Securities trading in the guise of event contracts? Prediction markets accelerate their penetration into US stocks, and the regulatory vacuum sounds the alarm.

According to experts in independent data and regulatory fields, prediction markets are rapidly becoming an alternative trading venue for traders to bet on U.S.-listed companies such as Tesla, Inc. (TSLA.US) and Apple Inc. (AAPL.US), but this has also raised concerns about investor protection and market oversight. This booming industry, pioneered by Polymarket and Kalshi, rose to prominence by allowing participants to bet on almost anything, covering sporting events, elections, and even military actions. According to a review, over the past year, these platforms have continued to expand into Wall Street's traditional business territory, listing tens of thousands of trading instruments covering stock price fluctuations, corporate earnings data, and other company events that can significantly affect individual stock movements. This has also brought more exposure to this high-growth niche segment of the industry. Although still insignificant in scale compared to the native stock market, stock-linked prediction markets are creating an entirely new venue for speculation in U.S. securities, one that operates outside many of the investor protection and market oversight rules followed by regulated exchanges. Legal experts warn that if these products continue to grow rapidly, they could ultimately affect trading in the underlying stocks and weaken regulators' ability to oversee the market. "This is a whole new frontier of market structure, financial innovation on steroids," said Yesha Yadav, associate dean of Vanderbilt University Law School, adding that regulators should respond to these new types of products quickly and flexibly. Polymarket and Kalshi said the platforms closely monitor misconduct, regularly refer relevant cases to U.S. regulators, and collaborate with regulatory agencies. "Market integrity is at the core of our operations," a Polymarket spokesperson said, adding that the company also strives to block U.S. users from accessing its international platform. The U.S. Securities and Exchange Commission (SEC) declined to comment, while the U.S. Commodity Futures Trading Commission (CFTC) did not respond to requests for comment. Both agencies said they are reviewing the regulation of stock-linked prediction markets. NVIDIA Corporation and Alphabet rank among the most popular stocks According to an analysis prepared by blockchain research firm Allium, Polymarket International launched individual stock markets last October, and as of early September, traders had bet more than $220 million across approximately 31,000 stock-linked markets. Allium found that nearly 60% of the funds were bet on individual stock movements, with NVIDIA Corporation (NVDA.US), Alphabet Inc. Class C parent Alphabet (GOOGL.US), Apple Inc., and Tesla, Inc. being the most popular, while the rest were bet on markets based on ETFs or stock indices. These listed companies did not respond to requests for comment. The trading pattern is typically as follows: traders choose "yes" or "no" to bet on whether a particular stock or index can reach a specific price level by a designated date. One wallet identified by Allium generated $175,000 in trading volume through approximately 1,300 Apple Inc.-related trades, with a position structure designed to produce a small profit regardless of whether the "yes" or "no" contracts paid out. A review of Kalshi's website and the data it provides shows that Kalshi currently does not offer individual stock bets, but on a given day offers approximately 2,500 index and corporate "key performance indicator" (KPI) markets, such as iPhone launches and Tesla, Inc. delivery volumes. Kalshi did not respond to requests for trading volume data. Although prediction markets target retail investors, they are also courting institutional investors by promoting event contracts as an alternative way to hedge traditional economic and market risks. Unlike stock markets, prediction markets allow investors to trade around the clock and express multiple views on a company and its performance. But legal experts say they do not offer the same protections and rights, while multiple studies show that the vast majority of traders lose money. James Angel, a finance professor at Georgetown University, said that Polymarket International's offshore legal structure largely shields it from U.S. regulatory jurisdiction, which also makes it difficult for authorities to understand what is happening in these markets. "This is clearly the kind of risk regulators should be highly vigilant about," he added. It is understood that Polymarket's new CFTC-regulated domestic U.S. exchange has not yet listed individual stock markets, but has launched a small number of KPI-related contracts. Dispute over regulatory jurisdiction The CFTC says prediction markets essentially trade derivative contracts and should be regulated by it; however, calls for the SEC to step in are growing. Under U.S. law, contracts linked to a single stock are generally treated as security-based swaps (SBS), a type of derivative regulated by the SEC and mostly limited to professional investors. Legal experts say some KPI contracts may also qualify as SBS, although a Kalshi spokesperson disputed this. A Polymarket spokesperson said the company is working with relevant agencies to study how swap and SBS definitions apply to new types of event contracts. The two regulators jointly sought public comment in June on these issues and on whether one of them should become the primary regulator. Traditional financial institutions and consumer groups want the SEC to take the lead, citing the SEC's corresponding expertise. "Insider trading is entirely possible in these KPI contract markets, just like insider trading in the stock market," said Ben Schiffrin, a former SEC official who now works on securities policy at the nonprofit Better Markets. "Regulating this kind of behavior is inherently the SEC's responsibility." Several lawmakers, including U.S. Senator Adam Schiff, a California Democrat, have also raised concerns about prediction markets. In a statement, Schiff said Congress should not allow the industry to "package traditional financial products in the guise of prediction contracts to evade U.S. securities laws."