U.S.-China Relations
NextFin News - Prediction markets are no longer just betting on elections and sports. Contracts that settle on Apple's share price, the S&P 500's year-end close, Alphabet's quarterly earnings, and Tesla's deliveries are now trading alongside political and sports markets - and that expansion into securities-linked territory has drawn a direct warning from Washington. On July 22, 2026, Representative Sean Casten led seven House Democrats in asking the Securities and Exchange Commission to clarify whether event contracts that reference individual securities, stock indexes, or company metrics disclosed in SEC filings fall under the agency's oversight.
The letter marks the clearest signal yet that the regulatory battle over prediction markets - until now fought mostly between states and the Commodity Futures Trading Commission - is widening into a second front over who polices contracts tied to the stock market. The lawmakers' argument rests on a statutory boundary: under the Dodd-Frank framework, "any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities, including any interest therein or based on the value thereof" is excluded from the definition of a swap and belongs to the SEC's exclusive jurisdiction. If event contracts on Nvidia's stock price or Google's earnings are treated as options on securities rather than generic swaps, the platforms offering them would need SEC-registered exchanges, regulated broker-dealers, and cleared settlement - a compliance architecture none of them currently operates for those products.
The Situation: From Politics to Stock Prices
Prediction markets arrived in force in late 2024, when a federal court cleared Kalshi to offer election contracts 32 days before the presidential vote. The category has since scaled into a mainstream financial activity. Monthly transaction volume grew from about $1.2 billion in early 2025 to more than $20 billion by January 2026, with roughly 840,000 unique wallets participating each month, according to TRM Labs. Congressional Research Service data show Kalshi traded $39.7 billion over the twelve months through February 2026, with about 87% of that volume in sports contracts; Polymarket traded $36.2 billion in the same period, 38% of it in sports.
That growth has come with institutional validation. In October 2025, ICE - the parent of the New York Stock Exchange - announced a strategic investment of up to $2 billion in Polymarket at an $8 billion valuation. Kalshi has brought Nasdaq's market-surveillance technology onto its platform and struck a February 2026 institutional-access deal with Tradeweb, while Dow Jones integrated Polymarket's real-time prediction data across its consumer news platforms. Robinhood offers prediction markets through its Kalshi partnership, exposing the products to its 27 million funded brokerage accounts.
But the product line has quietly stretched beyond sports and politics. The Casten letter identifies contracts based directly on the S&P 500, Nasdaq-100, and Russell 2000 indexes, and on the share prices of Apple, Amazon, and Nvidia. It also flags contracts tied to metrics disclosed in quarterly or annual SEC filings: Alphabet's quarterly earnings, Coinbase's total trading volume, how many restaurants Cava will open, and Tesla's quarterly deliveries. These are not abstract macro events. They settle on numbers that public companies control, disclose on a schedule, and that move listed stocks the instant they print.
Why the SEC's Silence Is the Story
For most of 2026, the SEC has stayed on the sidelines while the CFTC fought the louder war. The CFTC and the Justice Department sued Arizona, Connecticut, and Illinois on April 2, 2026 to reaffirm the agency's exclusive jurisdiction over event contracts. On April 6, 2026, the Third Circuit affirmed a preliminary injunction barring New Jersey from enforcing its gambling laws against Kalshi's sports contracts, holding that the Commodity Exchange Act preempts state law for swaps traded on federally registered exchanges. The CFTC published an advance notice of proposed rulemaking in March 2026 and a proposed rule on June 10, 2026, open for 45 days of public comment.
The SEC's posture has been different: quieter, but more pointed. In February 2026, SEC Chairman Paul Atkins told the Senate Banking Committee that prediction markets sit at the edge of both agencies' authority. "Prediction markets are exactly one thing where there's overlapping jurisdiction potentially," Atkins said. "That is a huge issue we're focused on." He added that the space is "mostly, at least currently, on the CFTC side," but that the agencies "need to be harmonized in the way we're addressing these markets."
