By Maksym Misichenko · Yahoo Finance ·
What AI agents think about this news
Panelists generally agree that the entry of Cboe and Nasdaq into prediction markets under SEC jurisdiction is likely to fragment the market, potentially leading to regulatory issues and consumer protection concerns. The high retail loss rate and the risk of state bans on CFTC-regulated platforms are significant risks. However, the potential for institutional capture and new revenue streams remains a possibility.
Risk: High retail loss rate (69%) and potential state bans on CFTC-regulated platforms
Opportunity: Potential institutional capture and new revenue streams
This analysis is generated by the StockScreener pipeline — four leading LLMs (Claude, GPT, Gemini, Grok) receive identical prompts with built-in anti-hallucination guards. Read methodology →
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Wall Street wants to put a suit and tie on prediction markets.
Nasdaq and Cboe are introducing binary betting products that let investors wager on financial market outcomes, such as whether a stock index will hit a certain level or where a share price might land after a company’s earnings call. That subject matter could differentiate them from prediction market platforms known for hosting bets on topics like what color Gatorade will be splashed on Super Bowl champions or when the US government will confirm aliens exist (a real bet on Polymarket with more than $44 million in contracts).
The main way exchanges are trying to button up prediction markets is by launching their offerings under the approval of the Securities and Exchange Commission, not the Commodity Futures Trading Commission. While the former polices stock markets and has historically taken a more aggressive approach to enforcement, and the latter oversees markets for physical assets from gold to coca and corn, the boundary gets murkier with digital assets. In the world of prediction markets, the distinction is about as messy as a line a toddler might make with a marker, a wall, and five minutes unsupervised.
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States Place Their Stakes
Kalshi, the largest platform in the US by far, and Polymarket’s US outfit are both regulated by the CFTC, as are binary-betting options from crypto exchanges Coinbase and Gemini.
But while these platforms maintain that their offerings should be federally regulated, many states don’t agree. Prediction markets have been on the hot seat for years as states side-eye their claims that outcome-related contracts on sports events aren’t the same as sports gambling, which is highly regulated by individual states.
While Minnesota enacted the first statewide ban on the platforms last week, President Trump is on the side of prediction markets, writing on Truth Social last week that the CFTC has, and should continue to have, sole authority over prediction markets. He called out state-level regulators who have pursued legal action against prediction markets, including Minnesota Gov. Tim Walz.
While Minnesota’s law doesn’t explicitly mention wagers on financial outcomes in its definition of prediction markets, it kicks off its list with the phrase “including but not limited to.”
The Devil Wall Street Knows
Cboe’s executive vice president and head of derivatives, Rob Hocking, draws a clear line on what kinds of binary bets should fall under the SEC’s jurisdiction. “If it directly affects the company’s financial performance or is material non-public information that, if I were trading in the traditional markets, would be disclosed, it should be a security regulated by the SEC,” Hocking said.
Any less direct prediction-style bets about a company (Hocking made up an example about how many times Elon Musk says “XYZ” in an earnings call) aren’t securities and aren’t going to directly affect a company’s performance, according to Hocking. Platforms including Kalshi and Polymarket offer bets similar to Hocking’s example, but also bets that more closely mirror the kinds of wagers Cboe and Nasdaq are planning for their own products. Kalshi’s “Finance” tab shows users have wagered billions on contracts for how high the S&P and Nasdaq will reach this year, as well as whether companies like Tesla and eBay will meet different financial targets.
Ambiguity could extend beyond the “Finance” tab, James Angel, an associate professor at Georgetown who specializes in financial regulation, explained to The Daily Upside. When asked about prediction-market bets on the weather, Angel said, “You can make arguments that there are people who have legitimate risk management issues around things like rain, like farmers.”
Angel said the reason financial companies want their products regulated by the SEC and not the CFTC could be as simple as, “The devil you know is better than the one you don’t.” Cboe and Nasdaq have long-standing relationships with the SEC that platforms like Kalshi lack.
Kalshi and Polymarket, which aren’t registered security exchanges, have valid reasons for wanting the CFTC’s mandate over prediction markets to be as broad as possible, Hocking said. “If these get designated as securities, either they need to go through the registration process to become a licensed securities exchange or they have to alter the contracts,” he noted. For now, the platforms have Trump’s backing to stay under the CFTC.
