vs options
| Prediction market | Sportsbook | Options | |
|---|---|---|---|
| Counterparty | Other traders | The bookmaker | Other traders, through an exchange |
| Price set by | Supply and demand | The bookmaker's odds | Supply and demand |
| US regulator | CFTC | State gaming regulators | SEC or CFTC |
| Exit before the event | Yes, sell at the market price | Sometimes, through cash-out | Yes |
Risks
You can lose the full amount you put into a contract. Thin markets can be hard to exit, a resolution can be disputed, and gains may be taxable. Treat prediction markets as speculative and only use money you can afford to lose.