Prediction markets boom amid legislative showdown in the US

Prediction markets are booming, evolving rapidly from novelty wagering sites into a serious financial infrastructure that is statistically embarrassing Wall Street, The New York Times reports. Trading volume on prediction platforms surpassed USD 26.2 bn in January, with platform Kalshi alone recording nearly USD 10 bn. While sports wagering drives much of this liquidity, a significant portion — over USD 60 mn on any given day — is now staked on serious economic and political questions, offering a real-time “truth” that professional forecasters are finding impossible to ignore.

This surge has revealed a startling trend: the crowd is often just as smart, if not smarter, than the highly paid professionals. A recent working paper published by the National Bureau of Economic Research found that over a five-year period, traders on Kalshi were as statistically accurate as professional economists in predicting economic indicators — and even more precise at forecasting inflation. Another study by researchers from the London Business School and Yale found that bettors on Polymarket forecast corporate earnings more accurately than the analysts paid to advise investors.

The reason is simple: incentives. Professional analysts often face structural conflicts, researchers argue. They may hesitate to publish an outlier forecast for fear of embarrassment or be influenced by their firm’s need to drive trading commissions. However, anonymous traders face no such social pressure. “The nice thing about prediction markets is that you have to put your money where your mouth is,” said Theis Jensen, a Yale professor who studied the phenomenon.

The rapid commoditization of real-world events has triggered a fierce legislative war that threatens to strangle the industry, The Guardian reports. Because platforms like Kalshi classify their products as “event derivatives,” they operate under the oversight of the Commodity Futures Trading Commission (CFTC), bypassing US state wagering laws.

This distinction has enraged US state regulators. At least 20 federal lawsuits have been filed against major platforms, with state attorneys general arguing they are operating illegal sportsbooks disguised as financial exchanges. Despite the backlash, CFTC Chair Michael Selig said the agency had filed court briefs defending its “exclusive jurisdiction” over prediction markets and vowed not to allow state governments to undermine federal authority.

As US courts decide whether these platforms are the future of finance or merely unregulated casinos, the economic implications are profound. Some economists, like Justin Wolfers at the University of Michigan, suggest that institutions like the Federal Reserve should formally incorporate this data. Yet, he notes a deep institutional resistance. “There’s a deep problem, which is, if you were to do this, you democratize decision making,” Wolfers said, adding that “right now the senior economist has a ton of power. Their view goes.”

MARKETS THIS MORNING-

Asia-Pacific markets are in the green in early trading this morning, mirroring gains seen on Wall Street as tech stocks rebound from earlier losses. With the Shanghai Composite and Hang Seng still closed in observance of the Lunar New Year, South Korea’s Kospi is leading gains.

THE CLOSING BELL-

The EGX30 rose 0.8% at yesterday’s close on turnover of EGP 8.8 bn (43.4% above the 90-day average). International investors were the sole net sellers. The index is up 24.9% YTD.

In the green: Raya Holding (+12.5%), Beltone Holding (+6.4%), and Misr Cement (+6.4%).

In the red: Oriental Weavers (-0.8%), Heliopolis Housing (-0.7%), and CIB (-0.7%).