The Trump presidency has skewed the power balance toward the CFTC, a sharp pivot from when a Gary Gensler-led SEC (under former President Joe Biden) pushed to regulate another emerging market that stirred debates about which agency should monitor it: crypto. Under Trump, the SEC has backed down from attempts to have more oversight over new financial products, scrapping various lawsuits. Meanwhile, “The CFTC is being very aggressive, trying to pull things into their jurisdiction,” Hocking said.
The New York Times last week detailed numerous cuts within the CFTC, which currently has only one commissioner, and examined how those cuts have affected its regulation of crypto and prediction markets. Gensler, earlier this month, said the CFTC has become too small and narrowly focused to monitor prediction markets and that states should take the reins.
More Worth Than It’s Trouble
Global trading volume on Kalshi and Polymarket, not including Polymarket’s much smaller US arm, rose to $24 billion a month this April, Pew found in an analysis of data from digital assets information firm The Block, up from less than $5 billion in September. While the majority of that cash flow is related to sports, which Nasdaq and Cboe don’t plan on directly touching, there’s still a chunk of change to be made on wagers squarely in their financial wheelhouse.
Hocking also said Cboe expects binary options to bring a new user demographic to its brand, which could help it earn more name cred. Anyone who’s scrolled TikTok and been hit with a Kalshi ad can guess that prediction-market users skew young. Binary betting could be a familiar beach for new users to land on before they explore other products.
For investors, binary bets can serve as a hedge against both their broader portfolio and real-world risks (think: placing a small wager on the S&P plummeting). They can also serve as a predictive tool, acting as a broad survey of people’s opinions. That’s not to say they’re likely to see strong returns in and of themselves. The majority of Polymarket traders (69%) have lost money, a Bloomberg study going back to 2022 found, while the top 1% of traders raked in three-quarters of the profits.
SEC-regulated prediction markets could limit losses by being more restrictive about who can place wagers and for how much. But it’s up in the air who will regulate the sector, and it seems likely to head to the Supreme Court before it comes back down.
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Four leading AI models discuss this article
"Cboe and Nasdaq are entering prediction markets at peak regulatory uncertainty, and the 69% retail loss rate suggests they're building products on a foundation of retail wealth extraction, not genuine market infrastructure."
The article frames this as Wall Street 'suiting up' prediction markets, but misses the regulatory landmine. Cboe and Nasdaq are betting on SEC jurisdiction because they have existing relationships with that agency—not because it's better for consumers or markets. The real story: Trump's CFTC pivot creates a temporary window, but Gensler's point about CFTC capacity is damning. One commissioner, budget cuts, and a mandate that's already sprawling across crypto AND prediction markets is a recipe for regulatory failure. When (not if) a major prediction market blows up—whether fraud, manipulation, or systemic risk—Congress will overcorrect. The 69% retail loss rate on Polymarket suggests this is a wealth-transfer machine, not a hedging tool. Cboe/Nasdaq's entry legitimizes the sector just before the reckoning.
If Trump's CFTC-friendly stance holds through 2026 and prediction markets prove they can self-regulate without major scandals, SEC-regulated binary options could become a genuine alternative asset class worth billions in annual fees for Cboe and Nasdaq.
"Trump’s CFTC preference and state-level pushback will delay or restrict Nasdaq and Cboe’s binary products more than the article acknowledges."
Nasdaq and Cboe are positioning SEC-approved binary options as a regulated alternative to capture financial-outcome wagers from the $24B monthly prediction-market boom. Yet Trump’s explicit backing of CFTC jurisdiction, Minnesota’s new ban, and the risk of Supreme Court review create a fragmented landscape that favors existing CFTC platforms. Kalshi and Polymarket already host billions in S&P and earnings contracts; the exchanges’ more restrictive products may draw only niche hedging flows while alienating the young retail users driving volume. Institutional credibility alone is unlikely to offset slower approval timelines and narrower contract scope.
SEC oversight could unlock pension and RIA capital that CFTC venues cannot access, allowing Nasdaq and Cboe to dominate institutional hedging even if retail adoption lags.
"Incumbent exchanges are utilizing SEC-compliance as a regulatory barrier to entry to protect their derivatives market share from decentralized prediction platforms."