That harmonization effort produced the June 18, 2026 joint SEC-CFTC request for public comment on the definitions of swaps and security-based swaps - the very boundary that determines which agency regulates a stock-linked event contract. The request covers definitions relating to swaps and security-based swaps, the scope of exclusions from the swap definition, the treatment of mixed swaps and novel products, and jurisdictional and interpretive questions. In that release, Atkins said, "Clarification is long overdue on Title VII definitional issues, including event-based products," while CFTC Chairman Michael Selig called the joint request "an opportunity to address longstanding ambiguities within Title VII of Dodd-Frank that have stifled fair competition and responsible innovation."
The Casten letter is the political pressure applied to that process. It quotes Atkins's own acknowledgment that prediction markets may involve "overlapping jurisdiction" and that the SEC "ha[s] enough authority" to regulate the space, then asks the agency to issue formal guidance on contracts referencing securities, indexes, or related metrics. Eight Democrats signed it: Bill Foster, Jim Himes, Vicente Gonzalez, Brad Sherman, Ritchie Torres, Gregory Meeks, and Janelle Bynum. The SEC has also previously warned investors about "fantasy stock trading" websites that offer individuals the chance to make money from publicly traded companies without buying stock, flagging that such offerings may violate federal securities laws - a reminder that the agency has been watching this product category for some time.
The Mechanism: What Changes If the SEC Moves In
The difference between CFTC and SEC oversight is not cosmetic; it is a different operating system. The CFTC regulates designated contract markets where participants trade directly on the venue. The SEC's framework for security-based products requires regulated broker-dealers as intermediaries, trading on SEC-registered exchanges, and clearing through registered clearing organizations. The Casten letter states the consequence plainly: securities-linked event contracts "would need to be listed and traded on SEC-registered exchanges, offered by regulated broker-dealers, cleared through an established and regulated clearing organization, and subject to robust investor protections."
That chain has three effects. First, compliance costs rise sharply for any platform that wants to keep offering stock-linked contracts to U.S. users. Second, liquidity fragments: a contract that currently pools all comers on one venue could be forced onto registered infrastructure with access restrictions. Third, and most consequential for the platforms' growth story, the institutional adoption now being courted depends on regulatory certainty. ICE's $2 billion commitment to Polymarket and Kalshi's Nasdaq and Tradeweb ties are bets that the rules will stabilize, not that they will change mid-game.
There is also a market-integrity dimension that regulators on both sides cite. The lawmakers wrote: "We recognize that event contracts tied to the performance of U.S. financial markets may present opportunities for investors and businesses to hedge their risks, protect their portfolios, and offset potential losses. However, without appropriate safeguards, these contracts can be highly susceptible to manipulation and insider trading." That concern is not theoretical. In February 2026, Kalshi closed two cases alleging trading on material non-public information against its own members, and the CFTC's Division of Enforcement publicized them. In March 2026, both Kalshi and Polymarket announced new measures to curb insider trading, and Polymarket updated its rule book to bar trades based on stolen confidential information or by people who can influence an outcome.
The insider-trading risk is structurally different for securities-linked contracts than for sports or politics. An employee who learns an earnings number before it prints - or a supplier who knows Tesla's delivery count - holds non-public information that is material to both the prediction contract and the underlying stock. In a securities framework, trading on that information violates insider-trading prohibitions and can be prosecuted; in a derivatives framework, the protections depend largely on the exchange's own surveillance rules. That asymmetry is the heart of the SEC's potential claim.
The Counter-Argument: These Are Derivatives, Not Securities
The most forceful case against SEC intervention is that event contracts are binary derivatives, not securities, and that the CFTC already has a coherent framework for them. A contract that pays $1 if Nvidia closes above a level and $0 otherwise does not convey ownership, dividends, or voting rights; it settles in cash on an external event. Proponents argue the "option on a security" exclusion in the swap definition was written for traditional listed options markets - puts and calls traded on registered options exchanges - not for all-or-nothing event contracts that merely reference a price.
