There are perennial topics at the Security Traders Association’s annual market structure conference, and there are newcomers.
Options, retail and buy side are among perennials. Prediction markets is decidedly a newcomer, but from what was said on the Thursday morning panel, it will become a perennial.
The STA panel, entitled Regulating the Future: Prediction Markets in a Modern Market Structure featured speakers from Robinhood, DraftKings, and Kalshi.
A backdrop was presented at the outset: prediction markets sit at the intersection of finance, technology, and how people ingest and process information. The premise of prediction markets is that everyone has a prediction, and markets enable prices to be put on that prediction. As for trends, prediction markets volume has scaled rapidly and platforms are innovating with new products, but institutional adoption remains elusive.
Prediction markets can be dismissed for their perceived connection to sports betting, but that perception is misplaced, according to platform operators. Some products on prediction markets are based on sports, but otherwise there is no direct intersection with sports betting, which has a single-dealer market structure entirely different from that of prediction markets.
Prediction markets are likened to sports betting because of their speculative element, but it was noted that speculation is considered healthy and necessary in financial markets, and financial products such as insurance, credit default swaps and some options contracts also have binary payouts.
Retail demand has driven the growth of prediction markets so far, as the nascent markets meet the demand for always-on trading in a wide variety of categories. The STA panel noted that institutions already have the ability to hedge and speculate in a bespoke way through their sell-side banks, and prediction markets’ liquidity, product standardization, and margin capacity aren’t up to institutional standards yet.
It was said that many institutions are interested in prediction markets, but they are waiting for others to get involved first. Once that happens and there are more safeguards and education, market operators say liquidity will beget liquidity and prediction markets will grow more rapidly.
To the question of what the next one to three years holds in store for prediction markets, it was said that sports will grow as an absolute number, but will be a lower percentage of overall prediction markets volume. There will be more product development, legal durability, and international expansion, and progress will be made toward institutional participation.
