MediaTalk | Season 4 | Ep. 16 - Betting on the Future: How Prediction Markets Are Changing the Game

View Full Transcript

Mike Reynolds: Hi, I'm Mike Reynolds, a senior reporter covering the media industry with the S&P Global Market Intelligence Tech, Media, and Telecom news team. Welcome to "MediaTalk," a podcast hosted by S&P Global Market Intelligence, where the news and research staff explore issues in the ever-evolving media landscape. Today, I'm joined by Stefan Modrich, my colleague on the TMT News team. Stefan covers tech policy and is the author of Washington Rap, which you can find on our CapIQ Pro website.
How are we doing today, Stefan?

Stefan Modrich: Good to be here, Mike.

Reynolds: Our prior “MediaTalk” conversations have focused on AI and chips. This time, Stefan is going to discuss the burgeoning prediction markets.
Stefan, for folks who haven't been following this, what exactly are prediction markets? It's not quite stocks, it's not quite betting, sports or otherwise. Can you give us a sense of what prediction markets are and why they've been attracting so much attention of late?

Modrich: Sure, Mike. To borrow a phrase that I've heard used, this has been described by some as "sports gambling lite." Of course, it doesn't only involve sports, so that is one big difference. But to the average FanDuel or DraftKings user, it won't look a whole lot different in terms of the markets available for people to wager on. Some key differences are, first, that you're running against the house when it comes to those sportsbooks, and you're actually competing against other users on platforms like Kalshi and Polymarket. Let's take, for example, a hypothetical: "Will it rain in DC tomorrow?" The "yes" bet on that is trading at 60 cents. So that basically means there's a 60% probability. Then you could take "no" at 40 cents, or 40%, and either way, you're looking at a payout of $1 per contract, which is the event contract basis. Basically, you're agreeing to wager that amount for that outcome to occur.

Reynolds: Okay, alright. There's been a lot more attention being paid. If you can, maybe give us a sense for what's driving the push at this moment?

Modrich: Sure. One big catalyst for this, when the prediction market business was really still a thing among DC insiders, was the 2024 election cycle. That was really the surge where we saw billions flowing to those platforms. Once people were betting on that Trump-Harris race, then the platforms expanded to lots of other things. In that time, we've seen a 400% surge in trading volume. Kalshi, I think at last check, is taking in $3 billion weekly, and there are projections that they'll surge to about $240 billion annually.

Reynolds: Geez. Okay, so Kalshi's the big player, right?

Modrich: They are. And they advertise this all around DC at bus stops, metro stations, and other places. They've blanketed the city with ads, advertising that they are fully federally regulated by the Commodities Futures Trading Commission.

Reynolds: Okay.

Modrich: And so they've captured upwards of 90% of the US market.

Reynolds: And Polymarket's the distant No. 2?

Modrich: They are. What's interesting about Polymarket is that they are technically limited to offshore betting at this juncture.

Reynolds: Really?

Modrich: The US version is in, I guess, what they're calling a limited beta phase. And they also trade on cryptocurrency, not on US dollars like cash and the other sportsbooks do.

Reynolds: That's a big difference there.

Modrich: Absolutely. One event that was intended to be a coming-out party and a game changer of sorts happened in March, when a local bar partnered with Polymarket to sponsor this "Situation Room" event. That was a play on some unique aspect of DC bubble internet culture, where people in and around politics are "monitoring the situation" and keeping tabs on geopolitical events. There was this event that played on this; they had live flight radar, financial trading information, and social media feeds. It fizzled out and was called by some an absolute disaster. Unfortunately for them, it was not what they had hoped for it to be, and that sputtered a lot of the momentum they were hoping to build.

Reynolds: I think you had told me it's been likened in some circles to the Fyre Festival debacle.

Modrich: I think that was a pretty apt analogy, yeah.

Reynolds: Okay, alright. For those who haven't participated yet, prediction markets are more mainstream. There's a lot of news organizations that are using this for content.

Modrich: They are indeed. We've actually seen this: The Wall Street Journal has reached a licensing agreement with Polymarket.
The Associated Press and CNN are among those who have reached licensing agreements with Kalshi to use their election prediction data in their news coverage. We're also seeing this with CNBC, Dow Jones, nd even financial trading platforms like Robinhood and Webull.

Reynolds: Okay, alright. So it's becoming more and more out there, much more mainstream than just a few years back. Stefan, you recently penned an overview piece that's available on CapIQ Pro. It's titled "Prediction Markets Create Insider Trading Loophole as Enforcement Lags." You had a great opening to the story.Can you give our listeners a sense for what happened?