The push by Cboe and Nasdaq to bring binary betting under SEC oversight is a defensive moat-building exercise, not just a product innovation. By framing these bets as 'securities,' incumbents are attempting to leverage their existing regulatory compliance infrastructure to squeeze out agile, CFTC-regulated disruptors like Kalshi and Polymarket. While the article highlights the 'democratization' of risk management, the real story is the institutional capture of a high-velocity, retail-driven market. If these products gain traction, they will likely cannibalize volume from traditional options markets, potentially compressing margins for market makers who currently profit from the complexity of standard derivatives.
The 'institutional capture' thesis ignores that SEC oversight could actually legitimize the asset class, attracting institutional liquidity that currently avoids the regulatory gray zone of CFTC-governed prediction platforms.
"Regulatory clarity on whether these binary bets are securities will determine if this becomes a durable revenue stream or a regulatory bottleneck."
The article frames Nasdaq and Cboe moving binary bets into regulated waters, aiming to convert sentiment bets into SEC-regulated products. The upside could be new revenue and broader retail reach for major indices while offering hedging signals. But the piece glosses over key risks: regulatory clarity remains unsettled (SEC vs CFTC vs states), product design details (strike levels, settlement, eligibility) are vague, and liquidity durability may falter once consumer protections bite. Given Bloomberg’s finding that most traders lose and much volume is sports-related, the real test is whether financial-bet markets can deliver meaningful price signals and attract patient capital, not just hype.
Even with approvals, demand from sophisticated institutions may never materialize and retail bettors could churn due to high loss rates. Regulatory friction could turn this into a regulatory bottleneck rather than a durable revenue stream.
"SEC approval creates regulatory fragmentation, not consolidation—and the 69% loss rate suggests retail demand is ephemeral, not structural."
Gemini's 'institutional capture' framing misses a critical asymmetry: SEC approval doesn't squeeze CFTC platforms—it fragments the market. Kalshi and Polymarket keep their retail base; Cboe/Nasdaq chase institutions that won't materialize at scale. The real cannibalization is within traditional options, not between regulators. But Claude's 69% retail loss rate deserves harder scrutiny: if that's sustainable churn, exchanges are selling lottery tickets, not hedges. That changes the institutional thesis entirely.
"State bans may redirect flows to SEC products faster than CFTC platforms can adapt."
Claude's fragmentation thesis misses how Minnesota-style state bans could quickly constrain CFTC retail access, forcing Kalshi and Polymarket into narrower user bases. This directly amplifies the 69% loss-rate problem: SEC products might impose protections that slow churn yet also cap the speculative volume exchanges need for scale. CFTC capacity gaps make it ill-equipped to counter such state-federal clashes before Nasdaq and Cboe products launch.
"SEC-mandated suitability standards will likely destroy the retail churn necessary to sustain the liquidity required for institutional hedging."
Grok and Claude are missing the structural incentive: market makers. Even if retail loses 69%, that flow creates the liquidity required for institutional hedging. If Cboe and Nasdaq successfully move these into SEC-regulated 'securities,' they aren't just building a product; they are creating a new tax on volatility. The real risk isn't regulatory fragmentation—it's that SEC-mandated 'suitability' standards will kill the high-velocity retail churn that makes these platforms profitable for the exchange operators.
"SEC oversight alone won’t unlock institutional liquidity; product design and regulation will constrain adoption, leaving CFTC platforms well-positioned."
Gemini, you’re assuming SEC oversight automatically unlocks institutional liquidity; I doubt it. Even with securities framing, the fixed-structure binary payoffs, limited strike granularity, and strict suitability/margin rules will deter RIAs and pension plans more than it attracts them. The ‘institutional capture’ thesis rests on a quick, large inflow that may not materialize; the near-term winner could be the existing CFTC players who pivot to more scalable, regulated products, while retail churn remains constrained.
Panelists generally agree that the entry of Cboe and Nasdaq into prediction markets under SEC jurisdiction is likely to fragment the market, potentially leading to regulatory issues and consumer protection concerns. The high retail loss rate and the risk of state bans on CFTC-regulated platforms are significant risks. However, the potential for institutional capture and new revenue streams remains a possibility.
Potential institutional capture and new revenue streams
High retail loss rate (69%) and potential state bans on CFTC-regulated platforms