Event contracts on sports took the gambling industry by surprise in early 2025. However, within a historical perspective, they’re actually the next step in a long drift that futures have made from institutional hedging and pricing instruments to retail products aimed at increasingly niche investing needs and interests.
Ilya Beylin recently published a history of derivatives regulation in The University of Chicago Business Law Review, Winter 2025 edition. The article tracked the development of new futures contracts and the steps they took toward event contracts. As new futures contracts addressed new risks and increasingly catered to retail customers, the Commodity Futures Trading Commission (CFTC) allowed futures to be based on more and more non-financial events.
On the one hand, prediction market platforms are the next natural step in the evolution of futures contracts. But on the other, the gambling industry and its regulators have fought back over how derivatives have evolved into some of the same products offered under state gaming regulations.
While Beylin is critical of how far futures contracts have traveled, he traces a clear path from the earliest agricultural futures to the sports contracts that prediction market exchanges and their brokers now offer nationwide.
What were futures for, originally?
Beylin argues that event contracts are beyond the scope of the Commodity Exchange Act (CEA). In his view, the CEA only authorizes derivatives used for hedging or pricing in cash markets. In his view, forecasting and entertainment are insufficient reasons to offer a futures contract, even if it has at least some hedging utility.
The earliest agricultural futures were contracts to deliver wheat at an agreed-upon price on a future date. Not only could a farmer or exporter use these contracts to hedge, but members of the industry also referenced futures contracts to help them set their own prices. As Beylin writes:
“Each step away from statutory assumptions about the role of derivatives looks relatively small and justifiable, but in the aggregate, the steps trace a path that has led to many products being authorized despite having scant if any connection to the goals of derivatives regulation.”
While his view is not shared by the prediction market industry or the current CFTC, his history of derivatives sheds light on why event contract exchanges are so dismissive of accusations that they are simply gambling platforms under another name.
The road from sophisticated derivatives to event contracts
Traditional agricultural derivatives were contracts to deliver a set amount of product at a certain price point, and the contract’s value changed over its lifetime. That value change allowed the futures contract to track the magnitude of asset price changes. For example, a large change in wheat prices would result in a similarly large change in the wheat future’s value.
In the 1980s, the same type of contract was created for interest rate fluctuations in the wake of President Nixon’s departure from the gold standard. The interest rate futures were the first to be settled without a product promising to be delivered. A deposit account couldn’t be delivered like wheat or grain, so an underlying transaction was no longer necessary for a futures contract. This opened the door to futures on insurance company performance and mortgage repayments, but futures remained tools for financial products.
The 1990s saw the first futures contracts settled on events. Crop yield futures were based on how much product a set amount of land produced. This was a useful tool for farmers whose traditional futures couldn’t mitigate this particular risk. However, this was the first futures contract to be settled based on a non-financial event.
Yield futures walked so event contracts could run. In 1999, the first futures contracts on temperature, wind, and precipitation were approved.
Binary event contracts that settled on a Yes/No basis were not far behind.
Futures for the common man
Traditional futures contracts change value throughout the contract’s term. To guarantee the ever-changing value, parties of a futures contract post or receive collateral each day. Whichever side of the contract loses value pays the difference in cash to a clearinghouse. That way, the winner’s cash is in place if the contract settles at the new value. Daily margining remains a standard practice for these types of futures today.
An institutional trader can afford the time and money it takes to satisfy these margining requirements, but an ordinary retail trader typically cannot. However, a binary event contract does not require daily margining. Each side of the trade contributes the full dollar that pays out at settlement.
HedgeStreet applied to become an exchange offering binary event contracts in 2001 and was finally approved in 2004. It offered many of the same derivatives that already existed on financial and non-financial events. However, HedgeStreet offered the binary outcome version of them.
These binary contracts were intended for retail traders–ordinary people instead of investment firms. Even though many of these contracts were functionally the same as older futures, the binary payout was a key difference. Beylin explained:
“Being responsive to margin calls on a daily basis—as futures require—is expensive and relatively inconvenient for retail and other smaller traders to support. That is why from an administrative or operational perspective, binary options are better suited to retail participants. The costs of calculating, obtaining, transferring and custodying collateral are avoided, making the products cheaper to support—both for traders and intermediaries…binary options can be used to hedge, but in a far more limited way than the futures contracts.”
Event contracts as the next logical step
Older futures contracts thus set a few precedents that made modern prediction market platforms like Kalshi possible:
- Contracts that did not require an underlying delivery of goods
- Contracts that could be settled on non-financial events
- Contracts that could be settled in a binary outcome
By November 2020, when the CFTC approved Kalshi’s exchange, event contracts had been used mostly in academic settings. The Iowa Electronic Market received a no-action letter from the CFTC in 1992, allowing it to trade political contracts as long as the scale remained small. PredictIt received a similar no-action letter in 2014, but also remained a small-scale academic project.
Kalshi was the first commercial and CFTC-regulated event contract platform that took the last 50 years of derivatives regulation to its logical next step. Its exchange offers contracts tailored to retail investors and has expanded to include markets for almost any conceivable event.
Based on the CFTC’s permissive history, Kalshi and the growing prediction market industry are justified in considering their contracts legitimate financial products.
Incremental vs. aggregate change
The sports contracts at issue today bear little resemblance to the old generation of futures. There’s no NFL market that can use a sports contract’s price for price discovery. Hedging is possible with any event contract, though Yes/No contracts have less hedging utility than futures that track the magnitude of asset price changes. Modern event contracts also pay interest on positions, which no longer makes their outcomes strictly binary.
However, each small step toward them has been justifiable:
- Interest rate futures addressed the hedging needs of firms affected by newly volatile interest rates.
- Yield futures gave farmers a way to hedge against a different type of risk and allowed settlement based on an event’s occurrence or non-occurrence.
- Finally, HedgeStreet’s binary contracts made a version of futures accessible to retail customers.
States have noticed the magnitude of change that has taken place over the last 50 years manifest in an abrupt manner. Suddenly, wagers that were only available under state gambling law became available on federal exchanges. States do not receive taxes from these wagers, and event contracts don’t fund problem gambling programs in states that prioritize such funding.
Whether sports contracts remain legitimate retail hedging tools or cross the line too far into entertainment will be decided by the Third and Fourth Circuits and possibly the Supreme Court. Unsurprisingly, it’s taking the courts to settle the two irreconcilable differences in how sports contracts are viewed.