Modrich: Sure. This harkens all the way back to an earnings call from the company Coinbase that took place in October of last year. The Coinbase CEO, Brian Armstrong, basically rattled off a bunch of jargon for the cryptocurrency industry, including words like blockchain and Bitcoin.
What happened as a result was $80,000 in wagers across some of these prediction market platforms. That sparked some concerns, especially among those who follow market manipulation and insider trading matters, about some of the regulatory considerations for these emerging prediction markets.

Reynolds: I got a chuckle out of it, because you take things a little more seriously than I do in most cases. You dug into this and spoke to a number of people who weren't quite as amused by this as I was.

Modrich: I spoke with a professor of finance at Carnegie Mellon University, Chester Spatt. He was formerly the SEC Chief Economist. He said that the behavior of Armstrong could constitute market manipulation, even if it doesn't qualify as a classic insider trading case under the SEC securities law.
Regardless, it was definitely something that raised a lot of red flags across industry circles. We did get a response from a Coinbase spokesperson who said that the company does have robust safeguards in place that cover employee participation in prediction markets, including internal surveillance teams and strict internal policies.
That is similar to what we've heard from Kalshi directly as well. We did not hear from Polymarket specifically about their policies.

Reynolds: Again, in the case with this gentleman rattling off some industry names and jargon, it's hard to keep tabs on who's doing this. This is really broad-based, right?

Modrich: It is. There have been widely documented incidents of other public figures and politicians who have publicly called this out.
Another anecdote from my story was an interview that California Governor Gavin Newsom did, where he directly referenced that he could theoretically bet on himself running for president. For what it's worth, the Kalshi CEO, Tarek Mansour, responded directly to him on social media and said that the platform would immediately flag such activity as illegal.
But there is concern, at least on the transparency side, and those who have been critical of these platforms are basically asking to see the receipts: What are you doing to ensure that insider activity is actually enforceable and searchable?

Reynolds: Now, you mentioned before the CFTC, the Commodity Futures Trading Commission. I guess this is the watchdog, but it's lost some staffing. Are they able to hold up as more and more people are getting involved with this?

Modrich: Yes. The former acting associate director of the CFTC, Peter Sanchez Gura, is a financial derivatives lawyer now who spent 22 years there. He told me there is some concern about the staffing levels and how the limited resources make it more difficult. If you think about what's considered a commodity and how many different industries and markets are monitored under the jurisdiction of the CFTC, it is an overwhelming volume. Even just perusing the homepage of Kalshi as we speak, I can point to a live baseball game between Detroit and Boston, the length of the government shutdown, which companies will have a top-ranked AI model this year, inflation—almost anything you can think of, you can find a bet for it. And even crossing over into cultural territory: In the case of the Super Bowl, I remember seeing a lot of rumblings. I happen to live in a household where my partner was very invested in the outcome of the Super Bowl halftime show and the order of the setlist. That was another area where, in theory, you could bet on what was the first song that Bad Bunny performed, and what surprise guests were going to appear.
Anything like that—Coachella, Lollapalooza, Oscars results—it's all there, Mike.

Reynolds: I gotcha. Yeah, so there's almost anything and everything.
A lot of the states are stepping up. I think Arizona just got involved; they sued the CFTC. Can you bring us up to speed there?

Modrich: Yes, I can. Just to catch folks up, Arizona was one of the first states to sue Kalshi on the grounds that their prediction market activity was illegal. The federal government's countersuit was a response to the posture that this should be a federally regulated industry, and they called it inappropriate for Arizona to initiate a criminal case there. A federal judge granted a temporary restraining order that blocked Arizona from prosecuting, and this is consistent with the CFTC's stance that they view this as a federally regulated industry. That is also consistent if we look at the Trump administration's policy toward things like AI and others, where they're seeking federal preemption. The different approaches that both the states are using to argue their case versus how the platforms themselves are seeking to be regulated—that is ultimately headed to the Supreme Court, most likely.

Reynolds: So Arizona lost, but other states have been taking their shots too, right? Generally speaking, the states believe this should fall within their boundaries, not the federal government's auspices.

Modrich: They do. One reason is we can go back to the advent of sports gambling as a state-regulated industry and how, as time listeners and followers of this space will likely know, this was at one point limited to Atlantic City and Las Vegas, and then pockets of tribal lands and other kind of special jurisdictions. We have since now seen it explode to online markets in many states.

Reynolds: I think we're up to close to 40 states and DC having some form of legalized sports betting, and this is all within, I think, the change in the law came back in 2018 or 2019, so an explosion over the last six or seven years.

Modrich: Sure. Basically, the state argument there is that the local jurisdiction is what gives them the ability to collect all of those hundreds of millions in taxes and licensing fees that they get from the casinos and sportsbooks. If Kalshi undercuts that by offering the same product essentially without having to obtain the state license, then that's a big revenue hit and undermines this regulatory authority and the moat where there's minimal competition due to the heavily regulated nature of the industry.