The courts have so far leaned toward federal primacy. The Third Circuit's April 6, 2026 decision in KalshiEx LLC v. Flaherty held that the Commodity Exchange Act preempts state gambling laws for swaps on registered exchanges, and other courts have reached similar conclusions on CFTC jurisdiction. The CFTC has built a consistent record: it first recognized event contracts in 1992 with the Iowa Electronic Markets, and after the 2008 crisis Congress granted it comprehensive authority over contracts based on a commodity, broadly defined. At least eight CFTC-regulated designated contract markets have collectively self-certified more than 3,000 event contracts.
Even within the Third Circuit panel, however, the reasoning was contested. Judge Roth dissented, arguing that Kalshi's sports-related offerings are "virtually indistinguishable from the betting products available on online sportsbooks, such as DraftKings and FanDuel," and that the majority failed to account for the strong presumption against preemption in areas traditionally regulated by states. That dissent matters for the stocks question: if event contracts on stock prices are functionally bets on corporate outcomes rather than securities, the dissent's logic would undercut the case for forcing them into the SEC's broker-dealer and clearing framework.
There is also evidence that the two agencies are converging rather than colliding. The June 18 joint comment request is a deliberate harmonization exercise, and both chairmen framed it as cooperation. If the CFTC's final prediction-market rule - expected after its 45-day comment period closes in late July - explicitly encompasses securities-linked contracts without an SEC objection or carve-out, the de facto boundary could settle on the CFTC side without any formal SEC action. In that scenario, the Casten letter's alarm proves premature.
But that outcome requires the SEC to stay silent, and the agency has already signaled it will not. Atkins's "huge issue" framing, the joint definitional review, and the agency's broader enforcement posture under his chairmanship suggest the SEC is preparing to test the boundary rather than concede it.
What to Watch
The near-term catalysts are concrete. The CFTC's 45-day comment window on its June 10, 2026 proposed rule runs into late July 2026; the SEC-CFTC joint comment period on the swaps definitions runs 60 days from the June 18, 2026 release, into mid-August. The Ninth Circuit appeal in the Nevada case - joined by related matters involving Robinhood and Crypto.com - will test whether the Third Circuit's preemption logic holds outside its own circuit. A split between circuits would raise the odds of Supreme Court review.
The falsifying signal for the SEC-alarm thesis is specific: if the SEC issues formal guidance or a no-action position confirming that stock- and index-referencing event contracts fall outside its jurisdiction, or if the CFTC's final prediction-market rule explicitly covers securities-linked contracts without any SEC objection or carve-out, the case for a new SEC front collapses. Conversely, if the SEC issues guidance asserting jurisdiction over contracts tied to individual securities or SEC-filed metrics, platforms offering those products face a choice between registering under the securities framework or delisting them.
The short-term read is legal volatility: platforms will likely narrow or restructure securities-linked offerings while the boundary is contested. The medium-term read depends on which regime wins - a CFTC-led framework preserves the current low-friction model, while an SEC-led framework raises compliance costs and could push some activity into registered channels or offshore. The long-term structural read is that the boundary itself, not the cycle, is what matters: once prediction markets reference public-company data, they collide with the securities regime by design, and that collision will not revert on its own.
"Without appropriate safeguards, these contracts can be highly susceptible to manipulation and insider trading."
The prediction-market industry's growth has been built on a regulatory premise: that event contracts are derivatives, regulated by the CFTC, and that state gambling laws cannot reach them. That premise is holding in court. But the industry's next growth vector - contracts tied to stock prices and corporate disclosures - runs straight into a different regulator with a different rulebook and a chairman who has already called the overlap a "huge issue." The real story is not whether prediction markets survive; it is which rulebook they survive under.
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