Prediction Markets: The Pack is Forming

The commercial race into prediction markets is accelerating. The control model is not.

Robinhood and Susquehanna are launching an exchange. Interactive Brokers has expanded its offerings. Charles Schwab is working with Cboe on binary options that deliver the same economic exposure through a different wrapper. Robinhood is exploring additional partnerships as its suppliers become competitors.

The structures differ, but the direction is clear: established brokers, exchanges and market makers are competing to determine how clients access prediction markets.

And, the compliance pack is behind.

What Are Our Peers Doing?

Across conversations with dozens of major financial institutions, the same question keeps surfacing: What is everyone else doing?

This is not intellectual curiosity. When no accepted control model exists, peer alignment reduces institutional and personal risk. It supports investment, reassures leadership and provides a future defense to auditors or regulators: our approach matched that of other respected firms confronting the same facts.

But interest is not consensus. Firms are deciding whether to prohibit employee activity, classify prediction markets as another asset class, extend existing controls or build something new.

The pack is moving. It has not settled on an answer.

The Business Is Expanding the Risk

This is no longer just a question of whether employees should be permitted to trade event contracts.

As firms become FCMs, market makers, introducing brokers or distributors, they gain access to client activity, order flow, positions and firm trading intentions. That creates opportunities to misuse information, front-run clients or the firm, and enter trades that existing controls do not recognize as conflicts.

The Wall Street Journal has documented a rise in suspicious prediction-market trading tied to confidential government information.

The conduct is advancing faster than insider-trading frameworks built for traditional securities markets. These risks do not stop at Washington. Institutional participation in prediction markets (along with digital assets) increases the volume of valuable non-public information moving through firms.

The business strategy is expanding the control surface. Are compliance controls expanding with it?

Another Asset Class Is Not an Architecture

Adding “prediction markets” to a restricted list or employee-trading policy may be necessary. It is not sufficient.

Schwab and Cboe’s planned offering illustrates the problem. The instrument may be structured as an option rather than an event contract, but the economic exposure is the same. Controls organized around product labels reach different conclusions about the same risk.

The same fragmentation exists inside firms. Personal account dealing, control-room processes, surveillance and information barriers each see part of the activity without recognizing the complete conflict.

There will always be another market, product or distribution channel. A framework that responds by adding another category or exception guarantees permanent catch-up.

Comfort Is Not Control

Peer behavior matters. CCOs need to understand how respected firms are responding to an emerging risk. But the pack creates a false sense of comfort when firms copy a familiar answer without testing whether it matches the risk. A widely adopted control can still be incomplete. Defensibility requires more than proving that others made the same choice.

The decisions forming now extend beyond prediction markets. They should also force large institutions to reconsider why they continue building non-differentiating compliance technology themselves.

The commercial pack has decided that prediction markets are worth entering. The compliance pack is deciding what reasonable control looks like.

Firms can wait for that answer to harden around them. Or they can help shape it by answering a more demanding question:

Are our controls following the product - or the risk?