Reynolds: California and Texas, the two most populous states, do not have legalized sports betting.
Florida, which is the number three state, only has it through the Seminole tribe in Hard Rock. So prediction markets are thriving in those three states at this point.

Modrich: They have been, yes. Especially as they've been the sole alternative that does have a regulatory stamp of approval on it, let's say. If the federal preemption wins out, then those state gambling prohibitions go out the window, and that would be the nightmare scenario for some of those state regulators. If the platforms are now operating nationwide under the CFTC license, then regulators in California, Texas, and Florida—to say nothing of the other 47—have no say in the matter.

Reynolds: Sure.
What about the leagues themselves? I think MLB, NHL, UFC, MLS—they've got partnerships with the prediction market platforms, right?

Modrich: They do. We've seen this. The MLB signed a Memorandum of Understanding with Polymarket in April. This amounts to the first formal agreement between the CFTC and a pro sports league.
It remains to be seen if other prediction market platforms and other leagues will enter the fray.

Reynolds: And again, FanDuel and DraftKings—these are the top two sportsbooks in the US.
Now they've hedged their bets. They're in the prediction markets game as well.

Modrich: They are. That is a classic response to the dynamic we were just discussing in terms of having this traditional model of paying those licensing fees and taxes to operate in that regulatory moat.
If you have these newer prediction market players able to operate without the same constraints, then that is a losing proposition for the legacy sportsbook players. Basically, you could call it a hedge—the prediction market businesses that DraftKings and FanDuel are doing—because they're trying to ride the wave either way. If the federal preemption argument wins out, then they're still competitive and at least attempting to compete with the Kalshis and Polymarkets of the world. If the states win, then it goes back to the status quo and they can shut down those products and focus back on those licensed sports betting markets.

Reynolds: Alright. So I mentioned a few of the leagues, but the two biggest—the NBA and the NFL—are not in the game yet. Where do things stand with the basketball leagues, Stefan?

Modrich: Sure. The NBA is in active talks with both the two major prediction markets, Kalshi and Polymarket.
Basically, the NBA wants control over which markets get listed. They're trying to avoid markets on things like injuries or individual player performance that are obviously ripe for potential manipulation. We've already seen lots of concerns with the traditional sports betting markets, and that's already an area that the NBA understands is a vulnerability for them.

Reynolds: Okay. And the NFL—a little bit slower at this point.

Modrich: It has been. There again, they're trying to get out in front of that same sort of concern that the NBA has about things they consider objectionable, whether it's markets like injuries or individual player performance, or things that could incentivize point shaving or other things that the league would consider a violation of their own integrity policies or unsportsmanlike conduct.
Again, maybe a dynamic that we see play out in different media rights deals and other ways the two leagues operate, where the NBA has tried to be a little bit more ambitious and opportunistic, whereas the NFL has that integrity, risk, and "protect the shield" mindset, where they're a little bit slower to adopt more innovative or tech-focused things.

Reynolds: Stefan, we've covered a lot of areas. You've been kind enough to answer a lot of questions. What have I jumped over that's important to what you'll be looking at with the prediction markets in the months ahead?

Modrich: Sure. One of the potential jurisdiction angles here is: say a Kalshi or Polymarket was to say, "Hey, we want to be regulated like an AI company, like Anthropic, because we use AI in our trade surveillance software, and we're implementing AI in our business. Therefore, we consider ourselves a tech company and want to be regulated as such." It was put to me this way: If in the lobby of, say, a nuclear power plant, you're running a casino, the casino portion of your business is not federally preempted.
So the AI is how you're running the casino, but the fact that you're running a casino is separate from the fact that you're running an AI company, if that makes sense. The AI portion may be federally regulated, but if the states were to win, then the states would still be able to regulate them effectively as sportsbooks.

Reynolds: Is Congress going to get involved with this? I guess there are a couple of things that are unsavory that these markets are also playing with, right?

Modrich: There have been a couple of legislative attempts to ban what have been called "death contracts," which involve markets on potential assassinations or war or conflicts. So there are some lines being drawn there. It definitely remains to be seen in terms of what the political appetite will be to tackle something like that in a serious way with all that's been going on here. But that has also been part of the marketing play, I think, in Kalshi wanting to distance itself from Polymarket as well. They heavily emphasized the fact that they are federally regulated and that they don't offer markets on some of those things, which would be considered by some as morally dubious or questionable.

Reynolds:  Stefan, thanks for joining us. Appreciate the knowledge and we'll be looking forward to more stories from you about the prediction markets and the rest of the Washington and regulatory world. We appreciate you being here.

Modrich: Thank you Mike.

Reynolds: Alright, that concludes this episode of “MediaTalk.” I wanted to thank Stefan again and we will all catch up on the next installment of “MediaTalk” soon. Bye everybody.