In the traditional financial world, betting on the direction of the S&P 500 index typically requires buying call or put options linked to specific prices in the options market. Nowadays, a simpler alternative is capturing investors’ attention. Through prediction platforms like Kalshi or Polymarket, even novice investors can participate in “all-or-nothing” bets, wagering on whether an individual stock or an index will hit a specific price point.
It is noteworthy that institutional investors are also beginning to show interest in this area. Stuart Kaiser, Head of U.S. Equity Trading Strategy at Citi, has observed that some clients are paying attention to prediction markets with the same tentative attitude they had towards cryptocurrencies. He believes the core issue lies in market depth; it remains to be seen how large the trades could be executed in prediction markets for hedge funds managing billions of dollars. Although the depth and liquidity cannot compete with the options market, the probability predictions derived from both can be surprisingly close. For example, in mid-February, Kalshi contracts showed a 6% probability of the S&P 500 closing the year between 8000 and 8200 points, while the over-the-counter derivatives market at the time gave a probability of about 7%. To supporters, this closeness is a manifestation of the wisdom of the crowd, suggesting that the collective judgment of ordinary retail investors can rival professional models.
In contrast, operating in the traditional options market is far more complex. If one used the same $2,190 premium to buy a call spread option with strike prices of 8000 and 8200 points, the investor would not only need the index to break through the lower limit of the range to profit but also constantly monitor complex factors like volatility and time decay that affect daily profits and losses. Furthermore, the potential maximum profit for a single contract is around $20,000. In comparison, the simplicity and intuitiveness of prediction market contracts hold significant appeal for many retail traders.
However, the future development of this emerging market will largely depend on regulatory direction. Kalshi’s contracts are regulated by the U.S. Commodity Futures Trading Commission (CFTC), while Polymarket, which operates primarily overseas, remains largely outside U.S. regulatory oversight. Yet, as platforms add new stock market-related bets, it could also attract the attention of the U.S. Securities and Exchange Commission (SEC). The current uncertainty over which agency has jurisdiction over such products has already sparked market concerns. Craig Donohue, CEO of Cboe Global Markets, has stated outright that, based on both legal definition and economic substance, such products should be classified as securities and listed on exchanges regulated by the SEC. Additionally, these platforms are facing scrutiny from federal and state lawmakers over issues like potential insider trading and the legality of contracts, with some states even filing lawsuits against them, labeling them as illegal gambling operations.
For now, the scale of prediction markets remains minuscule compared to traditional markets. Since late December, the trading volume for bets on the year-end level of the S&P 500 on Kalshi has exceeded $1 million. However, in the traditional options market, the daily notional trading volume for S&P 500 options expiring on December 31st alone exceeds $100 million. Nevertheless, the trend towards convergence between the two is already quite evident. Of course, some industry insiders remain skeptical about prediction markets. Marko Papic, Chief Strategist at BCA Research, stated frankly that rather than using prediction markets to bet on an index, one might as well just trade the S&P 500 directly.
